Much has been reported in the media regarding the significance of the proposed settlement of federal securities law claims agreed to by certain former WorldCom outside directors as well as a similar settlement agreed to by certain former Enron outside directors. These events must be viewed in perspective - and not with the sense of doom that followed in the days immediately following the announcements of the settlements.
Under the terms of the proposed WorldCom settlement, eleven former directors of WorldCom have agreed to pay over $20 million of their own money (representing approximately 20% of the directors' collective net worth, excluding primary residences, retirement funds and certain joint marital assets. Ten former directors of Enron have agreed to pay $13 million of their own money (representing 5% of the gains they made selling Enron stock before Enron's true condition became known to the public). In both cases, these payments are part of negotiated compromises that would obviate difficult trials and would be added to much larger payments by insurance carriers and other defendants, all of which still cover only part of the massive losses alleged to have been incurred by investors.
The WorldCom and Enron cases are unique on many obvious levels, but directors of public companies are rightfully concerned that these developments may represent a new trend that potentially puts at further risk the personal assets of conscientious fiduciaries.
These settlements should not be viewed - as some have suggested - as a harbinger of new exposure of directors to personal liability. Indeed, the law and the courts continue to protect conscientious directors who exercise due care in good faith and in the best interests of the corporation and its stockholders. The time-honored business judgment rule is alive and well under state law. Good faith and diligence should be a safe harbor under federal law when public filings signed by directors are later shown to contain false or misleading statements. Courts may be looking harder at director conduct to ensure that directors seeking the protection of these statutory and judicial doctrines have acted with the good faith the law always has required. Further, the SEC continues to remind us of their increased focus on "personal accountability" for corporate gatekeepers - but new pitfalls have not been created for conscientious directors by virtue of new statutes or case law.
Jurisprudence, however, is not the whole story. Institutional shareholders and the plaintiffs' bar may seek to use the WorldCom and Enron settlements as tactical precedents when formulating strategy for settlement negotiations. In fact, some institutional investors have already begun offering higher contingency fee premiums to plaintiffs' lawyers that successfully extract settlement payments from the personal assets of directors.
This tactic creates a practical concern that may make more difficult the settlement of cases that are headed for trial, after having survived motions to dismiss and motions for summary judgment. This is particularly true where egregious misconduct is alleged and D&O insurance would be insufficient to cover a potential verdict. However rare these cases almost certainly will be, directors must be aware of the potential for things going awry and take the steps that will in almost all cases protect them.
There is, of course, no "one size fits all" checklist that will protect all directors in all cases. We believe, however, that adherence to the suggestions set forth below will protect almost all directors under almost all circumstances.
Ira Millstein is a Partner of Weil, Gotshal & Manges LLP and a leading authority on Corporate Governance and the Hon. E. Norman Veasey is a Partner of Weil Gotshal & Manges LLP and former Chief Justice of the Supreme Court of Delaware.