Tag: Insurance


D&O Liability: A Downside of Being a Corporate Director

Alex R. Lajoux is chief knowledge officer at the National Association of Corporate Directors (NACD). This post is based on a NACD publication authored by Ms. Lajoux. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

One of the few downsides to board service is the exposure to liability that directors of all corporations potentially face, day in and day out, as they perform their fiduciary duties. The chance of being sued for a major merger decision is now 90 percent; but that well known statistic is just the tip of an even larger iceberg. The Court of Chancery for the state of Delaware, where some one million corporations are incorporated (among them most major public companies), hears more than 200 cases per year, most of them involving director and officer liability. And given the high esteem in which Delaware courts are held, these influential D&O liability decisions impact the entire nation.

This ongoing story, covered in the May-June issue of NACD Directorship magazine, recently prompted the National Association of Corporate Directors (NACD) to take action. Represented by the law firm Gibson Dunn & Crutcher LLP, NACD filed an amicus curiae (“friend-of-the-court”) brief in the matter of In re Rural/Metro, a complex case likely to continue throughout the summer. Essentially, the Court of Chancery ruled against directors and their advisors, questioning their conduct in the sale of Rural/Metro to a private equity firm.

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What’s New in 2015: Cybersecurity, Financial Reporting and Disclosure Challenges

The following publication comes to us from Weil, Gotshal & Manges LLP and is based on a Weil alert; the complete publication, including footnotes, is available here.

As calendar-year reporting companies close the books on fiscal 2014, begin to tackle their annual reports on Form 10-K and think ahead to reporting for the first quarter of 2015, a number of issues warrant particularly close board and management attention. In highlighting these key issues, we include guidance gleaned from the late Fall 2014 programs during which members of the staff of the Securities and Exchange Commission (SEC) and other regulators delivered important messages for companies and their outside auditors to consider. Throughout this post, we offer practical suggestions on “what to do now.”

While there are no major changes in the financial reporting and disclosure rules and standards applicable to the 2014 Form 10-K, companies can expect heightened scrutiny from regulators, and heightened professional skepticism from outside auditors, regarding compliance with existing rules and standards. Companies can also expect shareholders to have heightened expectations of transparency fostered by notable 2014 events such as major corporate cyber-attacks. Looking forward into 2015, companies will need to prepare for a number of significant changes, including a new auditing standard for related party transactions, a new revenue recognition standard and, for the many companies that have deferred its adoption, a new framework for evaluating internal control over financial reporting (ICFR). The role of the audit committee in helping the company meet these challenges is undiminished—and perhaps, in regulators’ eyes, more important than ever.

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Changing the Cyber Security Playing Field in 2015

Paul A. Ferrillo is counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation. This post is based on a Weil Alert authored by Mr. Ferrillo; the complete publication, including footnotes, is available here.

“If this incident [Sony] isn’t a giant wake-up call for U.S. corporations to get serious about cybersecurity, I don’t know what is. I’ve done more than two dozen speaking engagements around the world this year, and one point I always try to drive home is that far too few organizations recognize how much they have riding on their technology and IT operations until it is too late. The message is that if the security breaks down, the technology stops working—and if that happens the business can quickly grind to a halt. But you would be hard-pressed to witness signs that most organizations have heard and internalized that message, based on their investments in cybersecurity relative to their overall reliance on it.”

— Author Brian Krebs, Dec. 20, 2014.

“For those worried that what happened to Sony could happen to you, I have two pieces of advice. The first is for organizations: take this stuff seriously. Security is a combination of protection, detection and response. You need prevention to defend against low-focus attacks and to make targeted attacks harder. You need detection to spot the attackers who inevitably get through. And you need response to minimize the damage, restore security and manage the fallout.”

— Professor Bruce Schneier, Dec. 19, 2014.

