Options backdating which companies are at risk
When securities class action suits are filed against directors and officers of public companies, it’s quite common to see derivative suits brought against these same directors and officers as almost a by-product of the securities class action suit.For example, if a company’s stock falls precipitously, a class action suit follows, and we’d expect one or more derivative suits to be filed on the same underlying facts.But almost of the companies with options backdating problems had a derivative suit.And, these derivative suits settled for cash—in some cases a lotof cash.Rather, the shareholder is bringing the suit the corporation that is being injured by the reported misconduct of the directors and officers.
In our recent “Focus on D&O Insurance Limits” report, we discuss limits in more detail, including what to do.In these cases, the shareholder would typically go directly to court. No one likes to be sued, but derivative suits are especially threatening for individual directors and officers.This is because, unlike securities class action suits, there is much less clarity about what can and cannot be indemnified by a corporation in the case of settlements and judgments of derivative suits.When structuring your D&O insurance program, the threat of derivative suits—and the fact that the settlement or judgment may not be indemnifiable by the corporation—is an argument in favor of having adequate amounts of separate Side A limits.As a reminder, Side A is part of a D&O insurance program that responds when a corporation cannot indemnify its directors and officers.
If the board refuses the demand or does not act upon it, the shareholder would then seek redress in court by filing suit.