Publicly held companies generally receive greater media attention about scrutiny from shareholders and government regulators than private companies, but that doesn’t mean that private companies are immune to lawsuits regarding management activities that can disrupt operations and create a financial burden for the business.
“People think that privately held businesses and nonprofits do not have much exposure. The reality is that there are many lawsuits that are brought by shareholders, employees, regulatory agencies, competitors and customers that are not covered by general liability insurance. Only a directors and officers policy can provide coverage for an actual or alleged wrongful act, breach of duty or mismanagement,” says Peter Bern, CEO of Leverity Insurance Group.
Smart Business spoke with Bern about the risks private companies face and how directors and officers insurance (D&O) can help limit exposure.
What are some potential D&O claims for private companies?
Regardless of your company’s size, the legal cost to defend a director, officer, or employee is substantial, as are the potential penalties that can be personally incurred. Because of the personal liability risk, which is not covered under a personal insurance policy, protecting these key individuals and the entity itself is critical.
Private companies have investors, shareholders, creditors and employees that can bring lawsuits alleging wrongful acts, mismanagement, breach of duty or neglect. Regulatory agencies, suppliers, competitors and customers can also be plaintiffs.
Types of lawsuits include the following:
- Breach of fiduciary duty, including self-dealing and conflicts of interest.
- General business mismanagement and bankruptcy.
- Failure to deliver services.
- Failure to disclose information.
- Disclosing materially false or misleading information.
- Regulatory agency actions and investigations.
- Merger and acquisition complications and objections.
- Shareholder derivative actions suits.
- Freeze-out mergers forcing minority shareholders to sell stock below fair market value.
How can companies determine what coverage they need?
Because there is no standardized policy, it makes it difficult to comparison shop. There are special endorsements or enhancements that can be placed on these policies. It’s a matter of analyzing needs and selecting the necessary limits and coverages accordingly.
Underwriting factors for D&O insurance include company characteristics such as:
- Age: Companies with less experience and shorter history of effective management are riskier.
- Industry: Investment banking and securities expose executive management to more risk than those experienced by board members of a small nonprofit.
- Financial stability: If a company’s finances are unstable, there is a greater chance of becoming insolvent during a lawsuit.
- Litigation history: Insurers will analyze a company’s history of previous lawsuits and any adverse business developments.
Is D&O coverage becoming more commonplace?
It’s been around for a long time, but it had been very cost prohibitive. Also, directors and officers thought it wasn’t necessary to purchase coverage if the company wasn’t publicly traded. But even nonprofits have exposure. They have volunteers donating time, making decisions and moving money; D&O covers them if there is mismanagement.
Still, many companies are not aware D&O insurance is available. Without D&O coverage, executives are not protected personally — business pursuits are excluded from homeowners insurance.
Whether you’re a privately held, nonprofit or a public company, it is likely that your business can benefit from a D&O liability policy. Since there is no such thing as a ‘standard’ policy, a professional insurance agent is invaluable when purchasing D&O coverage. He or she will understand your organization and can help design a policy that will meet the needs of the directors and officers, shareholders and the entity itself.
Peter Bern is the CEO of Leverity Insurance Group. Reach him at (216) 861-2727 or firstname.lastname@example.org.
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The costs of litigation can quickly escalate, especially if you’re facing a motivated and well-funded plaintiff who seems intent on aggressively pursuing litigation. Dealing with litigation can create a big burden upon management to respond, collect documents and be available to give a deposition, testimony or consultation.
“If you have experience with lawsuits, then you understand the cost and time pressures associated with them,” says Stephen L. Ram, Attorney with Stradling Yocca Carlson & Rauth. “That’s why attempting to come to a resolution with the other party ahead of reaching the courts makes sense for both parties.”
Smart Business spoke with Ram about resolving disputes without litigation and the legal protections that exist around conversations undertaken to come to an agreement outside the courts.
What are kinds of disputes do companies become aware of before a lawsuit is filed?
