Directors and Officers Liability: Expert Counsel for Your D&o Risk

A director or officer who signs or certifies financial statements containing materially false or misleading information faces liability under Section 10(b) of the Securities Exchange Act and Rule 10b-5, and the Sarbanes-Oxley Act requires the CEO and CFO to personally certify the accuracy of the company's financial statements and the effectiveness of its disclosure controls, creating direct personal liability for certification failures. A director or officer who fails to disclose a material fact that a reasonable investor would consider important also faces liability under the SEC's duty of disclosure rules.

Financial reporting investigations and financial fraud counsel can advise on the specific financial reporting and disclosure failure liability risks and develop the financial reporting compliance and D&O defense strategy.

A director or officer who fails to exercise adequate oversight of the company's operations, compliance programs, or risk management systems may be liable for governance breakdowns that allow illegal conduct to cause harm to the company or its shareholders, and the Delaware Chancery Court has held that directors who completely abandon their oversight responsibilities can be held personally liable for corporate misconduct even if they were not personally involved. Corporate mismanagement allegations can arise from acquisitions at excessive prices, unjustified executive compensation, and related-party transactions not subjected to adequate independent review.

Corporate governance advisory and corporate governance counsel counsel can advise on the specific D&O liability framework and develop the D&O defense, governance, and compliance strategy.

Corporate disputes and corporate litigation counsel can advise on the specific governance breakdown and mismanagement allegation risks and develop the corporate governance defense strategy.

The duty of care requires directors and officers to act on an informed basis, in good faith, and in the honest belief that the action taken is in the best interests of the corporation, and a director or officer who makes a business decision without adequate information or reasonable deliberation can be held liable for the resulting harm. The business judgment rule creates a presumption that decisions were made in good faith on an informed basis, but the presumption can be rebutted by evidence that the director or officer had a financial interest in the transaction or failed to conduct adequate due diligence.

Board of directors meetings and breach of fiduciary duty counsel can advise on the specific duty of care and decision-making responsibility obligations and develop the duty of care compliance and business judgment rule defense strategy.

The duty of loyalty requires directors and officers to give the corporation's interests priority over their personal interests and to avoid self-dealing transactions in which they have an undisclosed financial interest, and a director or officer who approves a transaction from which she personally benefits without disclosing the conflict and obtaining disinterested approval can be required to return any profits obtained from the transaction. Conflicts of interest most commonly triggering duty of loyalty claims include undisclosed related-party transactions, corporate opportunities diverted to the director or officer, and executive compensation arrangements approved without independent analysis.

Corporate fraud and executive compensation counsel can advise on the specific duty of loyalty and conflict of interest risks and develop the duty of loyalty compliance and conflict of interest management strategy.

A shareholder derivative action is a lawsuit brought by a shareholder on behalf of the corporation against its directors and officers for breach of fiduciary duty, and the shareholder must make a pre-suit demand on the board before filing unless the demand would be futile because a majority of the board is interested in the challenged transaction or lacks independence. A securities class action is brought by shareholders who allege that the company's directors and officers made material misstatements or omissions that caused them to purchase the company's stock at an artificially inflated price.

Securities litigation and securities fraud class action counsel can advise on the specific shareholder lawsuit and derivative claim risks and develop the shareholder litigation defense and derivative action response strategy.

The SEC has authority to investigate and bring enforcement actions against directors and officers for violations of the securities laws, including misstatements in financial reports, failures to disclose material information, insider trading, and violations of the Sarbanes-Oxley Act's certification requirements, and the SEC can seek civil monetary penalties, disgorgement of profits, and officers and directors bars that permanently prohibit an individual from serving as an officer or director. A director or officer subject to an SEC investigation should engage experienced securities defense counsel immediately.

SEC enforcement and SEC investigations counsel can advise on the specific regulatory enforcement and securities violation risks and develop the SEC enforcement response and securities violation defense strategy.

An effective corporate governance program establishes written board and committee charters that define the responsibilities and decision-making processes of the board, creates audit and compliance committees with independent directors who have the authority to monitor compliance, implements a system of internal controls that prevents and detects financial reporting errors and compliance failures, and documents the board's deliberative processes in sufficient detail to support a business judgment rule defense. The Sarbanes-Oxley Act requires public companies to maintain internal control over financial reporting.

SEC compliance and Sarbanes-Oxley Act counsel can advise on the specific governance policy and internal control implementation requirements and develop the governance compliance and internal control enhancement strategy.

A D&O insurance policy provides coverage for the legal costs and financial exposure of directors and officers who are named in shareholder lawsuits, regulatory investigations, and other claims, and a properly structured policy should provide broad coverage for defense costs and settlements without requiring the director or officer to pay a large deductible before coverage attaches. An indemnification agreement requires the company to advance defense costs and indemnify directors and officers against judgments and settlements, and state corporation laws generally permit broad indemnification except in cases of fraud or willful misconduct.

Indemnification claims and insurance coverage disputes counsel can advise on the specific D&O insurance and indemnification coverage issues and develop the D&O insurance coverage and indemnification protection strategy.