January 20, 2005 by Canadian Underwriter
The recent settlements by former WorldCom and Enron directors highlights the new phenomenon of directors paying to settle litigation using their own funds, according to an article by Darryl P. Rains, partner at legal firm Morrison & Foerster LLP. In the past, outside directors rarely contributed personally to litigation settlements, but just this month 10 former WorldCom directors agreed to pay US$18 million of their own money, and 10 former Enron directors said they would pay US$13 million of their own funds, to settle cases.
Rains notes that the cases are highly unusual in that WorldCom and Enron represent “extreme” cases for several reasons. This includes the public nature of the cases, as well as the fact that the lead plaintiffs are public employee pension funds, as well as the overall size of the cases. Also, both cases have involved large criminal case components.
However, Rains also notes that directors must now expect that they could be asked to contribute personal funds to a litigation settlement. “Plaintiffs’ lawyers will be quick to say these other cases are “like WorldCom” or “like Enron,” and so are deserving of personal settlement payments by individual directors,” he says.
Among the strategies directors must now look at to minimize exposure are more thorough due diligence before accepting a board position and increased vigilance over compliance, Rains notes. Directors should also be looking closely at issues such as executive compensation and “related party” transactions (i.e. to avoid conflict of interest or possible insider trading allegations). And, he adds, directors must insist on full indemnification, as well as having an up-to-date directors’ and officers’ insurance program, including supplemental “side A’ coverage to protect them if the corporation is unable to do so for financial reasons.
The full article can be found at http://www.mofo.com/news or at www.mondaq.com.