'Would you want to drive an automobile without insurance? All of us make mistakes and, even if we haven't, a judge or jury will decide if we have.'
--Chester I. Lappen,
Dataproducts, a Woodland Hills-based manufacturer of computer printers, plans to ask its shareholders at a special meeting next month to limit its directors' exposure to lawsuits.
If shareholders approve, the company will become one of the nation's first to take advantage of a 7-week-old Delaware law intended to counter the drying up of directors' liability insurance and the skyrocketing rates on the coverage that still exists.
Under the new law, companies can protect directors from being sued for negligence. For example, directors cannot be personally liable for a corporate acquisition that goes sour as long as they act in good faith. The board members still can be sued, however, if they are guilty of transgressions such as fraud or misconduct.
Dataproducts, the nation's largest independent maker of computer printers, is incorporated in Delaware, as are most of the nation's largest companies. Delaware offers corporations greater flexibility in areas such as structuring boards of directors and drafting anti-takeover provisions.
Of Dataproducts' eight board members, only Jack C. Davis, the company's new chairman and chief executive, is also an officer. Davis would be covered under the new law when making decisions as a director, but not when acting in his role as an officer, said Chester I. Lappen, a Dataproducts director and a partner in the company's law firm of Mitchell, Silberberg & Knupp of Los Angeles.
No Suits Pending
Dataproducts said the proposal wasn't prompted by any suit against the company, and that none of its directors is now being sued. Rather, the company said, it hopes to cut its insurance premiums and head off the threat of litigation, in light of the rash of suits being filed by shareholders against directors of U. S. companies.
Senior Vice President Frank J. McQuaid said the company is paying about $2 million more this year than last for half the coverage, slashed from $40 million to $20 million, and bought through a syndicate that includes Lloyd's of London. McQuaid would not disclose what Dataproducts pays in premiums.
Legal experts expect many Delaware-incorporated companies to take advantage of the new law, which went into effect July 1. So far, however, only five companies--including Harper & Row Publishers Inc., NCH Corp. and Wurlitzer Co.--have filed proxy statements to do so, according to Charles E. Simon & Co., a business information company in Washington.
Dataproducts' special meeting, scheduled for Sept. 30, was announced Thursday at Dataproducts' annual shareholders' meeting. At that session, shareholders voted to indemnify company directors, enabling Dataproducts to use its funds to defend directors against lawsuits and pay any resulting judgment.
Problem Is Widespread
Corporations and their directors are hardly the only ones with liability insurance problems. The shortage of such coverage and the high cost of existing policies have created crises for local governments and charitable organizations. Insurers say they have pulled out of the field largely because of a surge in litigation and huge court settlements, prompting many states, including California, to take steps to limit liability.
Companies without enough liability insurance have complained that it is becoming more difficult to attract qualified outside directors. In many instances, directors have resigned rather than risk their personal fortunes.
"Would you want to drive an automobile without insurance?" Lappen asked. "All of us make mistakes and, even if we haven't, a judge or jury will decide if we have."
Critics of the new law, however, argue that it removes an incentive for directors to do a good job.
"We've been trying for many decades to build an esprit de corps among directors to get them to pay more attention, make inquiries and focus on what they are doing. Now we're saying there's no penalty if they don't do that," said Stanley A. Kaplan, a prominent Chicago lawyer.