Before You Get Pushed Out: Protecting Yourself Against Future D&O Claims

The shareholder activist landscape continues to be very frothy, and sometimes results in unfriendly new board members joining a board. In some cases, these activist-nominated directors come to appreciate existing management—but not always. Savvy CEOs, CFOs and GCs know that one possibility in these cases is that they will be asked to leave.

In these situations the first question I get is: “Will the unfriendly board turn around and sue the newly pushed out executive officer?” This is typically followed quickly by, “What steps should I take to protect myself?”

Are You Likely to be Sued After You are Pushed Out?

It’s unlikely that a board will sue you after firing you. Generally, boards are pretty content with just firing a disfavored executive, absent any egregious behavior on the part of the departing executive.

More concerning is the situation in which a regulator shows up asking questions, for example, after an accounting restatement or similar situation where the company or a regulator has discovered that something in the past may not have been exactly as it should have been.

The risk here is that the company may be less full-throated in its defense of the executive than if he or she had still been in the company fold. This concern is real, and is why both well-drafted D&O insurance policies and indemnifications provide coverage for a departed executive officer (or board member) if they are sued in connection with activities that took place before the separation.

What Steps Should You Take to Protect Yourself Before You are Asked to Leave?

As always, disaster planning is best done well before a disaster. Sooner than later, consider taking the following steps:

1. Identify potential litigation counsel. While you probably do not actually need to hire someone, think about whom you’d hire if needed. As an experienced executive, you probably have a number of relationships you can call on. This was hopefully part of your network-building in better times. Remember that company counsel ultimately reports to the company’s board, so they are not going to be the right choice to help you now.
2. Make sure you have a copy of your company’s articles of incorporation, bylaws and personal indemnification agreement. These are all potential sources of indemnification for you. They may also be sources for funding, should you need legal fees advanced to you—even in the face of it being the company who is suing you. In the best case, you will have gone through the exercise previously of updating your indemnification agreement so that it is as modern as possible. As I’ve discussed in the past, these agreements need to be updated on a regular basis.
3. Obtain a copy of your company’s D&O insurance program. You don’t just want a summary; you want actual copies of all the policies in the D&O insurance program. A normal custom and practice of asking for an electronic copy of all the policies for your personal records makes getting this information in any one year easier. Even if you were not in the habit of asking for these documents in the past, take the time to get these documents now while you are still formally affiliated with the company. As a beneficiary of the insurance program, you will likely be able to get copies of policies after your separation, too, but this is always more awkward and difficult than if you had obtained policies before your separation. Being proactive now lets you avoid unnecessary friction later.

It’s worth saying one more time that after an unfriendly board takes over a company and asks an executive to leave, that executive typically only needs to worry about his or her reputation and finding a new job.

Litigation against a departing executive in these circumstances is rare. Nevertheless, the simple steps outlined above are worth taking if only to have one less worry should you, in fact, be forced out of your company.