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Banking & Finance Law Report

Category Archives: Corporate Governance

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Personal Liability, Bank Directors and the Business Judgment Rule

Posted in Bank Regulation, Community Banking, Corporate Governance, Corporate Law, Regulation and Compliance

Last April, a trade association for bank directors, the American Association of Bank Directors reported the results of a survey designed to measure the impact of concerns about personal liability on the decision of bank board members to resign and by individuals to turn down board seats on banking organizations.

One of the key concerns, the survey highlighted, is the possibility of an FDIC lawsuit against the directors if a bank failure occurs. The fear was bank directors would be liable for decisions made as directors notwithstanding what is commonly referred to as the business judgment rule. Generally, the business judgment rule shields corporate directors, including bank directors, from liability when board decisions result in losses to the corporation or to shareholders.

The AABD mentioned in particular a then pending lawsuit in Georgia arising out of FDIC claims related to the failure of Buckhead Bank. These claims against the directors sounded in simple negligence regarding the making of loans. And the directors had asserted the business judgment as a defense.

A few days ago the Georgia Supreme Court ruled on the matter and the decision is worth a review by bank directors and managers even though they don’t do business in Georgia. The Georgia Supreme Court decision elegantly summarizes the business judgment rule including its history and common law origins. So the opinion is a useful “read” for bankers everywhere because the development of local jurisprudence in most states is likely similar to the process described in the opinion.

The …


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Duty of Ohio LLCs to pay the Litigation Expenses of Their Managers, Officers, Employees and Agents

Posted in Corporate Governance, Corporate Law

Both Ohio corporations and Ohio LLCs are permitted (but not required) to enter into indemnity agreements with their officers, directors, managers and employees. But when forming an Ohio corporation or Ohio LLC, entities should carefully consider the differing mandatory indemnity obligations that also apply to each type of organization.  

As we noted in a previous post, the Ohio Supreme Court recently stated in Miller v. Miller that even without an indemnity agreement, Ohio corporations have certain mandatory responsibilities to pay directors’ litigation expenses (provided that a director first submits an "undertaking" to the corporation) under Ohio Revised Code §1701.13(E)(5)(a).

Mandatory indemnity requirements for Ohio LLCs are quite different. Ohio Revised Code §1705.32(C) states that to the extent that a "manager, officer, employee or agent" of a limited liability company has been successful on the merits or otherwise in defense of any action, suit or proceeding related to their status as a manager, officer, employee or agent, such person "shall" be indemnified against expenses that were actually and reasonably incurred. 

This statute does not allow an Ohio LLC to avoid the indemnity by making a statement in its articles of organization or operating agreement. The LLC statute also applies to managers, officers, employees and agents – the Ohio corporate statute described above applies only to directors. In those regards, an Ohio LLC’s mandatory indemnity requirements may seem more burdensome (from the LLC’s perspective) than the indemnity requirements applicable to an Ohio corporation.

The circumstances in which an Ohio LLC would have to pay litigation expenses …


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Ohio Supreme Court Rules On Duty of Corporations to Pay the Litigation Expenses of its Directors

Posted in Corporate Governance, Corporate Law

Ohio corporations should carefully consider whether their articles of incorporation or code of regulations should state that Ohio Revised Code §1701.13(E)(5)(a) does not apply to the corporation. Without making that exclusion, the lack of an indemnity agreement will not prevent a director from exercising his statutory right to receive (from the corporation) payment of his litigation expenses.

Corporations and their directors often enter into indemnity agreements. These agreements usually state that the company will reimburse the director for certain expenses (such as legal fees) incurred by the director as a result of his or her status as a director. But Miller v. Miller, a recent decision by the Ohio Supreme Court, makes clear that even without an indemnity agreement, Ohio corporations have (unless otherwise stated in their articles of incorporation or code of regulations) certain mandatory responsibilities to pay directors’ litigation expenses. 

Ohio Revised Code §1701.13(E)(5)(a) states that Ohio corporations "shall" pay the expenses (when they are incurred) of directors who are subject to "actions, suits, or proceedings" asserted against a director because he is a director. The only step a director must take to receive such advances is to execute an "undertaking," which must state that the director will: (i) reasonably cooperate with the corporation concerning the action, suit or proceeding, and (ii) repay all expense to the corporation if it is proven in court by clear and convincing evidence that the director’s action or failure to act was taken deliberately to harm the corporation or with reckless disregard for the best interest …


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FINRA Rule 6490 Imposes Fees on Community Banks with Securities Traded Over-the-Counter

Posted in Corporate Governance

Enforcement of a relatively new rule of the Financial Industry Regulatory Authority (FINRA) has resulted in significant fees in 2011 for small issuers with securities traded over-the-counter (OTC), such as some community banks. FINRA Rule 6490 requires issuers to provide notice to FINRA of certain company-related actions, such as dividends and stock splits, or face a $5,000 fee, which some might characterize as a fine.

