The proposed solution to the controversy surrounding civil liability under the Code and its relationship to indemnification, contribution, and insurance is not a panacea. It is not as neat as one would desire, and it leaves questions unanswered, such as whether the indemnification and contribution changes ought to apply beyond section 1704. Nevertheless, the proposal is internally consistent--an improvement over the Code's liability and indemnification provisions. Furthermore, it has a sound policy basis, and it attempts to meet the arguments of both sides of the American Law Institute debate. In summary, the proposal is as follows:(1) Define inside directors as those who are officers or employees of, or those who are controlled by or who control the registrant, and those persons whom the plaintiff proves to have such a high level of responsibility in the registrant's operations that they must be considered inside directors. Outside directors are all other directors and those defendants who can prove that they bore such insignificant responsibilities in the operation of the registrant that they should be considered outside directors.(2) Maintain sections 1704 and 1705 as drafted, but consider lowering the liability limitations for individuals under section 1704 below $100,000.(3) Prohibit indemnification and liability insurance for damages assessed against inside directors in section 1704 actions, but permit insurance to fund litigation expenses unless the defendant acted with scienter.(4) Expressly permit indemnification and insurance for both damages and litigation expenses of outside directors in section 1704 actions, unless the defendant acted with scienter.(5) Adopt the Uniform Contribution Among Joint Tortfeasors Act rule on contribution between settling and nonsettling defendants.
Thomas D. Washburne, Jr.,
Liability of Directors Under the Federal Securities Code,
33 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol33/iss5/4