Board materials and communications are relatively easy for shareholders (and plaintiffs’ lawyers) to request and obtain, even without filing a lawsuit. For that reason, among others, consider not using your personal email address for board business. Intermingling board business by using your current professional email address also comes with some risks and potential inconveniences. Consider requesting an email address from the corporation or setting up a dedicated account. It is also advisable to have a designated person who transmits materials to the board, and to have that individual maintain the minutes and materials in a central repository.
Pay Attention to Public Statements
The duties of care and loyalty include a duty of candor. Directors, and the company, may be liable for the contents of public filings they sign and for the statements they make (to investors, to the press, and even on personal social media pages). Public statements should all be supported by internal backup and should match the internal analyses. Management should memorialize the processes used to prepare the analyses and to present them to the board and executives speaking on the company’s behalf. Financial projections are often the subject of litigation. Ensure that management has appropriate processes for developing the company’s public guidance and that there is well-documented support for the numbers provided to investors.
Revise Rather Than “Refresh” Regular Filings
With repeat or regular filings, there is often a tendency for management to auto-populate certain sections or otherwise streamline the review. Insist upon a careful analysis of whether circumstances have changed and make sure that the statements within are up to date. Prospectuses, registration statements, and other documents filed with the SEC in connection with stock offerings warrant particular care. The securities laws impose civil liabilities on directors when those documents contain a false or misleading material statement or omission. There may be defenses available when a director has exercised due diligence. Due diligence means that the director believed the challenged statements were true and did not contain any material omissions, had reasonable grounds for that belief, and undertook a reasonable investigation into the truth of the challenged statements. A diligent director should be able to demonstrate regular attendance at board and committee meetings, ongoing dialogue with management about key issues and unusual developments, and sources supporting a reasonable belief that the statements were true at the time they were made. Explaining what you did after the fact is not as powerful as being able to show it through contemporaneous evidence.
Avoid Suspicious Stock Sales
Sales by directors and other insiders are publicly reported and monitored. Fortuitously timed or out-of-the-ordinary trades will draw unwanted attention. Be wary of actions that remove lockups or other restrictions applicable to insiders. It is advisable to use a 10b5-1 plan when trading company stock. Those are prearranged trading plans through which stock is automatically sold at specified prices, times, or other conditions. They can be a powerful defense against charges of insider trading. Establish a 10b5-1 plan during a time when you do not have any material, inside information and have it remain in place for a period of years. Request that the SEC filings documenting your trades indicate that your sales were made pursuant to such a plan. Consider whether to require that management and other insiders do the same.
Maintain Appropriate Protections
Corporations want talented individuals to serve on their board without undue fear of personal liability. With that interest in mind, certain protections have become standard. Check the bylaws and certificate of incorporation to ensure that the corporation limits, to the fullest extent permitted by law, a director’s personal liability for breaches of fiduciary duties. Make sure those protections are also memorialized in an indemnification agreement between you and the corporation, which should include a provision indemnifying directors for litigation expenses and advancing those costs. The corporation should also include a provision in the indemnification agreement providing for directors and officers liability insurance covering both the company and the board. The appropriate amount of insurance varies greatly. Consult with a broker and other advisors.
As with any skill, keeping current is key. Directors should be encouraged to attend trainings and courses relevant to their positions. Many companies have a budget for director education or will arrange for trainings upon request.
Exercise Your Judgment
Do not forget the skills that earned you a role on the board in the first place. Directors are expected to exercise their reasonable business judgment. The considerations and tools mentioned above are meant to enhance, not supplant, that skill.