Articles & Updates - Priya Cherian Huskins

Insurance remains the best, most effective hedge against a director or officer’s worst-case scenario—the one-two punch of lawsuit that comes on the heels of his or her corporation’s filing for bankruptcy.

If you are sued as a director or officer, you would normally expect your company to advance legal fees to you and indemnify you. Unfortunately, that expectation will be dashed if you are sued while your company is in bankruptcy or if your company goes into bankruptcy while you are being sued. In bankruptcy, you are at best an unsecured creditor standing in line with all the other unsecured creditors hoping the company’s limited assets don’t run out. Your D&O policy may be the only thing left protecting you.

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Directors and officers of companies face the possibility that — even if they diligently discharge their duties to their stockholders — their stockholders may still sue them. During the period leading up to an IPO, directors and officers may be particularly concerned about their personal liability because the chance that they will be sued by their stockholders substantially increases once the company’s shares are publicly traded. Recognizing that the risk of personal liability makes being a director or officer of a public company unattractive, most companies purchase director and officer liability insurance, or “D&O Insurance”, to protect their directors and officers. This insurance can in turn help companies recruit and retain good directors and officers.

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When a non-US company (a “foreign filer”) decides to list its stock for trading on a US stock exchange, the following question arises: will the foreign filer’s directors and officers be adequately protected from shareholder lawsuits brought pursuant to US securities laws? The answer is likely “no,” unless the foreign filer consults with experts on US-style securities litigation as well as director and officer liability insurance.

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It was smooth sailing for quite a while for the company on whose board of directors you serve. Products were selling well, the management team was impressive and the company appeared on everyone’s hot list.
Then the waters got choppy. Maybe some key executives left. Or the product was eclipsed by something newer, faster, cheaper or better. The economy might have taken a toll on customers or suppliers. Whatever the reason, the ship has begun to take on water, and it seems that no amount of frenetic bailing is going to keep it afloat.

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What would happen if a company’s director and officer insurance proves to be inadequate or is otherwise unavailable to settle a claim alleging wrongful acts by independent directors? Or what would happen if the company lacked the resources to meet its obligations to indemnify its independent directors from such a claim? In such instances, how might an independent director nevertheless protect his or her personal assets?

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For a long time, many directors and officers of companies have been happy to accept whatever indemnification provisions a company may happen to have in its charter documents and sign whatever form of indemnification agreement that their companies handed to them. An indemnification agreement obligates a company to defend directors and officers against certain kinds of lawsuits related to the duties performed by directors or officers. However, directors and officers became a lot more motivated to review these documents in October 2003. Read this article to learn why.

 

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Has the Securities and Exchange Commission implemented a new risk oversight disclosure rule that might potentially be a bonanza for the plaintiff's bar?

 

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