Published on August 25th, 2005 by Alan L Sklover
Prudent corporate officers will always insist upon “continuing indemnity.”
ACTUAL CASE HISTORY: For four years Theresa was employed by a publicly-held hotel management company as its Director of Investor Relations. Following the departure of the company’s General Counsel for a teaching position at a local law school, Ruben, the company’s chief executive, asked Theresa if she would also serve on an interim basis as Corporate Secretary. Theresa had no experience as a Corporate Secretary. Though she was reluctant to take on more responsibilities, the additional compensation Ruben offered her was enticing. After discussions, she agreed to take on the additional role, with the understanding that the Deputy General Counsel would assist her with these additional duties. As time went on, the Deputy General Counsel did most of the Corporate Secretary work for Theresa, including recording and certifying Board Minutes, attesting to their accuracy, distributing them to Board Members, and overseeing shareholder proposals, investor initiatives and Board elections.
Two years later, Theresa was contacted by an executive recruiter, and after two interviews was offered an Investor Relations Director position at a major entertainment company. Following a brief and successful negotiation with her prospective employer, she tendered her resignation to Ruben, who reluctantly accepted it. Then, after a three-week notice period, during which Theresa transitioned her duties to her assistant, Theresa departed for her new job in the entertainment industry. The transition was professionally navigated. All seemed fine.
Seventeen months later, the Summons arrived. Theresa had been named as a defendant in a shareholder class-action lawsuit. Not understanding why she had been named a defendant, she contacted Ruben, who told her he’d speak to the company’s lawyers. One of the company’s outside lawyers contacted her a few days later, and asked to speak with “the lawyer who will be representing you in this case.” Theresa was confused. “Won’t you be doing that?” she asked. He told her that he would have to get back to her on that.
As matters turned out, Theresa’s former employer did not provide her with legal assistance, or reimbursement of her legal bills, either. Nor did her former employer’s “D & O” (Director and Officer Liability) insurers do so. It turned out that three problems existed: (1) The company’s By-Laws provided that the company would protect its directors and officers in the event of their being named in a lawsuit, but the By-Laws said nothing about “former” directors and officers; (2) The Company’s D & O policy provided for payment of judgments against “insured directors and officers,” but no one had made arrangements for a “tail” policy for Theresa. [A “tail” insurance policy is a separate insurance policy that provides continued coverage after the relation is over for acts that took place during the relation. Doctors who leave or retire from active medical practice always make sure they have “tail” medical malpractice coverage to protect them from later suits.]; and (3) Theresa had never asked for, or received, indemnity from her employer or its insurer that would provide her with either primary indemnity coverage or “tail” coverage.
The investor class action lawsuit alleged that the company’s Board of Directors had never disclosed to the investing public that it had received a notice of investigation regarding insider trading from the U.S. Securities and Exchange Commission. Theresa had been Corporate Secretary during the time period in question, but remembered nothing at all about it. It turns out the Deputy General Counsel deleted mention of the SEC notice from the Board Minutes because she didn’t want the matter “publicized prematurely.” The lawsuit was eventually settled, but Theresa was left holding a legal bill of over $200,000, far more than she had ever been paid to act as Corporate Secretary. And her lawyers told her she’d gotten off lucky: only with great effort had they been successful in negotiating her not having to pay any part of the $20 million settlement: Ruben, the CEO, had to contribute $1 million of his own monies.
LESSON TO LEARN: These days shareholder lawsuits are common, and they frequently name directors and officers as defendants. Even in privately owned companies, directors and officers may be named defendants in lawsuits by suppliers, vendors, lenders, and even government agencies, especially when company obligations are not fulfilled.
If at any time you agree to serve as a corporate officer of any company, whether publicly held or privately owned, or as a member of a corporate Board of Directors, make sure you are covered at all times – even after you leave your posts – with either a written promise of some kind of protection from lawsuits, or insurance against being held liable. Such protection can take several forms, but must always be confirmed in writing.
The protection from lawsuits must cover the time you serve in your officer or director posts, as well as any lawsuit begun afterward that is based on your time in the post, commonly called “tail” coverage. If you are denied your request for such protection, you should reconsider serving as a corporate officer.
Our unique SkloverWorkingWisdom™ Method of workplace negotiating focuses on “Rewards” of a job, and the importance of “Responsibilities and Resources,” as well. But our SkloverWorkingWisdom™ Method also stresses the importance of “Risk-limitation” in your employment relations. For those agreeing, as part of their employment relations, to act as a corporate officer or corporate director, it is essential to ensure “Continuing Indemnity.”
WHAT YOU CAN DO: When asked to consider taking on the role and responsibilities of a corporate officer or director as part of your employment relation:
1. Ask for a written promise by the company that it will do two things for you: (a) pay the legal costs of your attorneys if you are ever personally sued based on your serving in that capacity, (commonly called “defense costs”) and (2) also pay any award, judgment or settlement that you might be held responsible for (commonly called “full liability”).
2. Second, ask for a letter from the company’s General Counsel regarding whether, and to what extent, the company’s By-Laws provide you with indemnity from lawsuits, including both (a) “defense costs” and (b) “full liability.”
3. Third, ask that your name be added to any “D & O” policy that protects the company’s directors and officers from such lawsuits. [It is essential that you be given the policy information including the policy number, so that you can write to the carrier and request that you be given written notice if for any reason the D & O policy is cancelled, non-renewed or disavowed.]
4. In any of these three ways of protecting yourself noted in Paragraphs 1, 2 and 3, above, make sure that you are covered both while an officer or director, and for all times afterward, too. That “tail” coverage may require a separate policy of insurance for you.
5. Remember that your company might either (a) go bankrupt, and so not be able to fulfill any promises to you, or (b) for any number of reasons refuse to indemnify you. For this reason, you would be best served by insisting on protections in all three ways noted in Paragraphs 1, 2 and 3, above.
6. If you are provided written promises of protection against lawsuits, or given insurance as a form of protection against lawsuits, insist that the terms of those protections be “no less favorable” than those protections afforded any other director or officer. [By terms of protection we mean limits of coverage, deductibles, waiting periods, and choice of counsel.]
7. If your request for such protections is denied, you would be well-advised to consider politely declining the considerable honor you’ve been offered.
If you would like to obtain our Model Letter Requesting an Indemnity Letter, that shows you “What to Say and How to Say It”™ just [click here.] Delivered Instantly By Email to Your Printer.
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