(Reprinted from the Houston Business Journal, February 11-17, 2005)
The WorldCom settlement was recently torpedoed by the investment bank defendants in the case. The Judge agreed with their argument that the proposed settlement improperly limited a potential damages reduction for the directors' responsibility to which the banks would be entitled. Nevertheless, as a firm of trial lawyers primarily representing businesses in litigation, we expect that unhappy shareholders will continue the trend and we will see more cases where plaintiffs seek to hold directors personally liable for mismanagement occurring during their tenure.
While much has been written on recruiting a good board, advice for potential directors seems harder to come by. Two areas of special concern for individuals considering a directorship are indemnity and insurance. Corporations routinely agree to indemnify directors for litigation costs and amounts paid on claims; however, the extent to which indemnification may provide personal liability protection varies by corporation and state law. Directors and Officers Insurance is another vehicle by which some measure of liability protection can be obtained, but coverage exclusions abound to the extent that often, the only value is the policy's defense cost obligation. Additionally, most D&O policies are "claims made" policies, subject to very strict claim notification requirements. A thorough understanding of the scope of the indemnity agreement and of the D&O coverage is a must before accepting appointment as a director.