We have been closely following the recent explosion of litigation against executives and officers. Last month, in a closely-watched case not specifically related to executive compensation, well-respected Judge Lewis A. Kaplan of the Southern District of New York approved the settlement of the lawsuit against the officers and directors of Lehman Brothers. The case was closely-watched and the settlement controversial because:
- The plaintiffs’ lawyers proposed to settle their claims against the executives and officers for $90 million to be paid by certain of Lehman's insurance policies without any contribution by any of the former directors and officers.
- The plaintiffs’ lawyers had said that they potentially could recover a judgment of “many billions of dollars,” from the former directors and officers at trial.
- The former directors and officers would be released from all claims that were or might have been asserted against them in the lawsuit.
Some commentators had argued that that this was the classic example of a case where officers and directors should be required to contribute to the settlement from their personal assets. See, for example, “Susan Beck's Summary Judgment: Let's See Kaplan Kick the Third Rail of Shareholder Litigation.”In his memorandum and order approving the D&O settlement, Judge Kaplan acknowledged that the $90 million settlement was not easy to accept in light of plaintiffs’ claims that they could recover a judgment of “many billions of dollars” at trial. However, after sorting through the nine factors to be considered in approving a class action settlement, he found:
While some may be concerned at the lack of any contribution by the former director and officer defendants to the settlement, Lead Counsel's judgment that the $90 million bird in the hand is worth at least as much as whatever is in the bush, discounted for the risk of an unsuccessful outcome of the case, is reasonable.
Judge Kaplan seemed particularly swayed by two considerations. First, he observed that if he did not approve the D&O settlement, the $90 million in Lehman insurance money currently on offer quickly would be depleted or consumed entirely. Second, an independent review and his personal review apparently indicated that recovery from the available assets of the officers and director was highly uncertain.
Only a very few cases have involved recovery from the personal assets of officers and directors (see Worldcom for example). However, the fact that this decision was a fairly close run thing and the controversy surrounding it cannot be grounds for executives and directors to sleep any easier.