Is directors’ and officers’ insurance needed?
Yes. Anyone who signs the company’s registration statement and anyone who is or was a director of the company or who consented to be named as a director of the company at the time the registration statement was filed may be sued by any purchaser of the company’s stock. These officers and directors have several potential defenses to liability, including a due diligence defense. No person will serve as a director or officer without indemnification from the company and appropriate directors’ and officers’ insurance, and a company usually represents that it has such insurance in the underwriting agreement.
What is the SEC’s position on indemnification for
Securities Act liabilities?
Since its early history, the SEC has consistently stated that indemnification of directors, officers and controlling persons for Securities Act liabilities is against public policy and is therefore unenforceable. Every registration statement is required to set forth the
SEC’s position. Nonetheless, companies have always provided such indemnification and courts have upheld such contract rights.
By Nilene R. Evans, Of Counsel, and Peter Seligson, Associate, Morrison & Foerster LLP
© Morrison & Foerster LLP, 2013