Big Banks Move to Shield Outside Directors From Suits

The nation’s biggest banks are moving to protect their outside board members from costly shareholder lawsuits, a problem that has made it increasingly difficult for banks to attract and retain qualified directors.

In proxy statements being mailed this week, nine of the country’s top 10 banking firms urge their shareholders to approve changes in corporate bylaws designed to shield outside directors--those not employed by a firm--from liability claims filed by angry shareholders.

The banks acknowledge that the moves may chill shareholder litigation, raise the banks’ legal costs and benefit the banks and their directors more than the shareholders.

Nonetheless, the banks urge adoption of the changes to help them keep good directors and allow board members to act without fear of jeopardizing their personal wealth because of decisions they make on behalf of the firm.

Currently, corporate directors put their personal fortunes on the line when they serve on a board of directors because the laws in most states limit the amount and type of insurance protection that a firm can provide its board members.

But recent changes in laws in Delaware and New York, where the biggest bank companies are incorporated, allow corporations to insure their directors against a wider range of lawsuits, including claims of negligence or even gross negligence claims, as long as the directors were acting in what they believed was the company’s best interest. Previously, a director could be sued individually for actions that, for example, caused the bank’s stock price to fall, or for failing to accept a merger offer.

The company’s insurance policy would cover the costs of defending against such suits. However, however, if directors were found liable, they might have to shoulder the cost of the award themselves.

A proliferation of such suits made even the limited commercial insurance available for corporate directors and officers all but impossible to buy. The banking industry formed three wholly owned “captive” firms to underwrite policies for banks that could not find coverage on the open market.

Even if the bylaw changes are adopted, corporate directors will still be vulnerable to lawsuits based on claims that they knowingly violated the law or their duty to shareholders, that they profited personally from their actions, or that they made illegal dividend payments or stock repurchases.

With one exception, the nation’s 10 biggest bank holding companies, all of which are based in New York or California, are incorporated in New York or Delaware.

San Francisco-based Wells Fargo & Co., now incorporated in California, is asking shareholders to approve a plan to reincorporate in Delaware to take advantage of the new liability provisions and of Delaware law’s more stringent anti-takeover rules.

The nine banking companies asking their shareholders for added protection for directors are Citicorp, Chase Manhattan, Manufacturers Hanover, J. P. Morgan & Co., Chemical New York and Bankers Trust New York, all based in New York; Security Pacific and First Interstate, Los Angeles, and Wells Fargo.

Chemical and Bankers Trust are incorporated in New York state; the rest are incorporated under Delaware law.

In language typical of all the banks’ proxy statements, J. P. Morgan, parent of Morgan Guaranty Trust, said approval of the amendment “will enable Morgan’s directors and officers to continue to exercise their good faith business judgment in Morgan’s best interest without being constrained by concerns of uninsured individual liability.”

Morgan and several of the other banks noted that the proposal was not made in response to specific lawsuits and said they have not as yet had any difficulty attracting new directors.

Of the nation’s top 10 banks, only BankAmerica, headquartered in San Francisco and incorporated in Delaware, has not asked its shareholders to approve adoption of the new liability provisions. BankAmerica has by far the greatest number of outstanding shareholder suits against directors--at last count 21 such suits had been filed--and the most trouble finding insurance for its board members.

BankAmerica’s liability coverage for directors and officers currently is underwritten by a wholly owned subsidiary chartered in the Bahamas. Its previous insurance coverage was canceled in mid-term in 1985 by two commercial insurance companies.

BankAmerica’s insurance problems stem from its poor financial performance and from insurance industry anger over BankAmerica’s filing of a liability claim two years ago against several of its own executives because of $95 million in losses from an alleged mortgage fraud. Insurance executives said liability policies were not designed to protect a company against the misdeeds of its own employees and the matter is still pending.

BankAmerica may be contemplating asking shareholders for broader protection for the company’s directors.

But the banking firm’s proxy statement will not be mailed until next month, and company spokesmen declined to say whether such provisions would be included.