FINRA’s ability to charge issuers is new as of 2010, and is a significant departure from FINRA’s historically ministerial role with respect to issuers. FINRA primarily oversees broker-dealer member firms, but it also performs certain functions for issuers of OTC securities. For example, it reviews and processes requests to announce or publish certain actions by issuers of OTC securities and maintains the symbols database for OTC securities. …


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SEC Whistleblower Rules

Posted in Corporate Governance

In mid-August the SEC’s new whistleblower rules will take effect (click here for the Final Rule).  The new rules explain and further define the requirements of a whistleblower program that has been in place since the Dodd-Frank Act took effect on July 21, 2010. In general, anyone who provides information to the SEC relating to a possible violation of the securities laws is entitled to an award if the following requirements are met:

  • The information must be provided voluntarily, before the SEC asks for it;
  • The information must be based on the whistleblower’s independent knowledge and not already known to the SEC or derived from public filings;
  • Providing the information must lead to successful enforcement by the SEC or a federal court or administrative action; and
  • The SEC must obtain monetary sanctions above $1 million.

Successful whistleblowers can receive an award of between 10 and 30% of the total monetary sanctions collected. The whistleblower program is a significant expansion of previous SEC whistleblower rules that only applied to insider-trading cases and were capped at 10% of the penalties collected (click here for the SEC press release). 

The whistleblower rules do not require the whistleblower to comply with the company’s internal compliance program, but do encourage such internal compliance. For example, a whistleblower who reports through the company’s internal compliance program is still eligible for an award if the company reports the information to the SEC, and the whistleblower receives credit for all information proved by the company, even information …


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Developments in Corporate Minute-Taking Best Practices

Posted in Corporate Governance

Proper board meeting minute taking has recently increased in importance as a result of a number of court decisions. Bankers and other businessmen doing business in the corporate form should carefully consider the impact of cases such as In re Walt Disney Company Litigation (Del. Ch. 2004). 

In many states, minutes are considered to be prima facie (i.e., presumptive) evidence of what actions an entity actually took. Some courts have also taken the position that other evidence (such as witnesses testifying that serious debate did actually occur in a meeting, even when the minutes don’t record such debate) won’t be allowed unless minutes are clearly incomplete or ambiguous.

In re Walt Disney Company Litigation (Del. Ch. 2004) is a case in point and is particularly instructive with respect to the appropriate level of detail in board minutes. The Disney plaintiffs charged that the board of directors of Disney violated their duty of good faith when considering the CEO’s hiring of a new president. When Disney’s board met to discuss the hiring, the minutes did not review or approve: (i) any presentations or reports regarding the terms of the draft hiring agreement, (ii) any questions raised by any board members, and (iii) the employment agreement being authorized. The Disney board ultimately approved the hiring. The total space in the minutes dedicated to the hiring was less than one and one half pages.…


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SEC Finalizes New Proxy Access Rule

Posted in Corporate Governance

Last week, the SEC finalized a new proxy access rule for 3% shareholders (or larger) that was first proposed over a year ago. Proxy access refers to the right of a shareholder to use the company’s proxy statement to solicit votes for a nominee for the board of directors. Prior to the new rule, a shareholder that wanted to solicit votes for a nominee had to prepare its own proxy statement at significant cost. Now 3% shareholders (or larger) can use the company proxy statement to nominate directors.

In general, if a shareholder (or group of shareholders) holds at least 3% of the voting power of a company for at least three years, among other requirements, it can include nominees in the company proxy statement for as many as 25% of the seats on the board.

The new rule is in effect for the 2011 proxy season, except it will not apply to smaller reporting companies for three years.

The new rule has considerably more potential to affect smaller reporting companies because it is easier to obtain 3% of a smaller reporting company than a larger company. And, three years is a long time to tie up the estimated $3.5 billion needed to reach the 3% threshold at any of the 20 largest U.S. corporations by market cap. The 3% threshold may ensure that only significant long-term shareholders at large companies will be granted access, which was a stated goal of the Commission, but it could prove more likely to …


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April 2, 2010: Community Banks should consult SEC Small Entity Compliance Guide for Shareholder Disclosure Suggestions

Posted in Corporate Governance

            As you read this, annual meeting season is in full swing. One of the traditional hallmarks of the season is the annual proxy report which firms distribute in advance of the annual meeting. The ostensible purpose of the report is to solicit votes for the slate of directors, usually incumbents, to be elected at such annual meeting. But the broader purpose of the proxy of course is to describe the leadership of the firm, including such things as corporate governance practices, the overall structure of the board of directors, and the background of both management and the board of directors, including their compensation and real and potential conflicts of interest.

            The dramatic business environment over the last few years has led to numerous changes in both the form and the style of proxy disclosures. There is more emphasis now, for example, on what is called “transparency” for shareholders. In practice, this means more disclosures related to compensation and conflicts.…


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