competent persons inside or outside
the company.
should follow if they receive a demand
letter from a shareholder alleging wrong-
doing or if they or the company are sued
in a shareholder suit.
provision.
insist on participating in the selection
of counsel. The directors should be
represented by a lawyer who has sub-
stantial corporate governance experi-
ence including trying a shareholder
derivative case. Surprisingly, very few
of these lawyers exist. The case will
be prepared, defended, and presented
at trial very differently by lawyers
who have trial experience than those
who do not.
ignore or dismiss out of hand the al-
legations of wrongful conduct. While
it is natural for the directors to be
upset and disappointed and adopt a
circle the wagons mentality, this is
the wrong approach.
factual allegations in the demand or
the lawsuit. This can be conducted
by independent directors assisted by
independent counsel. The company's
regular outside counsel should not be
used because it is too closely tied to
the company.
during their depositions. Too many
officers and directors are prepared
by their lawyers to place responsibil-
ity on others, claim they were not
directly involved, or to testify they
just do not recall the details of what
transpired. The problem with this
approach is that if the case is not won
on a dispositive motion, it makes it
and directors to testify credibly
during a jury trial. Yet, these senior
officers and directors can be the most
effective witnesses if they are in-
formed, well prepared, and credible.
ment rule is a legal concept, it can
be readily understood by most lay
people, once put into common sense,
practical terms, that the business
people, while not infallible, tried to
exercise their best judgment on be-
half of their company. If the process
is reasonable, the result does not
have to be perfect.
as it is supposed to, the likelihood of
being sued is substantially diminished.
If directors are sued, finding competent
counsel will greatly assist the directors
in satisfactorily resolving the case.