Surviving the Litigious '90S: What Corporate Officers and Directors Can Do to Minimize the Risks of Lawsuits

By Massin, S. Scott; Brothers, Norman M., Jr. | SAM Advanced Management Journal, Autumn 1994 | Go to article overview

Surviving the Litigious '90S: What Corporate Officers and Directors Can Do to Minimize the Risks of Lawsuits


Massin, S. Scott, Brothers, Norman M., Jr., SAM Advanced Management Journal


"I don't want a lawyer to tell me what I cannot do; I hire him to tell me how to do what I want to do."

J. Pierpont Morgan

The last few decades have seen a disturbing increase in the number of lawsuits faced by corporations and their officers. The increase parallels an upward spiral in the size of monetary awards rendered to plaintiffs. The 1991 Wyatt survey of 872 lawsuits against corporate directors and officers showed that the average award to successful claimants was slightly over $3 million; the average cost of defending against such suits was almost $600,000.

Obviously, directors and officers of corporations can face many risks besides those arising from their business decisions. Corporate leaders are not only responsible in the fiduciary sense to their stockholders, but can also be held responsible to government and third party plaintiffs for violations of both written law (statutes) and common law.

Business executives can avoid lawsuits only if they educate themselves about their legal responsibilities. They must also take the steps necessary to ensure that their colleagues and co-workers are informed and act accordingly. Executives and directors owe it to themselves and their company to conduct their daily activities in such a manner as to minimize the risk of expensive, time consuming, and personally damaging legal actions.

Corporation and Stockholders

Stockholders are the legal owners of any corporation. The directors and officers of the corporation are their agents, responsible for running the business on a day-to-day basis. Shareholders can file a direct suit either against the corporation or the individual causing loss, or both, if there was damage to a shareholder that did not necessarily injure the corporation. Shareholders can also bring derivative actions if there was a wrongful act or omission which is perceived as injuring the corporation.

Corporate officers and directors are only rarely accused of inordinate neglect in the running of their business. The executives are generally assumed to be working actively on behalf of the company. This active effort is known by the concept "duty of care." Neglect of duty of care is analogous to the common law principle of gross negligence. The courts generally do not deal with this type of problem, leaving this aspect of business to those more intimately involved, such as a vote of no confidence by a board of directors or a stockholder revolt. Some recent cases in this area, however, suggest a movement of the law to considering the motives of executives as well as whether they had been active, critical, and attentive to their general responsibilities in the court's own business judgment.

Jerome Van Gorkom was the chairman and CEO of Trans Union Corporation, approaching the age for mandatory retirement. Van Gorkom solicited financier Jay Pritzger about a possible buy-out, presenting a proposal of $55 per share to Pritzger without consulting the board of directors.

Van Gorkom presented the proposal to the board in a 20 minute oral presentation. No written documents were provided, and no member of the board was a trained financial analyst or investment banker. The board approved the buy-out at the end of the two-hour meeting.

After an uproar by the stockholders, the Delaware Superior Court found the board to be negligent because (1) they failed to inform themselves about Van Gorkom's role as initiator of the sale, (2) they failed to obtain for themselves an accurate estimate of Trans Union's worth, and (3) they approved the sale rapidly even though there was no crisis or emergency demanding immediate action.

Although the $55 share price may have been fair, the board was found to be grossly negligent in the execution of its responsibilities to the shareholders and was held liable for damages. As a direct result of this case, many outside directors became fearful of the potential for significantly increased liability. …

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