So you want to serve on a Board….
Serving on a Board of Directors of a privately held company can be very rewarding but it may also be quite risky. It’s an honor to be asked to serve on a board and often a good business decision. There are great relationships formed serving on the board of privately held companies and depending upon the compensation structure a future payday may be coming with a successful sale of the company.
However, the problem many people have is the only risk management step they take prior to accepting a board position is asking whether or not the company carries Directors and Officers (D&O) insurance. That’s like saying the house is secure because the front door is closed but the garage door and windows are wide open! Serving on a board is a serious responsibility. It is critical to work with an advisor to review your D&O policy. Coverage may not exist for the applicable event and board members may be left personally liable. Be careful before serving on a board. It’s a serious responsibility.
Here are just a few Directors & Officers Liability claim examples:
Non-Entity Employment Practices Liability
Plaintiff agreed to work for a company as its Chief Operating Officer. He alleges that his employment was terminated without cause and that the company hindered his attempt to find new employment by telling third parties that plaintiff was prohibited from using trade secrets and intellectual property that allegedly belong to the comp[any. Complaint filed against company for breach of contract and unfair and deceptive trade practices. Defense costs and settlement for individual named defendant – $180,000
Plaintiff filed a complaint against CEO, CFO, & COO of a company alleging they conspired to use the plaintiff’s services to furnish, install and repair the company’s equipment knowing that it was insolvent. Causes of action included fraud, misrepresentation, deceptive trade practices and conspiracy. Defense costs and settlement – $100,000
Plaintiff represents a class of non-insider stockholders who invested in the company. Plaintiffs alleged that certain directors and officers failed to disclose material facts and provided them with misleading information on high turnover of management and development of the website. Causes of action after bankruptcy of the company included fraud, misrepresentation and breach of fiduciary duties. Defense costs and settlement – $2,400,000.
Plaintiff filed a complaint against a company specializing in medical devices founded by a former partner. Plaintiff alleged the former partner failed to file a patent application while still a partner, liquidated the partnership and formed the new company with the purpose of stealing the technology. Causes of action included fraud, misrepresentation, breach of fiduciary duty, conversion and successor liability. Defense costs and settlement – $1,000,000.
Plaintiff filed a complaint against a competitor alleging that a former employee, now an employee of the competitor, engaged in the unauthorized use of confidential and proprietary information, Causes of action included misappropriation of trade secrets and confidential information, computer fraud, injunctive relief, compensatory and punitive damages. Defense costs and settlement – $350,000
Plaintiff alleged that certain directors used the company for their own business purposes at the expense of minority shareholders. Causes of action included renegotiation of a service contract at a steep discount and booking the revenue in one quarter rather than over the three year life of the contract. Also alleged was the discount would cause other customers to request the same and result in lost revenue to the company. Defense and settlement – $500,000.