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How to Defend Officers and Directors in a Management-Hostile Environment

By Brian L. Shaw

As noted last month in part one of this article, it is less common, but not unheard of, for the debtor itself to directly provide funds to defend and indemnify its D&Os, in addition to, or in lieu of, maintaining D&O insurance or to address a situation where the D&O has refused coverage (which is not that uncommon of an development).

In light of the current atmosphere, it is understandable that any such payment would be subjected to serious scrutiny. However, it is the same hostile atmosphere that threatens D&Os which explains why companies find it necessary to make such payments itself in order maintain necessary, competent management. In fact, one would be naive to believe that as part of pre-bankruptcy preparation, companies never discuss whether prior to the bankruptcy filing, they should tender a retainer to independent counsel who will independently represent the D&Os during the pendency of that company's bankruptcy case. The need to have this discussion pre-petition is that because a company's bankruptcy petition is filed, creditor scrutiny is magnified, and creditors, as well the bankruptcy court and the United States' Trustee may raise questions about the proposed transfer and/or oppose it.

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