Know the risks - Zurich

• The board should ensure that, if a shareholder vote is required, proxy materialsmake full and accurate disclosures of the transaction and any director’s interest inthe transaction.• Any defensive measure adopted by the board in response to a takeover must bereasonable in relation to the reasonably perceived threat posed by the takeover bid.• If the institution initiates an active bidding process, the board must notunreasonably interfere with an open, unrestrained bidding process.Limitation of liability statutesA number of states have enacted statutes which limit the liability of directors, andsometimes officers. Most of these statutes require a corporation to adopt a charteramendment in order to take advantage of the protection afforded by the statute.Although limitation of liability statutes vary from state to state, they generallypermit a corporation to eliminate or limit the personal liability of a director to thecorporation or its shareholders for monetary damages for a breach of the dutyof care. Corporations may not eliminate or limit the liability of their directors forbreaches of the duty of loyalty, intentional misconduct, or transactions from whichthe directors derive an improper personal benefit.Limitation of liability statutes may or may not apply to state-chartered depositoryinstitutions, depending on the state. They do not apply to national banks or otherfederally chartered depository institutions. And, even if a limitation of liabilitystatute is applicable, under FIRREA it will not eliminate a director’s liability for grossnegligence. Limitation of liability statutes can, however, protect directors of affiliatesand subsidiaries.Because some states have only enacted enabling statutes, which allowshareholders to approve certain liability limiting provisions, directors should becareful to ensure that the maximum protection available in their applicable state isidentified and implemented.“All states have enactedstatutes that either permitor require corporations toindemnify their directorsagainst expenses incurredin connection with lawsuitsagainst them in theircapacities as directors.”Indemnification1. General principles of indemnificationIndemnification is the legal process by which an institution reimburses its directorsfor expenses or damages they incur if they are sued in connection with their dutiesfor the institution.All states have enacted statutes that either permit or require corporations toindemnify their directors against expenses incurred in connection with lawsuitsagainst them in their capacities as directors. Federal regulatory authorities have alsoissued rules relating to indemnification. For example, a regulation of the Comptrollerof the Currency provides that national banks may, with certain limitations, providein their articles of association for the indemnification of their directors in accordancewith the standards reflected in the state in which the bank is headquartered or thestandards set by the Model Business Corporation Act.23Financial institutions guide