What You Need to Know About Director Liability
NACD NJ SHOWCASE PROGRAM featuring nationally acclaimed expert Professor Charles Elson
What are the recent hot topics and trends that relate to director liability?
What are the differences between public, private and tax-exempt Boards?
How can a director determine if D&O coverage is adequate?
NACD NJ PROGRAM: WHAT YOU NEED TO KNOW ABOUT DIRECTOR LIABILITY
On April 8, 2015, nationally renowned corporate governance expert Professor Charles Elson from the University of Delaware updated the Chapter membership on a topic high on the radar screen of every director: director liability. This is an evolving subject since it is mainly a creature of case law that continues to develop over time, chiefly through rulings of the Delaware Supreme Court which are followed in many other jurisdictions. Prof. Elson was joined by insurance expert Hal Slapin from Scirocco Group, who summarized the most important points directors should focus on when they assess the liability insurance protection that covers them.
According to Prof. Elson, given today’s litigiousness, directors should always expect to be sued over any major transaction they approve, especially an M&A transaction. It can’t be avoided. As he said, “don’t take it personally.” However, under current case law and with a very few exceptions, the realistic possibility that a director will be found liable is extremely remote, provided the director has followed a few simple standards of conduct. First, the director must be honest. The clearest path to liability is created when a director acts with evil intent, or scienter, such as taking assets from the company for his own use. Closely akin to that would be a situation where the director seizes a corporate opportunity for his own personal gain. In deliberating on a matter, a director is held to a simple three prong standard: He must be sure he is adequately informed, his decision must be rational and he must always act in a good faith manner that evidences loyalty to the company. If this standard is met, Delaware law allows a company by charter provision to insulate its Board from monetary damages, so there would be no risk to a director who is “just being sloppy.” The ultimate defense for any director is the simplest one of just voting “no.”
Prof. Elson counseled that there are certain situations that “look bad” and could lead to serious questioning of a director’s bona fides. For example, a director who sells stock could more likely invite scrutiny of a transaction upon which he voted “yes.” The better course for a director who needs to sell stock for personal reasons is to resign from the board first. Another problem area arises when the facts show that the director is not really financially independent from management, although he added that the law seems to be that mere social relationships should be fine. He cautioned that, in a case where bad faith exists, the protections of company indemnity provisions and insurance would not ordinarily be available. He also alluded to the fact that specially regulated companies such as banks have more stringent standards, as does the SEC when the matter at issue relates to a registration statement that a director has signed.
Mr. Slapin advised strongly that directors need to review their insurance policies carefully, since, unlike in the case of auto or home insurance, there is no such thing as a standard policy form. Every D&O policy is different. Insurance remains important, in light of Professor Elson’s remarks, since even in the case where a director has a good defense against liability, the likelihood remains that a lawsuit will be brought which the director has to defend by hiring expensive legal assistance. Directors should note that policies are written on a “claims made” basis, meaning that the claim against the director needs to have been made during the term of the policy for it to be potentially covered and notice to the carrier must be given. When a “claim is made” is an area that has resulted in much litigation and includes situations short of when an actual lawsuit is filed. He also pointed out that severability of one contract provision from another is an important point to be sure is included so that an issue that impacts one part of the policy doesn’t carry over into provisions that impact protection of the independent directors.
Location and Time
Hotel Woodbridge at Metropark (formerly the Hilton
120 Wood Avenue South
Iselin, NJ 8830
7:30 a.m. - 9:00 a.m.
Charles M. ElsonCharles M. Elson is the Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. He is also "Of Counsel" to the law firm of Holland & Knight. He formerly served as a Professor of Law at Stetson University College of Law in St. Petersburg, Florida from 1990 until 2001. His fields of expertise include corporations, securities regulation and corporate governance. He is a graduate of Harvard College and the University of Virginia Law School, and has served as a law clerk to Judges J. Harvie Wilkinson III and Elbert P. Tuttle of the United States Court of Appeals for the Fourth and Eleventh Circuits. He has been a Visiting Professor at the University of Illinois College Of Law, the Cornell Law School, and the University of Maryland School of Law, and was a Salvatori Fellow at the Heritage Foundation in Washington, D.C. and is a member of the American Law Institute. Professor Elson has written extensively on the subject of boards of directors. He is a frequent contributor on corporate governance issues to various scholarly and popular publications. He served on the National Association of Corporate Directors' Commissions on Director Compensation, Director Professionalism, CEO Succession, Audit Committees, Strategic Planning, Director Evaluation, Risk Governance, Effective Lead Director, Board Diversity, Talent Development and Strategy Development, and was a member of its Best Practices Council on Coping With Fraud and Other Illegal Activity. He served as well on that organization’s Advisory Council. He is Vice Chairman of the ABA Business Law Section’s Committee on Corporate Governance and was a member of its Committee on Corporate Laws. He is also a member of the Standing Advisory Group of the Public Company Accounting Oversight Board. Additionally, Professor Elson served as an adviser and consultant to Towers Perrin, the international human resource management consultants, and as a director of Circon Corporation, a medical products maker, Sunbeam Corporation, the consumer products manufacturer, Nuevo Energy Company, an independent oil and natural gas producer, the Investor Responsibility Research Center, a non-profit corporate governance research organization, Alderwoods Group, an international death care services provider, and AutoZone, Inc., the national automobile parts retailer. He is presently a member of the Board of Directors of HealthSouth Corporation, a healthcare services provider and Bob Evans Farms Inc., a restaurant and food products company. He has served as trustee of the Big Apple Circus, Talledega College, the Tampa Museum of Art, the Tampa Bay Performing Arts Center, and the Delaware Museum of Natural History. He is presently a trustee of the Hagley Museum and Library, the Delaware Art Museum and the Museum of American Finance. He has been included in the list of the "100 most influential players in corporate governance" of Directorship, the "100 most influential people in finance" of Treasury & Risk Management, the list of top 10 governance “stars” of Global Proxy Watch, and Ethisphere’s 100 Most Influential People in Business Ethics in 2014