Director and Officer Liability Insurance Current Developments. Background. Events over the past two years have focused the attention of government authorities and the investing public on officers and directors of public corporations particularly in. Financial disclosure and reporting.
Events over the past two years have focused the attention of government authorities and the investing public on officers and directors of public corporations particularly in
Some of the situations are close to home --
Others around the country and in the news --
Financial Disclosure Problems
Governmental agencies, the media and others describe these situations as, among other things, “failures of corporate governance” --
Invariably, and appropriately, the focus of corporate governance centers on the board. Why?
Because the directors, as a board, are charged with the responsibility for managing the business and affairs of public corporations.
Despite the risks, directors do have substantial defenses available to them
State law provides the basic concepts of corporate governance, the relationships among the constituents and director responsibilities
Federal law provides a pervasive backdrop, however, primarily through the federal securities laws (disclosure, proxy regulation, etc.), but now most importantly through Sarbanes-Oxley
Directors are elected by the shareholders and specifically charged by state corporate law with the management of the “business and affairs” of the corporation, as fiduciaries
What are the legal responsibilities of directors?
Director duties are fiduciary in nature, derived from trust law concepts.
Easy to state the general rule under state corporate law:
In discharging its responsibilities, the board and its individual members are expected to act in good faith, to be fully informed, and make decisions or take actions which they honestly believe are in the best interests of the company and its stockholders.
An aspect of the Duty of Care
A director must put aside self-interest
But each has vulnerabilities, especially now.
Provides a presumption of regularity when directors act in good faith, without self-interest, and on a fully informed basis.
Importance of process, reliance on inside and outside advisors, and avoidance of conflicts.
How strong is the current presumption?
Indemnification limited by
State statutes are permissive; most companies convert to mandatory indemnification through charter, bylaw or contractual provisions
An indemnification agreement could provide, among other things, the following:
Corporate statutes generally permit companies to include in their charters (therefore, stockholder approval required) provisions that protect directors from liability to their corporations for monetary damages except in cases of
Fills the gaps left by indemnification limitations
But there are challenges to deal with
Restatements -- Undermines application representations
Rescission -- Different legal standards
Congress, the SEC, the NYSE, and Nasdaq are now requiring independent directors on boards --
But why would a person agree to serve on a public company board in this environment?
Liability protection is essential, and insurance can fill the gaps left by indemnification and other legal protections