According to a recent report by New York-based Willis Group Holdings, the following key decisions of 2003 are likely to have the greatest impact on management liability in 2004. Willis predicts that these decisions may have the broadest repercussions. Each summary provides an indication of which aspect of management liability will be most affected.
Adelphia: The latest decision from the bankruptcy judge in the Adelphia Communications case is that the company’s D&O insurers should not be permitted to rescind their policies due to concerns about the potential impact that this could have on the company’s reorganization efforts. [Impact: Insurance Coverage]
Campbell: In the most recent decision from the U.S. Supreme Court on the reasonableness of punitive damage awards, the Court held that few awards significantly exceeding a single-digit ratio between punitive and compensatory damages would satisfy due process requirements. This case has already been cited in a number of other actions. In some instances, the punitive damage award was reduced; in others, efforts have begun to trigger the exceptions to the rule that were acknowledged by the Court. [Impact: Liability]
Credit Suisse First Boston: The court ruled swiftly against CSFB in the investment banking firm’s coverage suit to apply the proceeds of its Errors & Omissions policy to cover its $100 million payment arising out of a global regulatory settlement with a number of investment banking firms. The court held that a $70 million portion of the settlement—labeled as disgorgement of monies to the SEC and NASD who had accused them of abusive practices on IPOs—was not covered loss. The court reasoned that the E&O payment would “negate the remedial effect of a settlement if the party that had to give back the disgorgement money is repaid by an insurer.” [Impact: Insurance Coverage]
Enron: Breach of fiduciary duty claims were brought by participants in two of Enron’s pension plans accusing certain company executives and the bank trustee. The court ruled that the ERISA suit could continue against several executives and the bank trustee on the theory that the executives were acting as ERISA plan fiduciaries and that the bank should have made sure that the administrator’s decisions were prudent. This verdict may be a loud wakeup call for executives and may prompt bank trustees to consider new risk management strategies in order to avoid new fiduciary liabilities under ERISA. [Impact: ERISA Fiduciary]
IBM: In a case currently on appeal, a district court ruled that the cash balance formula used by the company’s pension plans illegally discriminated against older workers. Almost at the same time, a court of appeals in another circuit ruled that participants who received lump sums under Xerox’s cash balance formula were underpaid. Wary of concluding broadly that some cash balance plans may be inherently discriminatory, fiduciaries will watch this appeal closely. [Impact: ERISA Fiduciary]
Walt Disney: In a surprise ruling, the Delaware Chancery Court stripped the independent directors sitting on Walt Disney’s compensation committee of the protections typically afforded directors under the business judgment rule as well as of any corporate indemnification in a shareholder claim as to the reasonableness of a $140 million compensation agreement with a former executive. The case is now before the lower court.