D&O Liability: A Downside of Being a Corporate Director
One of the few downsides to board service is the exposure to liability that directors of all corporations potentially face, day in and day out, as they perform their fiduciary duties. The chance of being sued for a major merger decision is now 90 percent; but that well known statistic is just the tip of an even larger iceberg. The Court of Chancery for the state of Delaware, where some one million corporations are incorporated (among them most major public companies), hears more than 200 cases per year, most of them involving director and officer liability. And given the high esteem in which Delaware courts are held, these influential D&O liability decisions impact the entire nation.
This ongoing story, covered in the May-June issue of NACD Directorship, recently prompted NACD to take action. Represented by the law firm Gibson Dunn & Crutcher LLP, NACD filed an amicus curiae (“friend-of-the-court”) brief in the matter of In re Rural/Metro, a complex case likely to continue throughout the summer. Essentially, the Court of Chancery ruled against directors and their advisors, questioning their conduct in the sale of Rural/Metro to a private equity firm.
Why did we get involved? Since its founding in 1977, NACD has striven to serve members in many ways. Through research reports, webinars, and live events, we provide directors with the information, insights, and networks they need to become effective board leaders. Yet there is another important way in which NACD has been helping directors over the years. From time to time, when directors express concerns about pending policy matters, we amplify those concerns to the powers that be—including all three branches of the federal government as well as state courts, particularly Delaware’s. In this way, we can be the “voice of the director.”
In our Rural/Metro brief, we spoke on behalf of the directors in this case (who, because they had settled out of court, could not directly represent themselves); far more importantly, however, we spoke on behalf of all directors in every state, addressing the legal principle at issue. We urged the Delaware Supreme Court to reverse Chancery’s finding that Rural/Metro’s directors had breached their fiduciary duties when they approved the company’s sale. NACD believes the Court of Chancery’s decision may expose directors of Delaware corporations to an unreasonable risk of litigation and personal liability for good-faith decisions made on the basis of their reasonable business judgments and in consultation with expert advisors.
Will our line of reasoning in the Rural/Metro amicus brief prevail? Whatever the outcome, NACD’s messages is likely to keep Delaware’s courts focused on standards of good faith rather than an ideal but unreachable goal.
In this regard, we can take heart from precedent. The Rural/Metro friend-of-the-court brief was the second one NACD has filed in recent years. The previous amicus brief, written in 2008 and presented by the law firm of Sidley Austin LLP, addressed the issue of indemnification in the matter of Bohnen v. Troy Corp. 962 A.2d 916 (Del. 2008). NACD asserted that the indemnification protection of former directors should continue past their years of service in legal matters that involved those same years.
Initially, the court could not consider our brief for technical reasons. However, NACD’s position was ratified in 2009 when, in response to concerns expressed by various parties including NACD, the Delaware legislature amended Section 145(f) of the Delaware General Corporate Law. As revised, Section 145(f) provides that a director’s right to receive indemnification or advancement pursuant to a company’s charter or bylaws generally “shall not be eliminated or impaired … after the occurrence of the act or omission that is the subject of the … indemnification or advancement.”
Even now the issue of indemnification remains current. Late last month, in the case of Blankenship v. Alpha Appalachia Holdings Inc., C.A. No. 10610-CB (Del. Ch. May 28, 2015), the Delaware Court of Chancery upheld and clarified the rights of former directors and officers to receive advance defense costs when they are named in litigation connected to their past board service. As stated in a recent article from Gibson Dunn, “This decision reaffirms the strong protection of director and officer indemnification and advancement rights under Delaware law.” The decision in this case cites Section 145 of the Delaware Code more than a dozen times, which demonstrates that NACD is truly making a difference for directors and the companies they serve.