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

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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.

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