Directors and Officers Liability an Overview

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Directors and Officers Liabilityan Overview
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Directors and Officers Responsibilities

• To the stock holder
• Duty of Care
• Business Judgment Rule
• Duty of Loyalty

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Sources

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

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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

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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

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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

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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

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Liabilities and Insurance

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

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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

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Directors and Officers Liability Premium

• 2003- 6.0 to 6.5 Billion in U.S.
• 2000- 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

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Recission

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

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Securities Class Action Suit

• Cause- failure to disclose information
• 2003- 216 new cases
• Securities cases set much of pricing of insurance
• Impacts all sizes of companies

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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

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Legislation

• Securities Acts of 1933 and 1934
• Securities Litigation Reform Act of 1995 forward
  looking statements- safe harbor
• 2002- Public Company Accounting and . Protection
  Act- Sarbanes-Oxley

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Sarbanes Oxley

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

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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

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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

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Executive Protection Policy
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Executive Protection Policy