Lessons from Recent Litigation Involving Directors' Fiduciary Duties
Plenary Session
Monday, October 20, 9:30 AM
| E. Norman Veasey | Senior Partner, Weil, Gotshal & Manges, and former Chief Justice, Delaware Supreme Court |
| Charles M. Elson | Edgar S. Woolard, Jr., Chair & Director, Weinberg Center for Corporate Governance and Director, Autozone |
| Chief Justice Myron T. Steele | Delaware Supreme Court |
| Pamela S. Tikellis | Partner, Chimicles & Tikellis LLP |
Norman Veasey began the session with highlights of a number of key topics in the current director liability environment, including:
- SEC Certification to the Supreme Court, and a Supreme Court Decision in CA
- Corporate Bylaws
- Fiduciary Duties of Directors in Decision-making and Oversight
- Section 220: Demands for Corporate Books and Records
- Constituency Directors
- Risk Management, and
- A Series of Recent Cases
The full details of each of these topics are available in the session handout (Click here to download).
Norman Veasey then polled the audience for their opinions on the current environment and several "hot" issues concerning director liability. Conference attendees overwhelmingly indicated that the board's oversight of risk assessment is a responsibility which should be given equal-or more-weight than the board's compliance oversight responsibilities.
| Yes |  91% |
| No | 9% |
Total Responses: 365 |
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Interestingly, a full 70% of attendees did not believe that boards-in light of the current environment-should be more averse to risk-taking in maximizing profits.
| Yes | 30% |
| No | 70% |
Total Responses: 345 |
|
Myron Steele:
In his remarks, Norm mentioned the Disney case. In a "current topics" discussion, why would you mention Disney? - It remains a seminal case. It was highlighted because of the size of the compensation package. But rather than look at the details, I'm going to cover a few takeaways:
Chief Justice Myron T. Steele
1) Directors should avoid creating the perception that they can't conduct themselves separately from management. It's the ability to exercise independent objective judgment that really matters.
2) Directors must stay engaged in the oversight process. Looking at the process taken often raises questions of the willingness of directors to exercise this independent judgment.
3) Use expert advice. If you're protecting your decision-making process, consider using expert advice in good faith.
4) Best practices are not mandated with respect to the Business Judgment Rule, but it does provide a good shield for controversial decisions.
5) Institute a good oversight process. Think about-in the oversight context-establishing a framework for oversight and circumstances that show that you monitor that framework. Just having that framework in place is not enough.
Charles Elson:
Courts have been gentle on liability issues. This is because the company is in the hands of the board-but shareholders always have the means to vote directors out. The final "pressure valve" is the election-that is, the shareholders have the means to correct the problem.
The problem is that this assumes the election is a viable election process-which is not always true. In order to mandate investor confidence in the system, you need to have an accountability system that a viable election system creates. This is the idea that if you really mess up, the shareholders can replace you. That's why the short-slate reimbursement bylaw is so important.
| Yes | 12% |
| No | 77% |
| Depends on the circumstances | 11% |
Total Responses: 368 |
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If you have reimbursement, it means there is the threat of a real election from time to time with this bylaw-which is why I was so happy to see this bylaw. Without elections, you remove an important accountability issue for the board.
The way we look at the corporations, and the way we look at elections, and the way we look at boards is about to change. The government will be taking preferred stock stakes in the nine largest financial institutions. There is the potential that the government could have a voting stake-and ask for board seats-in businesses. What happens when the government-a political body-becomes a shareholder? I think you're about to see a dramatic shift of a state-centered system, based on shareholder primacy, which is about to be readjusted. Think about what this new involvement may do to a world we've grown accustomed to, and grown institutions around.
Pamela Tikellis:
As you've probably presumed from my background, I watch directors with a pretty critical eye.
I'm going to talk a moment about 220-Demands for Corporate Books and Records. Directors should look at this as an opportunity to avoid litigation through transparency. It does work.
| Yes | 53% |
| No | 47% |
Total Responses: 348 |
|
The court can requested many documents-including memoranda, emails, minutes, and other decision-making process documents. The court will search files-you'll search files-and you'll have to produce minutes (which may have hand-written notes on them). Personal files at home-your personal computer-if you store company documents on them, those are company files and you'll be required to search those files.
Many companies have document retention policies. To the extent that your company has a policy like that: You should know it and follow it. If your company doesn't have one, you should.
Plenary Session
If you read an email-delete it. If you don't do this with every email, you could end up with someone trying to show you that cherry-picked which e-mails to save in order to present a situation in a certain light.
Also, remember we are in a post-Enron world full of internal investigations. I would also take a look at the question of when/if you can exclude directors from accessing information. I think it is a question our courts will be addressing more frequently.
Remember that directors have an unfettered right to access information. It is the company that has the burden of proving that showing that information to that director will cause harm.
For More Information.
Norman Veasey, the panel moderator, was chair of NACD's Blue Ribbon Commission on Director Liability -which contains detailed information on standards of conduct for directors seeking to avoid undue liability concerns.
PowerPoint Presentation/Handouts
For More Information:
- Report of the Blue Ribbon Commission on Director Liability: Myths, Realities, and Prevention
Article: A Perspective on Liability Risks to Directors - FAQ : What are the basic duties of directors, and for what reasons might they be sued?
- FAQ What is director liability under state law?... under federal law?
