Directors and Officers Liability an Overview

1. Directors and Officers Liabilityan Overview

2. Directors and Officers Responsibilities • To the stock holder • Duty of Care • Business Judgment Rule • Duty of Loyalty

3. Sources • Security Act of 1933 • Securities Exchange Act of 1934 • Corporate Charter • By-Laws • Personally Liable

4. Delaware Statute • Corporation shall have power to indemnify • Judgments fines, amounts paid • If the person acted in Good Faith • To Best Interest of the Corporation

5. Delaware Statute • Section B • Far expenses for those adjudged to be liable to the Corporation • Section C • Mandatory Indemnification successful in Defense including expenses • Limitation • To the extent authorized by law

6. Creation of Liability • Almost without limitation • Includes • Improper guarantees • Breach of Contract • Incurring unnecessary tax liabilities • Failure to inspect corporation books • Sale of assets at unreasonable low prices • Failure to establish good internal controls • Fraudulent financial statement

7. Types of Shareholder Suits • Derivatives • Brought by shareholders • Any settlements are to the Corporation • Direct • Material Action • Class Action • Class action are brought on behalf of a group of plaintiff

8. Liabilities and Insurance • Major line of Insurance in Financial products are • Major under writer • AIG • Chubb • 20 plus others including Lloyds

9. The Insurance Policy • Two Parts • Part A- for losses not undermified by Corporation • Usually no deductibles • Part B- where losses are identifiable • Usually large or very large deductibles • Policy Limit- In the aggregate including Defense costs • Claim made- based on date of wrongful acts

10. Directors and Officers Liability Premium • 2003- $6.0 to $6.5 Billion in U.S. • 2000- $2.5 to $3.0 Billion • End of sort market 2000/2001 • Several and became many large markets • Enron $350,000,000 loss alone • Directors, particularly, will not serve without coverage

11. Recission • Voids contract from its effective date basics • Misrepresentation • Fraudulent intent to derive • Mis-statements or misleading statements • Clauses -Severalibility

12. Securities Class Action Suit • Cause- failure to disclose information • 2003- 216 new cases • Securities cases set much of pricing of insurance • Impacts all sizes of companies

13. Krispy Creme • Alleged • Expanded too …… • Wholesale business undermined retail • Stiff competition • Failed to recognize impart of low carb • Over exaggerated effect of diet food • Franchise buy backs • Purchase of franchises at inflated prices

14. Legislation • Securities Acts of 1933 and 1934 • Securities Litigation Reform Act of 1995 forward looking statements- safe harbor • 2002- Public Company Accounting and …. Protection Act- Sarbanes-Oxley

15. Sarbanes Oxley • Great Costs • Greater administrative responsibilities • Increase is use of outside public accounting firms • New software • Books, books, and more books • Paragraph 404

16. Loss Prevention • Best Practices Include: • Maximize use of outside directors • Educate directors • Effective meetings • Frequent meetings- audit compensation and nominating committees • Investigate warning signs • Demand Integrity • Plan for succession

17. More Loss Prevention • Conduct Periodic Director Review and Evaluation • Review internal controls • Measure company performance • Take advantage of advisors • Play the devils advocate • Become informed • Pressure ones independence

18. Executive Protection Policy

19. Executive Protection Policy