Directors' Liability for Year 2000 Failures
Publication year | 1999 |
Pages | 37 |
Citation | Vol. 28 No. 1 Pg. 37 |
1999, January, Pg. 37. Directors' Liability for Year 2000 Failures
Vol. 28, No. 1, Pg. 37
The Colorado Lawyer
January 1999
Vol. 28, No. 1 [Page 37]
January 1999
Vol. 28, No. 1 [Page 37]
Specialty Law Columns
Business Law Newsletter
Directors' Liability for Year 2000 Failures
by Carole Jeffery
Business Law Newsletter
Directors' Liability for Year 2000 Failures
by Carole Jeffery
Although no one knows what actually will happen, many
commentators are predicting that computer systems will be
unable to create, store, represent, and process data on or
after January 1, 2000.1 This "problem" is variously
called "Year 2000," "Y2K" and the
"Millennium Bug." For ease of reference, it will be
referred to in this article as "Y2K."
It has been estimated that as many as 15 percent of companies
and governments in the United States will experience at least
one mission critical system failure as a result of Y2K.2 Ten
percent of the failures will last three days or longer. The
cost to recover from a single failure is estimated to range
between $20,000 and $3.5 million.3 Thus, it will come as no
surprise when the lawsuits begin. Already, plaintiffs have
filed several lawsuits against hardware and software vendors
for existing and anticipated Y2K problems.4 While the number
of suits is currently low, the true litigation deluge is not
expected to arrive until after the close of 1999
At that time, in addition to other anticipated types of
litigation, courts will begin to see shareholder suits
alleging that a company's directors have failed to
exercise the appropriate level of care in performing their
duties, including their analysis and response to Y2K
problems. In addition, shareholders also may sue directors
for failure to disclose material information relating to the
potential or actual impact of Y2K problems on their
company's business
Shareholder Litigation
There are three types of shareholder litigation against
directors that can be expected to arise as a result of Y2K
issues
derivative suits for breach of fiduciary duty;
derivative suits to recover Y2K losses arising from (a) a
failure to acknowledge or correctly measure year 2000 risks,
(b) a failure to implement adequate Y2K remedial efforts, and
(c) waste of corporate assets; and
securities litigation for adverse Y2K impact on stock price
arising from (a) inadequate disclosures; (b) inadequate due
diligence to support disclosures; (c) materially false or
fraudulent disclosures concerning the scope of the problem;
(d) inadequate disclosure of contingent liabilities; (e)
misrepresentation of estimated costs to correct the problem;
and (f) insider trading.
Liability for these issues arises under both federal
securities laws and state fiduciary duty laws. In general,
all rise or fall on the question of whether the directors
fulfilled their duties to their corporation and its
shareholders.
Directors as Fiduciaries
It is a basic principal of Colorado corporate law, as
elsewhere, that directors of a corporation owe fiduciary
duties both to the corporation and to its shareholders. As
fiduciaries, directors are liable for losses of the
corporation caused by their bad faith or willful and
intentional departures from duty, their fraudulent breaches
of trust, their gross or willful negligence, and their acts
outside the scope of their authority.5
As stewards of the corporation's assets, directors are
vested with authority to control the business affairs of the
corporation.6 In doing so, they must take reasonable care.
The usual prescription for avoiding breaches of the duty of
care is careful attention to procedures that assure full
access to, and assessment of, relevant information, and time
for considered decision-making before corporate action is
taken.7 Colorado has codified the standards of conduct
required of directors.8 The statute provides that directors
must perform their duties in good faith, with the care an
ordinarily prudent person in a like position would exercise
under similar circumstances, and in what they believe to be
the best interests of the company.9
Included within the directors' duties is the requirement
to conduct a reasonable inquiry before making decisions.10
While a failure of internal computer systems would have been
an inconvenience thirty years ago, the same failure today
would cripple most businesses.11 This fact imposes on
directors a heightened duty to evaluate and solve Y2K
problems in order to avoid litigation.
Unfortunately, not all companies are analyzing and
remediating their Y2K problems. In general, companies that do
not deal aggressively with Y2K issues fail to do so for one
or more of the following reasons: (1) the potential impact of
the problem is viewed as minor; (2) the belief that the
media, commentators, and vendors are exaggerating the issue;
(3) the costs of remediation are viewed as alarmingly high;
(4) major competitors are not actively seeking Y2K compliance
either; and (5) resources have been diverted to the problem
of the conversion of European currency rather than to solving
Y2K problems.12
These failures to analyze and remediate Y2K problems have led
one commentator to evaluate the probability that Y2K damages
will be serious enough to trigger personal lawsuits. He has
estimated a 55 percent probability of lawsuits against
individuals who fail to...
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