Will Your D&O Coverage Be Yanked After You Retire?
from September/October 2008
by Craig Mellow
So you think you’ll be safe from board-related suits after your days as a director are over? Better think again, given the cautionary tale of William J. Bohnen, a retired director who in high Dickensian fashion died fighting for his directors’ and officers’ indemnity rights in Delaware Chancery Court, only to lose them posthumously. Here are the highlights of an intricate train of events, played out between private companies in an arcane set of circumstances but nonetheless capable of affecting D&O coverage for an enormous number of directors who are eyeing retirement.
Until February 2005, when he resigned because of ill health, Bohnen was on the board of closely held Troy Corp., a specialty-chemicals company in Florham Park, New Jersey, in which his family’s Steel Investment Co. had a significant interest—enough to get a board seat. His seat was taken by Richard W. Schoon, now 57, a longtime financial consultant to Steel Investment and the Bohnens.
Steel Investment was looking to sell its stake in Troy, and Schoon pushed Troy to disclose certain numbers, claiming that he was doing so in his role as a Troy director and in the interest of getting the best price for Troy shares. Troy declined, citing a concern that Schoon would share the information with third parties. Instead it invited him to visit the company headquarters in person, sign a confidentiality agreement, and then inspect the books. Schoon declined and in September 2005 sued to force Troy to disclose the data. In 2006 Troy sued a number of individuals, including Schoon and Bohnen, who it claimed had breached their fiduciary duty in the past by giving confidential data about Troy to Steel Investments (which still owns its Troy shares) and other parties.
That’s when the big D&O surprise hit. Bohnen and Schoon, reviewing their own defenses against Troy’s suit, learned that in November 2005 the Troy board had negated the bylaw that extended insurance coverage to directors who’d left the company. This meant Bohnen, since Schoon was still a director. It is unclear how Schoon missed this particular board vote. He did not return phone calls asking for comment. The company also declined requests for interviews, saying the suit is still in litigation.
Bohnen went to Chancery Court to have the D&O coverage reinstated but died within a year, in November 2006, at 61. Schoon, who remains on the Troy board, took up the suit. Schoon v. Troy Corp., as it became known, dragged on until March of this year, when Delaware judge Stephen P. Lamb ruled that Troy had a right to move its D&O goalposts. Bohnen’s protections did not “vest” until he was actually sued, Lamb declared, and since Troy’s board had amended the bylaw before suing him, the company wasn’t obliged to provide him with insurance. “At the time of the bylaw amendment,” said the judge, “Troy had not even conducted the discovery that it later relied on to assert the fiduciary-duty claims against Bohnen. Thus there is no evidence that Troy was even contemplating claims against Bohnen at the time of the amendments.”
This juridical abracadabra raised eyebrows and a flurry of client memos within the tight circle of attorneys and insurance agents who track the vagaries of D&O law. “The decision ran counter to the expectations of many directors and people who advise directors,” says D&O specialist Peter L. Welsh, a Boston-based associate at the firm of Ropes & Gray. Schoon’s attorneys are appealing the ruling. But the Delaware Supreme Court is traditionally loath to overrule the Chancery, and Lamb is a respected veteran judge.
If you’re thinking about retiring from a board, just how could this decision affect you? True, the details of the Bohnen case were unusual and involved far-from-common dealings between privately held companies. But Judge Lamb’s ruling that a company can cancel D&O protection for retired directors whenever it likes applies to any public corporation registered in Delaware, as many are. And it’s not hard to imagine situations that might lead to the same result. A messy corporate succession, say, that ended with ill feeling toward former board members, or simply a new management with its eye on costs, could pull away the D&O rug just before a surprise lawsuit landed on the company and its past and present directors.
What can you do to protect yourself? Stop trusting bylaws, for a start—they can be amended at will by your boardroom successors—and have your own lawyer draw up a personal-indemnity contract whereby the company or its insurer covers you into retirement for legal fees and damages in cases involving your board service. Fewer than 30% of Fortune 100 directors currently have this kind of protection, says Robert Quaintance, a partner with Debevoise & Plimpton in New York City. A thoroughly drafted contract, which can run to 15 or more pages, should specify how the director will be covered if he and the company end up on different sides in a lawsuit. A nice frill would be a pre-funded minitrust that would compensate the director for any deductibles in the company’s D&O insurance. They can be substantial.
Kevin Lacroix, a partner at Oakbridge Insurance Services in Cleveland who also publishes the D&O Diary blog, suggests another way to protect yourself. For “a few thousand dollars,” he says, you can buy millions of dollars of coverage against service-related torts for a six-year term. After that, presumably, you will have been gone from the board long enough for litigants to forget about you.
Plenty of lawyers are still busy with follow-up suits and countersuits stemming from the Bohnen case. But most directors haven’t yet shown concern. “We’ve seen some interest in drawing up contracts since the decision,” says Quaintance, “but directors have a lot of other things on their minds.” Maybe. But if Bohnen could speak from the grave, he’d probably tell them to make room for this.
