Know the risks - Zurich

Claims by or on behalf ofthe institutionClaims by the institutionAn institution may bring a direct action against current or, more often, former directorsand officers for breaching duties to the institution or its shareholders. The institution’sboard of directors generally has the power to determine whether or not such a lawsuitshould be filed against the institution’s directors and officers and, if it is filed, controlsall strategic decisions regarding the litigation. When an institution is insolvent orbankrupt, an entity that “stands in the shoes” of the institution, like a trustee, receiver,liquidator, or the FDIC, may also initiate a claim directly against current or formerdirectors or officers of the institution. The plaintiffs in those cases will often allegethat the directors and officers fraudulently transferred or misappropriated funds, orengaged in gross mismanagement, causing the institution’s insolvency or bankruptcy.Derivative claimsA derivative action may be brought by one or more shareholders on behalf andfor the benefit of the institution to recover for losses or damages suffered by theinstitution. If a harm or loss is suffered directly by the institution, thereby reducingthe value of its assets, shareholders are usually required to bring a derivative lawsuit,rather than a direct lawsuit.Derivative lawsuits are frequently brought against incumbent directors who, becauseof their own self-interest, elect not to authorize such an action by the institutionagainst themselves or other directors. Recovery in a derivative lawsuit is paid to theinstitution, not to the shareholders who brought the action, although the fees andexpenses of the shareholders’ attorneys are usually paid if a favorable settlement orjudgment is obtained.Because a derivative action is brought on behalf of the corporation and becausedirectors are normally entitled to deference in their corporate decisions (including thedecision whether to pursue legal action), a shareholder seeking to bring a derivativeclaim usually must first either demand that the board authorize the company toprosecute the claim directly or demonstrate the futility of making such a demand. 37In the face of a derivative lawsuit, directors will often appoint a special litigationcommittee comprised of disinterested directors to independently evaluate whetherpursuing the proposed litigation is in the best interests of the corporation. Generally,if the committee is independent in both its investigation and conclusions, a court willdefer to the committee’s decisions whether continuing or terminating the litigation isin the best interest of the corporation.37 Kamen v. Kemper Fin. Servs., Inc., 500 U.S.90 (1991); Levner v. Saud, 903 F. Supp. 452(S.D.N.Y. 1994), aff’d, 61 F.3d 8 (2d Cir. 1995).When the FDIC has taken control of a depository institution, FIRREA vests in theFDIC all rights and powers of a shareholder of the institution to bring a derivativeaction. Accordingly, in such instances, the FDIC has the right, power and privilege todemand corporate action or sue directors when action is not otherwise forthcoming.18Financial institutions guide