ICI Mutual Studies Director Litigation Risk

ICI Mutual has released a study on independent director litigation risk which describes the nature of the risk and reviews techniques directors may want to use to manage it. The study offers suggestions for directors before litigation is ever initiated as well as those if they become involved in litigation. "Since 2003 there has been an awful lot of litigation and independent directors are being drawn in," said Larry Maffia, president. "We wanted to try to help directors gain perspective about what their potential risks are and how to manage those risks."

Directors should focus on three principles--preparation, process and documentation--to reduce the risk of litigation, the study suggests. To reduce the direct financial impact of civil litigation directors should arrange for appropriate indemnification and professional liability insurance, it adds.

"Given the fund industry's size and the role it plays in the country's economic marketplace litigation risk is out there and it's likely to continue to be out there for the foreseeable future," said Dan Steiner, general counsel. "The risk to independent trustees has historically been and appears likely to continue to be relatively low. That being said, it's in the interest not only of directors, but of funds and shareholders, that this risk be understood and managed."

The study looks at the myth that independent directors face increased risk and liability. While a slew of suits have been filed since 2003, independent directors have generally been dismissed or dropped as defendants, even when the lawsuits otherwise survived, the study finds. Still, independent directors are often named in these suits. "Plaintiff's attorneys may include independent directors as defendants in civil litigation to increase financial and psychological pressure on funds groups to settle more quickly and/or at a higher sum than might otherwise be the case, to obtain a 'bargaining chip' for use with defendants' counsel at a subsequent stage of the litigation, to see to ensure the availability of insurance proceeds for settlements that may ultimately be reached in the litigation and to drive a wedge between the independent directors and other defendants, so as to undercut efforts by the defendants to present a unified defense in the litigation," the study notes.

The issues and observations in the study came from discussions with independent directors, outside counsel to directors and funds, litigators who represent funds and directors, analysis of ICI Mutual's insurance claims and review of publicly available information on fund litigation and related issues.

Suggestions To Boards

Front-End

1. Focus carefully on board materials and make your expectations regarding board materials known to management and counsel.

2. Consider ways to enhance your effectiveness as an independent director.

3. Pay close attention to the decision-making process.

4. Don't underestimate the importance of maintaining carefully written and accurate minutes of board and committee meetings.

5. Be very careful with personal notes and e-mails.

6. Periodically reevaluate your commitment to board service.

Back-End

1. Understand your indemnification rights.

2. Recognize that D&O insurance is not all the same.

3. Consider whether to supplement your fund's basic D&O insurance with special protection for independent directors.

4. Pay close attention to managing defense costs.