Without a doubt, the last month in the world of cyber security has been tumultuous. It has now been confirmed that two companies in the United States have potentially been the subject of cyber-terrorism. Servers have been taken down or wiped out. Businesses have been significantly disrupted. Personally identifiable employee information has been shoveled by the pound onto Internet credit card “market” sites. The cyber security world has changed. And two of the most respected men in cyber security have both iterated similar messages: it is time for U.S. corporations to take this stuff seriously.

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The Importance of a Battle-Tested Cyber Incident Response Plan

The following post comes to us from Paul A. Ferrillo, counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation, and is based on a Weil Alert authored by Mr. Ferrillo.

“The scope of [the Sony Pictures Entertainment (SPE)] attack differs from any we have responded to in the past, as its purpose was to both destroy property and release confidential information to the public…. The bottom line is that this was an unparalleled and well planned crime, carried out by an organized group, for which neither SPE nor other companies could have been fully prepared.”

— Remarks by Kevin Mandia, “Sony Investigator Says Cyber Attack ‘Unparalleled’ Crime,” Reuters, December 7, 2014. [1]

“The days of the IT guy sitting alone in a dark corner are long gone. Cybersecurity has become an obvious priority for C-Suites and boardrooms, as reputations, intellectual property and ultimately lots of money are on the line.”

— Priya Ananda, “One Year After Target’s Breach: What Have We Learned?” November 1, 2014. [2]

“Resiliency is the ability to sustain damage but ultimately succeed. Resiliency is all about accepting that I will sustain a certain amount of damage.”

— NSA Director and Commander of U.S. Cyber Command Admiral Mike Rogers, September 16, 2014. [3]

We have definitively learned from the past few months’ worth of catastrophic cyber security breaches that throwing tens of millions of dollars at “preventive” measures is simply not enough. The bad guys are too far ahead of the malware curve for that. [4] We have also learned that there are no such things as quick fixes in the cyber security world. Instead, the best approach is a holistic approach: basic blocking and tackling such as password protection, encryption, employee training, and strong, multi-faceted intrusion detection systems [5] really trump reliance on a “50 foot high firewall” alone. But there are also two more things that are critical to a holistic cyber security approach: a strong, well-practiced Incident Response Plan (IRP), and, as Admiral Rogers noted above, the concept of cyber-resiliency, i.e., the ability to take your lumps, but continue your business operations unabated.

In this post, we tackle two questions: (1) What are the essential elements of a Cyber IRP? and (2) Why are IRPs so important to your organization?

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Cyber Security, Cyber Governance, and Cyber Insurance

Paul A. Ferrillo is counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation. This post is based on an article authored by Mr. Ferrillo and Christine Marciano, President of Cyber Data Risk Managers.

JP Morgan Chase. Community Health Systems. The Home Depot. Kmart. There has been no shortage of data breaches in recent weeks—with new developments on an almost daily basis. The age of cyber hactivisim, cyber extortion, and cyber terrorism is here, and it is not going away any time soon.

Data security issues are no longer just an IT Department concern. Indeed, they have become a matter of corporate survival, and therefore companies should incorporate them into enterprise risk management and insurance risk transfer mechanisms, just as they regularly insure other hazards of doing business. As the number of data breaches has increased, the demand for cyber insurance has likewise dramatically increased more than that for any other insurance product in recent years. Every board of directors should be questioning its officers and management as to “whether or not its company should be purchasing cyber insurance to mitigate its cyber risk.” If management answers, “Oh, it costs too much,” or “Oh, it will never pay off,” second opinions should be obtained. Rapidly. Because neither answer is correct.

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Update on Directors’ and Officers’ Insurance in Bankruptcy

The following post comes to us from Douglas K. Mayer, Of Counsel in the Restructuring and Finance Department at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Mayer, Martin J.E. Arms, and Emil A. Kleinhaus.

Directors’ and officers’ (“D&O”) insurance coverage continues to represent a key element of corporate risk management. See memo of July 28 2009. A decision in the bankruptcy of commodities brokerage MF Global, In re MF Global Holdings Ltd., No. 11-15059 (S.D.N.Y. Sept. 4, 2014), provides a recent illustration of how D&O insurance may be treated upon the bankruptcy of the insured company, depending on the specific structure and terms of the insurance at issue.

