Archive for the ‘Director Liability’ Category

Story Circle: Discovering Agreement

October 25th, 2013 | By

Linda Alvarez discussed “Discovering Agreement,” a powerful alternative to the old-style adversarial model of contract law. Whether you’re buying a cellphone, selling a business, starting a job, or hiring an employee, contracts are a fundamental part of our personal and professional lives. Traditional practices pit contracting parties against one another, laying a foundation of mistrust. Discovering Agreement is a new paradigm that places shared vision and values first and foremost in the negotiation. The result is a stronger, more sustainable, and enjoyable venture that can endure and prosper—even in the face of disagreement or unexpected change.

1. Traditional contracts are usually structured to try to predict everything that could go wrong and determine the outcome if one of those unfortunate events occurs. One of the problems with traditional contracts is that they sit in a drawer until something goes wrong and then are used in an adversarial manner. That approach provides little incentive for either party to “fix” or address what went wrong, as they instead focus on trying to “win” the dispute. This can increase the chance that both parties will lose sight of why they entered into the contract in the first place.

2. The Discovering Agreement approach works within the framework of traditional contracts. It differs, though, by capturing additional information. Contracts structured under this approach provide for each party: (i) their vision, or higher purpose; (ii) their mission, or what they are joining forces to accomplish; (iii) their values, which will be key drivers under which they will operate; and (iv) their constraints and imperatives, which are what they must avoid and must accomplish with the contract. These serve as touch points if anything goes wrong, to bring both parties back to why they entered into the agreement and what they were trying to achieve. These can either be in a preamble or in an exhibit, as an addition to the deal points and actions that a traditional contract captures.

3. The other key difference in the Discovering Agreement approach is the inclusion of an additional provision for addressing change and engaging conflict. This clause calls for the parties to first try to resolve any dispute through direct conversation. And that discussion will hinge on considering the vision, mission, values, and constraints and imperatives they set out at the start of their relationship. This requirement for dialogue can allow both parties to alter the terms of the agreement and get to a point where both “win” and achieve what they want from the venture. To be practical, this provision will include a time limit. So, for example, if the parties are unable to come to agreement after a certain number of hours of discussion, then they agree to call in a mediator before resorting to litigation or other proceedings.

Linda Alvarez
Founder, Discovering Agreement, Attorney, Integrative Law Practitioner

This summary provided by PricewaterhouseCoopers.

D&O Liability 2013: What Every Director Needs to Know Now

October 18th, 2013 | By

Directors, take note: It’s likely that at some point during your board service, you’ll be involved in a lawsuit. Straight from the soon-to-be-released 2013 edition of the Report of the NACD Blue Ribbon Commission on Director Liability: Myths, Realities, and Prevention, this panel offered liability dos and don’ts for directors. Even if you have performed your fiduciary duty flawlessly, the chances of being involved in a lawsuit are high. The question is whether the suit will be successful and damage your reputation. The answer could be a resounding no if you follow some seasoned advice. Moderated by retired Delaware Supreme Court Chief Justice Norman E. Veasey, and featuring directors and officers’ liability experts, this panel presented guidance for directors and discussed the latest landmark cases out of Delaware.

1. Directors should accept that, particularly in the context of mergers and acquisitions, they will be sued—it is not a question of “whether” but more a question of “when.” Over 90 percent of all M&A deals result in a lawsuit being filed (involving, on average, between four and five different state courts). Another relatively new type of lawsuit alleges inadequate executive compensation disclosure such that investors’ say-on-pay votes will be influenced by misinformation. The business judgment rule, however, continues to protect directors from liability in nearly all cases. Thus, the best protection for directors against potential liability is to adhere to best practices, including creating a record showing they acted with the requisite care and good faith so as to be able to avail themselves of the safe harbor created by the business judgment rule.

2. The business judgment rule does not protect directors who intentionally or consciously disregard a known responsibility. Also, under Delaware law, corporations may not indemnify directors for damages that result from this type of conscious disregard of a director’s duties. (These types of damages may be covered by D&O insurance.)

3. Board meeting minutes are often an important way of demonstrating (both in a lawsuit and with regulators) the care taken by a board when making a decision. The panelists favored “long-form” minutes, over “short-form” minutes, the latter of which are often little more than an agenda, or a meeting transcript. “Long-form” minutes can include:

  • reference (not attachments) to the documents that directors reviewed (both in the meeting and during any previous meetings or other discussions)
  • the names and roles of the people who presented during the meeting
  • the rationale for making the decision (preferably with reference to how the decision relates to corporate strategy).

Generally, individual directors are not identified by name in the minutes, unless a director specifically requests that his/her position be noted for the record. Board and committee meetings should be written in similar styles, so as to not create an inference that the level of underlying deliberations between them is different. Directors should take care to read and comment on draft minutes, as they are often the most persuasive evidence of what occurred during a board meeting.


John J. Gorman
Partner, Luse Gorman Pomerenk & Schick; Director, SmartPros

Darla C. Stuckey
Senior Vice President, Policy and Advocacy, Society of Corporate Secretaries and Governance Professionals

Hon. E. Norman Veasey
Senior Partner, Weil; Retired Chief Justice, Delaware Supreme Court; Director, NACD, Delaware Bay Foundation

This summary provided by PricewaterhouseCoopers.

Effective Board Minutes

December 20th, 2012 | By

Even the most conscientious and reasonable directors serve with the possibility of facing a lawsuit in state or federal court. In the decade after Sarbanes-Oxley, board minutes have emerged as an important litigation tool for both the prosecution and the defense. While minutes continue to be essential to internal recordkeeping, they must also be crafted to stand up to judicial scrutiny if needed.

Incomplete or inadequate minutes can serve as the basis for prosecution for obstruction of justice, and some have expressed concerns that minutes may act as road maps for litigants. Minutes that fail to show due diligence in a board’s decision-making process reflect either poor minutes or poor process—both can be detrimental to directors defending themselves from liability. On the other hand, minutes capable of demonstrating the process behind well-informed board decisions, may be key evidence in any board’s defense. Directors should not fear “beefing up” minutes with details from meetings if they are doing their jobs competently.

With few formal rules surrounding the drafting of board minutes, directors may receive conflicting guidance on how to best represent board meetings. The National Association of Corporate Directors, with input from the Society of Corporate Secretaries and Governance Professionals, has put together a white paper outlining five board minute fundamentals. These fundamentals, based on a study of various recommendations, should serve as a framework for directors to review, interpret, and eventually approve the minutes. This white paper gives directors a firsthand look at full board and committee meeting minutes. A complimentary copy of Corporate Board Minutes: A Director’s Guide is available to all members.