There are a number of common disputes that can come from vendors, contractors and shareholders that stem from some dissatisfaction with your business relationship. Most often, a company is made aware of them through a demand letter sent from counsel, or, as with many vendor disputes, a sales representative will be aware that some looming frustration is becoming more than a trifle and should be a concern for the company.
How do you approach a solution when one or both parties are emotionally charged?
It’s common to have a powerful initial emotional response to a dispute when it arises, particularly when a party makes substantial or possibly outlandish monetary demands. Understand that emotional reactions are natural, but consider what is best for the company and its shareholders and find a suitable resolution. Recognize that the other side has different pressures and emotions to which it’s reacting. Step back and be dispassionate and objective because a measured, discerning approach makes it easier for you to facilitate a resolution. Also consider the applicability of any insurance coverage and notify the broker or carrier after receiving a demand.
What needs to be considered when unequal information is causing or adding to the dispute?
Disputes generally arise because one party speculates the other has done them wrong or has done something suspicious. While there may be a grain of truth to the gripe, the other party’s speculation is usually accompanied by a lack of information or a misunderstanding regarding what actually transpired. Naturally, you will undertake your own formal or informal investigation into the basis for the dispute. There is an opportunity before this dispute boils over into a lawsuit to be open to what the other side needs and wants from you, and you can consider your willingness to share information from your own internal inquiry. Being open to this type of dialogue makes it easier to work toward a resolution.
When should a representative begin talking with the other side?
The decision of when or how to open a dialogue is unique to each situation. Most times, the initial dialogue should be between counsel to ensure confidentiality protections and avoid a blindsided attack. The first step is to gauge and engage the other party, which involves acknowledging the other party’s monetary or other demands. However, you also need to be clear that you do not intend to cave to those demands to manage their expectations, but state your willingness to work with them to reach a fair resolution.
Next, establish parameters for future dialogue. If the other side is requesting information or you would like to voluntarily provide information to correct misunderstandings, legal counsel can assist in determining what documents to provide, what level of detail to share, or perhaps to make a company employee available to tell the story of what happened or answer questions.
If you are going to make a member of management or another company employee available, the third step is preparation. Preparation involves understanding the parameters for the dialogue, understanding of the relevant facts and your story, and that person’s ability to bring back conversations that go astray, or refrain from going beyond the scope of the conversation. This conversation can be as simple as a phone call or as structured as mediation.
Are you putting yourself at risk by engaging in this type of dialogue?
There are legal protections for communications that are undertaken for the purpose of reaching a settlement of a dispute. These protections, available under state and federal law, dictate that what you say during these resolution conversations is not admissible in court to prove liability. This means you can share information that might legally amount to admitting to a breach of a contract, for example, in an effort to reach a compromise.
To invoke the protections of these statutes, you just need to tell the other side you are having the conversation in order to resolve the dispute. But for added protection, talk with outside counsel about what you’re planning, that you’re serious about reaching a resolution, and ask for a confidentiality or nondisclosure agreement. Convince the other side to put this protected dialogue in place, as well. The confidentiality under these statutes and a binding agreement offer comfort to both parties and help facilitate conversations. Still, there may be situations where it’s not advisable to share or only share limited information.
If a resolution cannot be reached, how should you proceed with management of a lawsuit?
Keep an open dialogue and don’t entrench yourself in an emotional reaction or overly rigid position. Allow the other side to see that you’re serious about defending or prosecuting, but hopefully cooler heads can prevail and a resolution is reached, especially if there is an ongoing relationship. An early resolution is usually far less costly and disruptive than one reached after protracted litigation.
Stephen L. Ram is an Attorney with Stradling Yocca Carlson & Rauth. Reach him at (949) 725-4102 or email@example.com.
Every business, no matter how well it is run, faces the possibility of a lawsuit.
But there are steps you can take before that happens to position your company to prevail, says Thomas M. Hanson, a member of Dykema Gossett PLLC and head of the firm’s Dallas office financial services litigation practice.
“If you’re in business, litigation is not necessarily inevitable, but it is certainly a possibility,” Hanson says. “Every company needs to prepare for it, just as you would prepare for other contingencies that might affect your business.”