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Cyber Governance: What Every Director Needs to Know

The following post comes to us from Paul A. Ferrillo, counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation, and is based on an article authored by Mr. Ferrillo.

The number, severity, and sophistication of cyber attacks—whether on our retail economy, our healthcare sector, our educational sector or, in fact, our government and defense systems—grows worse by the day. [1]

Among the most notable cyber breaches in the public company sphere was that hitting Target Corporation (40 million estimated credit and debit cards allegedly stolen, 70 million or more pieces of personal data also stolen, and a total estimated cost of the attack to date of approximately $300 million). [2] Justified or not, ISS has just issued a voting recommendation against the election of all members of Target’s audit and corporate responsibility committees—seven of its ten directors—at the upcoming annual meeting. ISS’s reasoning is that, in light of the importance to Target of customer credit cards and online retailing, “these committees should have been aware of, and more closely monitoring, the possibility of theft of sensitive information.” [3]

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How Much Protection Do Indemnification and D&O Insurance Provide?

The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg; the complete publication, including footnotes, is available here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

We consider below how advancement of legal fees, indemnification, and insurance operate when officers and directors become involved in regulatory investigations and proceedings. Part I addresses the enhanced risk officers and directors face today in an Age of Accountability. Part II addresses advancement of legal fees, which may be discretionary or mandatory depending on a company’s by-laws. Part III covers indemnification, which generally requires at least a conclusion that the officers and directors acted in good faith and reasonably believed that their conduct was in, or at least not contrary to, the best interests of the corporation. Part IV examines insurance coverage, which varies from carrier to carrier and may or may not provide meaningful protection. Finally, Part V summarizes the principal lessons from the analysis. Although there is significant overlap with similar principles that apply to private litigation, we limit our discussion here to advancement, indemnification, and insurance for regulatory investigations and proceedings.

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Labor Representation in Governance as an Insurance Mechanism

E. Han Kim is Professor of Finance at the University of Michigan.

Worker participation in corporate governance varies across countries. While employees are rarely represented on corporate boards in most countries, Botero et al. (2004) state “workers, or unions, or both have a right to appoint members to the Board of Directors” in Austria, China, Czech Republic, Denmark, Egypt, Germany, Norway, Slovenia, and Sweden. Such board representation gives labor a means to influence corporate policies, which may affect productivity, risk sharing, and how the economic pie is shared between providers of capital and labor.

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Multiple-Based Damage Claims Under Representation & Warranty Insurance

The following post comes to us from Jeremy S. Liss, partner focusing on capital markets and mergers and acquisitions at Kirkland & Ellis LLP, and is based on a Kirkland publication by Mr. Liss, Markus P. Bolsinger, and Michael J. Snow.

Private equity funds are increasingly using representations and warranties (R&W) insurance and related products (such as tax, specific litigation and other contingent liability insurance) in connection with acquisitions as they become more familiar with the product and its advantages. [1] Acquirors considering R&W insurance frequently raise concerns about the claims process and claims experience. A recent claim against a policy issued by Concord Specialty Risk (Concord) both provides an example of an insured’s positive claims experience and highlights the possibility for a buyer to recover multiple-based damages under R&W insurance.

R&W Insurance Advantages

Under an acquisition-oriented R&W policy, the insurance company agrees to insure the buyer against loss arising out of breaches of the seller’s representations and warranties. The insurer’s assumption of representation and warranty risk can result in better contract terms for both buyer and seller. For example, the seller may agree to make broader representations and warranties if buyer’s primary recourse for breach is against the insurance policy, and the buyer may agree to a lower cap on seller’s post-closing indemnification exposure as it will have recourse against the insurance policy. In addition, R&W insurance often simplifies negotiations between buyer and seller, resulting in a more amicable, cost-effective and efficient process.

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