Earlier this month, we discussed the Fiduciary Responsibilities of Directors and Officers as it related to financially struggling companies. As there are multiple risk factors they face, a Directors and Officers Insurance Program is also recommended to protect against the corporate governance liabilities of such companies. In order to ensure the decisions a director makes on behalf of the company are beneficial, these practices are advised to avoid litigation.
Best Practices- The most common protection is the “business judgment rule,” which allows the court not to scrutinize actions taken by the director on behalf of the company that are considered rational and does not provide personal interest in the transaction. In order to be able to take full advantage of this rule, the process by which the decision is reached is critical. When making decisions for a suffering company, directors and officers should do the following:
-Request and review all relevant information
-Ensure management and advisers provide accurate analysis
-Satisfy “entire fairness” legal standard if business judgment rule does not apply
-Seek experienced advice throughout process
Protecting the Board- If a director will personally benefit from a business transaction, the business judgment rule does not apply. In such cases, the judge will apply the “entire fairness” rule to decide whether or not the outcome was a product of fair dealing and price. To avoid conflict relating to this rule, Inside Counsel recommends the director recuse themselves from participation and voting on the matter to delegate decision making to ensure fairness.
Outside Advisers- Struggling companies should consult with outside counsel to ensure the negotiation and legality of decisions is satisfactory to creditors and other concerned parties.
Governance Document Protection- Delaware Law, the generally governing practice law, states that a corporation is permitted to exonerate its directors and officers from civil liability when a company is failing financially. Further, directors are protected against the incurred financial responsibility of obtaining legal defense on behalf of the company, regardless of the outcome. Lastly, this law allows directors and officers to acquire advancements on payment for such incidences when reimbursement is uncertain.
LLC Document Provisions- Fiduciary duties can be modified in LLC companies as the agreements are essentially contracts. However, these modifications should be crafted carefully in order to avoid ambiguity in court proceedings.
At PL Risk, we understand the risks that are associated financially struggling companies. In addition to industry news, we provide extensive coverage to safeguard your clients’ businesses and assets. For more information, contact us today at (855) 403-5982.
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