In the August edition of the ABA's Business Law Today, the Business Section's Committee on Director and Officer Liability (under the very capable direction of James Wing of Holland & Knight) has just issued a brief commentary and a checklist for use by corporate counsel who must manage the creation or renewal of an executive protection program for its directors and officers ("Ds&Os"). The commentary can be viewed here. The salient finding of the Committee (after extensive research and a process of peer review) is that most corporations' advancement and indemnity by-laws and the D&O insurance policies that support or supplement them focus their coverage on a claims' paradigm that is no longer of critical concern: that of a third party civil suit against a corporation to which individual Ds&Os have been added to facilitate collection, aggravate them, and/or facilitate cross examination should the matter ever get tried.
Since the demise of Arthur Andersen, however, the Committee has found that the paradigm has totally shifted to the detriment of Ds&Os. The reality now is that Ds&Os (particularly those in "grey areas" of potential exposure) are directly and immediately personally exposed to possible catastrophic criminal liability. This is because the corporation typically "cooperates" with authorities in such cases or even "self reports" after an internal investigation, while leaving "grey area" Ds&Os adrift. This potential criminal exposure can be personally and financially catastrophic, given U.S. plea bargaining practices. The Committee did extensive legal research and found the problem to be particularly acute where Ds&Os must sacrifice critical Fifth Amendment rights to obtain advancement of their defense costs, a result mandated by the corporate laws of many states.
The materials in the link suggest the scope of the problem in this already complex area without resolving it because the area is one where the interests of executives and corporations are adverse and where an ABA Committee cannot take an official position. Efforts are continuing in the insurance markets to address the problem, so far without a clear solution. The issue has already been the subject of two ABA presentations and will be the subject of a webinar sponsored by the ACC on September 18.
Thanks to Jim Wing for his expert analysis in this critical area and we will stay tuned for more developments in this area from Jim and his ABA committee.
Read more Delaware business litigation case summaries and commentary on Delaware Corporate and Commercial Litigation Blog, a blog hosted by Francis G.X. Pileggi, of Eckert Seamans.
For more information about LexisNexis products and solutions connect with us through our corporate site.