Why hasn't the Disney litigation settled: Part II

In response to yesterday's question, HCL speculates that “the Disney D&O insurer probably concluded before trial that the Disney defense has a good chance of winning the case.”

That's probably true, but it would not prevent settlement – what if the plaintiffs agreed? My point yesterday was that there is severe disagreement here, so the two sides can’t get together. That’s not so much because the case is big – after all, this is just about a very large pay package, not the collapse of a company which was involved in the Enron and WorldCom settlements. It’s because this case could be a turning point in director litigation – and it’s hard for the two sides to see around corners.

Insurers also may have more to gain from any judgment than from any settlement at this point. For insurers, it’s very good to get this liability issue settled for the benefit of future cases against directors. Although a plaintiff victory would be bad for insurers, the opinion would at least clarify the situation, and insurers just need to price the risk. A large settlement might signal the potential for liability without clarification, and invite more litigation with uncertain results.

Lesson:  clarity of rules is important regarding litigation costs, which are a big part of corporate governance these days.  We don't have that clarity right now.

PS:  It also occurs to me that what's driving this case isn't that it's so big but that, in number terms it's so small.  That's why the insurer can afford to lose this case in order to make a point that carries over to cases where the stakes are much bigger. This is another element of what makes this the "case of the decade" -- a perfect storm of factors that not only raise important issues, and at a important junction in the history of corporate law, but virtually guarantee that they'll be decided by a major court.

PPS:  And this is why I like blogging.  I post something, a reader asks a question, I respond and another blogger chimes in, and the result is, if not enlightenment, at least an increase in the total amount of information. 

PPPS:  Yet another twist raised in the comment below:  maybe the insurer has nothing to lose because if plaintiff wins there's personal fault that's not indemnifiable.  The questions are whether that's true, and whether defendants have individual insurance that would still be effective despite conduct that is not protected by 102(b)(7).  If they're not covered, the individual defendants may have little choice but to go for broke -- any meaningful settlement would still be in the millions, out of their pockets.

And if anything outside of 102(b)(7) becomes uninsured personal liability, we may see a lot of trials in the future, different insurance provisions, and really conservative corporate governance.

Comments

[Trish]

One thing that is nagging me, though, is that, if the court finds that the plaintiffs' allegations are true - that the actions of the directors in ignoring their fiduciary duties either involved intentional misconduct or were not in good faith - then the Directors would not be indemnified (because DE Code Section 102(b)(7) provides that a corporation's charter cannot eliminate a director's liability for breaches of the duty of loyalty or actions not taken in good faith or which involve intentional misconduct) and would ultimately have to pay out of their own funds. Is it possible that the D&O Insurers won't settle because, in the event of either a win OR a loss for the Directors in court, the insurance company is "off the hook"??

[Trish]

Well, a friend at an insurance agency (that will remain nameless - but is quite large) said he is fairly sure that Disney would have coverage for director acts that "lack good faith" (so my thought that the insurer might have been in a "win win" is off the table) - HIS TAKE - interesting - is that the D&O insurer may be testing the waters - that a verdict for the plaintiff would cause the insurer to pay (possibly more than they would in a settlement), true, BUT, it would also be a reason (deemed higher risk because now these claims would be both (a) withstanding motions to dismiss AND (b) resulting in plaintiff verdicts) to increase insurance rates for this type of coverage!