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
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
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. …