Firms Plan to Use New Delaware Law Limiting Liability of Directors

Article excerpt

NEW YORK - Last June, the state of Delaware - home to most of the nation's largest companies - passed a law allowing corporations to limit, or even eliminate, their directors' financial liability for some kinds of mistakes. Under the Delaware law, shareholders can vote to eliminate the directors' liability, except in cases of disloyalty, bad faith or intentional misconduct.

A surprising number of companies say they are now going to use the law. In fact, companies seem to be moving to Delaware to take advantage of it.

The law was designed to ease the problems many corporations were having in getting people outside the company to serve on the board, because of a growing fear that they could be made to pay damages for negligent decision-making. And since many companies have had trouble getting directors' and officers' insurance, directors who were found guilty faced an increasing likelihood of having to pay the money out of their own pockets.

Because the law required shareholder approval - and because proxy mailings to shareholders usually go out early in the year - most corporations are only now getting the chance to limit their directors' liability.

But according to the preliminary results of Korn-Ferry International's Annual Confidential Survey of Board Practices, most Delaware companies are planning to make use of the law. More than two-thirds of the Delaware corporations responding to the survey conducted by the executive search firm said they were asking their shareholders to approve a measure limiting the directors' monetary liability.

And while only 1 percent of the responding companies said the Delaware statute would completely resolve the problem of directors' liability, more than three-quarters of them said it would partly solve the problem.

The survey of 1,000 of the nation's largest corporations also shows that the directors have good reason to fear legal liability: 16 percent of the responding companies said the board or its directors had been sued within the last three years.

Several other states - including Indiana, Kansas, Lousiana, Missouri, New York, South Dakota, Virginia and Pennsylvania - have also taken steps to try to solve the director liability problem, and other states are considering such measures. But because so many of the nation's leading businesses are incorporated in Delaware, that state's law is likely to be the most important of its kind.

`'I think it's had a very significant effect,'' said Edward P. …