Director, Protect Thy Self


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Director, Protect Thy Self

Morrison & Foerster Attorneys Offer Some Basic rules to Live By For Board Directors in the Wake of Precedent-Setting WorldCom and Enron Settlements

Morrison & Foerster

After two multi-million dollar personal settlements by former board directors of failed companies hit the front pages recently, directors have every reason to be nervous. Previously, outside directors rarely, if ever, contributed personally to a class-action settlement. Now it is possible that a new set of deep pockets have been found to be mined in future suits. Darryl Rains and Robert Mattson, partners at Morrison & Foerster, have some questions all directors should ask before they join a board.

The two cases involve the most notorious business failures of the last recent downturn. In the first, 10 former directors of WorldCom contributed $18 million of their own money as part of a $54 million settlement with shareholders. The second case had ten former Enron directors paying $13 million of their own funds in connection with a $168 million settlement.

The lead plaintiffs in both cases were public employee pension funds who have been quoted as saying they intended the settlements to send a message to directors and to raise the standard for acceptable corporate management.

?While the WorldCom and Enron cases are, in many ways, extreme, directors of other companies will have to keep these cases in mind when they are dealing with embroiled in shareholder litigation should be prepared to receive demands for personal contributions towards settlements,? said Mr. Mattson, who serves as co-chair of the firm?s Corporate Finance group (pictured above).

?Plaintiffs' lawyers will be quick to say their cases are "like WorldCom" or "like Enron," and so are deserving of personal settlement payments by individual directors. WorldCom and Enron will both serve as precedents in future settlement negotiations,? said Mr. Rains, the co-chair of Morrison & Foerster?s Securities Litigation group (pictured at right), who specializes in representing directors and companies in securities class actions.

Can directors do anything do avoid the risk of losing personal assets? Here are some basic steps that Mr. Rains and Mr. Mattson suggest directors take to minimize their exposure:

Deeper due diligence before accepting any board position
Increased vigilance and participation in the "compliance" aspects of the position
Implement "best practices" in financial reporting and public communications
Careful scrutiny of executive compensation and related party transactions
Full written indemnification agreement with company
Enhanced D&O insurance protection, including supplemental "Side A" coverage for outside directors

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