Smart Business spoke with Hanson about the policies you need to have in place and if, despite your best efforts, you are sued, the steps to take to lessen the pain.
What everyday practices can help minimize litigation costs and potential liability?
In litigation, documents generally carry the day. Most businesses utilize some type of standard form contract, such as purchase orders, sales orders, or a standard form employee/consultant agreement. Businesses need to review those forms on a regular basis to ensure they clearly lay out the terms of the contract. A manufacturing company might think, for example, that its sales order gives the buyer ten days to inspect the goods. But review the contract from the perspective of a judge who has no understanding of your industry. Will she read it the same way? If not, you should clarify the language and potentially save yourself many thousands of dollars in litigation costs, not to mention potential liability.
Significant litigation expense can also be avoided if you have a standard document retention policy. Every company should have one, particularly given the proliferation of e-mail communication. Whatever your policy — if e-mails are deleted every six months, every five years or never — it should be written down. When you get into litigation, courts are more and more interested in finding out what happened to electronic documents.
If you have a standard policy and can show that a key e-mail in the case was deleted according to a standard policy, you’ll be in much better shape than if you have no policy and it looks like e-mails were deleted haphazardly. Again, this simple practice can not only save you from attorneys’ fees but also from potential liability.
What other steps should businesses take to protect themselves?
Another issue with standard contract terms and conditions is making sure employees are using them. Too often, there is a two-page contract; the first page has a purchase order and page two is the standard terms and conditions. But your employees may not bother to send that second page. Suddenly, the case-winning provision you were relying on may not be part of your contract at all.
Finally, proper insurance coverage can be a lifesaver if your company is sued. If you have coverage, the insurance company is not only obligated to pay damages assessed, but, even more important, it is generally obligated to defend you and pay your lawyers. It makes cases infinitely more resolvable if you have a policy that will cover all or some of the cost.
If, despite its best efforts, a business is sued, how should it approach that suit?
Again, documents are key. In particular, courts are cracking down on what happens to electronic documents after litigation commences. If your servers automatically delete e-mails at a set time period, you need to have your IT personnel stop the automated delete function for any potentially relevant electronic documents.
Take steps to collect documents that might be relevant right at the beginning, and make sure, in writing, to instruct any employee who might have relevant documents not to delete anything — not e-mails, spreadsheets or documents stored on their hard drives. If you don’t, some courts may severely punish even the innocuous destruction or deletion of relevant documents. Real-life horror stories exist of courts ordering monetary sanctions of tens or hundreds of thousands of dollars or (even worse) issuing instructions allowing a jury to infer that the destroyed documents were harmful to the company’s case.
Should companies consider alternatives to fighting in court?
Absolutely. There are many ways of trying to resolve a suit without going through a trial, even without invoking a formal litigation process.
Arbitration, especially for smaller disputes among smaller companies, can be a great forum. You have much more limited discovery and, generally, you’ll have an arbitrator who is much more informal and will allow the parties more flexibility to try to work things out on a reasonable schedule. Also, decisions reached in arbitration can generally not be appealed, which lends more finality to a judgment that might be reached in court.
The downside is that you’ll have to pay for arbitration services, but a case that might be a two-week jury trial may only be three or four days in arbitration due to the informality and the lack of dealing with a jury.
Is settlement sometimes a better option than fighting a lawsuit?
Yes. Businesspeople often take a sound, rational, economic approach to business matters until they get sued, then the gloves are off and they don’t care about the expense and just want to fight it. When passion takes over and you’re lashing out at the other side not because there is any long-term benefit but because you are outraged that you’ve been sued, you have to ask if this is the right business decision for your company. But if the answer is yes, and a principled stance is the best approach for the company’s long-term success, then stick to your guns.
Thomas M. Hanson is a member at Dykema Gossett PLLC. Reach him at (214) 462-6420 or firstname.lastname@example.org.
