August 27, 2007

Almost Half of Directors Serve on Only One Board: A Trend to Watch?

According to a PricewaterhouseCoopers/Corporate Board Member Study from earlier this year, 47% of directors sit on only one public company board – and a total of 78% sit on either one or two. Clearly, the issue of “overboarding” has come to director’s attention (although a more likely factor is the growing time commitment of serving on a board). But this trend poses a new dilemma: is there now sufficient cross-fertilization on boards?

Although it’s too early to tell, I think this trend is not problematic if most of those directors serving on only one board have sat on other boards previously (which I think will likely be the case). This trend could become a problem a decade or so in the future as it becomes less likely that directors have extensive board experience. And of course, it all depends on the individual – seem people are willing to ask the hard questions right off the bat. But most need to sit in a boardroom for a while to understand the boardroom dynamic and learn the mindset of what it means to be a director.

A Dust-Up over a Ditty

Recently, the “Above the Law” Blog has had a spat with Nixon Peabody over a song that celebrates the firm’s “Best Places to Work” recognition. Apparently, the song was not supposed to be released to the public. Unfortunately, the firm appears to be making a stink out of the song posting and there are dozens of critical comments posted on the blog’s site, including someone who went to the trouble of transcribing the text of the song. Here is a follow-up blog.

I did find the song somewhat funny (you know, “funny” in that nerdy way that lawyers can sometimes get), but not offensive in any way. In fact, if the song had been used for marketing purposes, I would have applauded the firm for doing something novel to set it apart. Law firms should be leveraging the Web for its multi-media abilities.

I first heard the song because it was e-mailed to me and I went to their home page to confirm they are an innovator – and indeed, it seems they are: they have posted an ad campaign and branded their practice as being “Legally Green.” Pretty forward-thinking stuff, as I think the legal profession should stop pretending that it’s not a business and start marketing like one…

Delaware Gloss on Advancement of Legal Fees

From Travis Laster: The scope of an individual’s advancement rights is an issue frequently implicated by criminal, regulatory or internal investigations, particularly where a company is concerned about advancing expenses to someone believed to be a wrongdoer. Delaware case law traditionally has dealt with mandatory advancement rights and has consistently held that mandatory provisions must be enforced according to their terms. A recent Delaware decision, Thompson v. The Williams Companies, Inc., C.A. No. 2716 (July 31, 2007), sheds light on the types of conditions a board of directors can place on permissive, i.e. non-mandatory, advancement rights. This case is an under-the-radar decision that offers particularized guidance to practitioners.

The Thompson case involved an employee who was first investigated and later indicted for participating in a conspiracy to manipulate the price of natural gas. The corporation’s bylaws provided for permissive advancement to directors and officers. For employees, the bylaw stated, “Such expenses incurred by other employees and agents shall be paid upon such terms and conditions, if any, as the Board of Directors deems appropriate.” Vice Chancellor Strine had no difficulty holding that this was a permissive grant of advancements and that the stray use of “shall” did not convert the provision into a mandatory right.

The board of directors in Thompson conditioned its willingness to grant advancements on (i) financial statements or other evidence from Thompson substantiating his ability to repay the funds if he were not indemnified, (ii) dollar for dollar security for the funds, in the form of a bond, letter of credit, or similar arrangement, and (iii) a certification by the employee that he believed himself entitled to indemnification. The employee challenged each of these conditions as unreasonable.

VC Strine held that in determining whether to grant advancements, the board could impose any condition that was not “arbitrary” and was “rationally related to a proper corporate interest.” As examples of arbitrary conditions, the Court offered “a requirement that Thompson walk a tight-rope between skyscrapers … or … post security worth five times the amount advanced.” The decision to impose conditions on a permissive advancement right is thus a matter of business judgment.

The Court found that each of the proposed conditions was one that “rational directors might believe necessary to protect [the corporation’s] legitimate interests” and therefore represented an appropriate business judgment. The board did not have any duty to offer the employee “terms and conditions that permit him to receive advancements.” Nor did the board have a duty to treat all persons receiving advancements equally. VC Strine declined to “read 14th
Amendment-like protections against unequal treatment into discretionary contracts governing the relationship of corporations and their executives.” VC Strine upheld each of the conditions imposed by the corporation.

Given the lack of precedent on permissive advancement rights, the Thompson decision provides a helpful guide for both the types of conditions that are appropriate and the standard by which conditions will be judged. Note, however, that the case involved a disinterested board addressing advancements for an employee. The case did not involve a board granting discretionary advancements to itself, which remains a self-interested decision to which entire fairness applies under Havens v. Attar, C.A. No. 15134 (Jan. 30, 1997).

– Broc Romanek