Directors and Officers Liability an Overview

Directors and Officers Responsibilities To the stock holder Duty of Care Business Judgment Rule Duty of Loyalty

Sources Security Act of 1933 Securities Exchange Act of 1934 Corporate Charter By-Laws Personally Liable

Delaware Statute Corporation shall have power to indemnify Judgments fines, amounts paid If the person acted in Good Faith To Best Interest of the Corporation

Delaware Statute Section B Far expenses for those adjudged to be liable to the Corporation Section C Mandatory Indemnification successful in Defense including expenses Limitation To the extent authorized by law

Creation of Liability Almost without limitation Includes Improper guarantees Breach of Contract Incurring unnecessary tax liabilities Failure to inspect corporation books Sale of assets at unreasonable low prices Failure to establish good internal controls Fraudulent financial statement

Types of Shareholder Suits Derivatives Brought by shareholders Any settlements are to the Corporation Direct Material Action Class Action Class action are brought on behalf of a group of plaintiff

Liabilities and Insurance Major line of Insurance in Financial products are Major under writer AIG Chubb 20 plus others including Lloyds

The Insurance Policy Two Parts Part A- for losses not undermified by Corporation Usually no deductibles Part B- where losses are identifiable Usually large or very large deductibles Policy Limit- In the aggregate including Defense costs Claim made- based on date of wrongful acts

Directors and Officers Liability Premium $6.0 to $6.5 Billion in U.S $2.5 to $3.0 Billion End of sort market 2000/2001 Several and became many large markets Enron $350,000,000 loss alone Directors, particularly, will not serve without coverage

Recission Voids contract from its effective date basics Misrepresentation Fraudulent intent to derive Mis-statements or misleading statements Clauses -Severalibility

Securities Class Action Suit Cause- failure to disclose information new cases Securities cases set much of pricing of insurance Impacts all sizes of companies

Krispy Creme Alleged Expanded too …… Wholesale business undermined retail Stiff competition Failed to recognize impart of low carb Over exaggerated effect of diet food Franchise buy backs Purchase of franchises at inflated prices

Legislation Securities Acts of 1933 and 1934 Securities Litigation Reform Act of 1995 forward looking statements- safe harbor Public Company Accounting and …. Protection Act- Sarbanes-Oxley

Sarbanes Oxley Great Costs Greater administrative responsibilities Increase is use of outside public accounting firms New software Books, books, and more books Paragraph 404

Loss Prevention Best Practices Include: Maximize use of outside directors Educate directors Effective meetings Frequent meetings- audit compensation and nominating committees Investigate warning signs Demand Integrity Plan for succession

More Loss Prevention Conduct Periodic Director Review and Evaluation Review internal controls Measure company performance Take advantage of advisors Play the devils advocate Become informed Pressure ones independence

Executive Protection Policy