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When your business parts ways with an employee, is your company —and those who work there — protected from a lawsuit? Without an employee separation agreement and release in place, an employee can make a variety of claims, including pursuing a civil action in court or administrative action through the Equal Employment Opportunity Commission or similar state agency. An employee can walk out the door with your trade secrets and key customers, taking them to a competitor — and even solicit valuable employees to join the other company.
“Every employer should consider an employee separation agreement and release, as no employer is immune from lawsuits and other employee claims,” says Michael J. Torchia, a member of Semanoff Ormsby Greenberg & Torchia, LLC.
Smart Business spoke with Torchia about how employee separation agreements can protect employers and individuals, and what components these legal documents should include.
What is an employee separation agreement and release, and who needs one?
An employee separation agreement and release ensures that a company and its individuals — including officers, directors, shareholders and employees — are not liable should an employee file suit after leaving the company, whether through termination, layoff or resignation. This legal document always contains a release of all of the employee’s claims and may include noncompete, nonsolicitation, trade secret and confidentiality, and ‘return of company materials’ provisions to protect the employer from such damage.
An employer needs the peace of mind of knowing that a former employee cannot cause damage to the business or instigate lawsuits that could harm the business. Every business should consider putting an employee separation agreement and release in place.
Why is it critical to put an employee separation agreement and release in place?
Think of all employees as potential plaintiffs. Are you offering them severance pay or other benefits on the way out the door without asking for anything in return? Businesses could instead require that employees sign a separation and release agreement in return.
Some employers are hesitant to propose an employee separation agreement and release because they are concerned that asking employees to sign the document will be an admission that the company has done something wrong or that the company is trying to hide something. But this is rarely true. These agreements are common business practice, and most employees are not surprised if requested to sign a separation and release.
What key components should be included in an employee separation agreement and release?
First, the employer must give some sort of ‘consideration’ when asking an employee to sign a separation agreement and release. In other words, what will you give the employee in return for signing it? Many times, this consideration is severance pay.
For example, in Pennsylvania, employers are not required to pay severance unless they have already agreed to do so, such as in an employment agreement, established company policy or collective bargaining agreement. Therefore, if your company has not committed to paying severance, you can offer some amount of severance in exchange for the employee signing the agreement. Or, if you offer two weeks of severance, for example, you may extend that to six weeks if an employee signs the agreement.
Confidentiality is also important. You don’t want employees telling others in the company what they are receiving in return for signing.
It’s also a good idea to include an attorneys’ fees provision. Should a former employee violate the agreement and file a lawsuit against your organization, the agreement would require that employee to compensate you for attorneys’ fees to defend the action. This is an important component that also deters employees from breaching the agreement, and makes the employer whole if employee does breach.
Other key points of the employee separation agreement and release include noncompete, nonsolicitation, confidentiality and trade secret provisions. Also, an employer will want to include provisions that:
* Employees must return all company property and materials upon their departure.
* Designate jurisdiction and venue so that a lawsuit will be brought, if at all, in a place convenient to the company.
* The employees acknowledge that the employer may provide the agreement to prospective employers to enforce it.
Also, note there are different requirements depending on an employee’s age in terms of time frames for reviewing the agreement. The Age Discrimination in Employment Act gives employees ages 40 and older 21 days to review an employee separation agreement and release, and after signing, seven days to revoke it and change their minds. And if more than one employee is laid off, that timeline extends to 45 days, with a seven day revocation period. Additionally, there are laws that vary by state concerning how the agreements need to be drafted and what provisions they may contain.
What next steps should an employer take to protect the business and the interest of individuals who work there?
There is much more to include in an employee separation agreement and release. These are not cookie-cutter documents, which is why enlisting an experienced employment law attorney is critical.
Avoid using agreements downloaded from the Internet, and do not borrow an agreement from a fellow business owner. It’s also a bad idea to use an old agreement of your own because laws, statutes and court opinions interpreting these laws regularly change. Speak with an attorney about whether the agreement you are currently using is up to date and contains all the necessary provisions to protect the interests of the organization and its people.
Michael J. Torchia is a member of Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-2042 or email@example.com.
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC