Has a dangerous shoe just dropped? What the 'Emerging Communications' case may mean for board members with specialized knowledge.

AuthorRaymond, Doug
PositionLEGAL BRIEF

IN 2003, THE SEC adopted regulations, mandated by Sarbanes-Oxley, to require that a public company's audit committee--and therefore the board--include at least one director who is an "audit committee financial expert." This requirement has been controversial, in part because of fears that designating an audit committee financial expert may suggest that the expert bears greater responsibility--and therefore is subject to a higher degree of liability--for audit committee decisions than other committee members.

In response, the SEC included in the regulations a "safe harbor," which stated that an individual serving as an audit committee financial expert would not be considered an "expert" for purpose of liability under the Securities Act of 1933. The safe harbor also included the following statement: "The designation or identification of a person as an audit committee financial expert ... does not impose on such person any duties, obligations or liability that are greater than the duties, obligations and liability imposed on such person as a member of the audit committee and board of directors in the absence of such designation or identification."

Many practitioners found this cold comfort, particularly because the SEC's federal securities safe harbor does not necessarily protect directors against a claim that they have breached state corporation law.

Many are now concerned that the other shoe has dropped. In a recent case, In Re Emerging Communications, Inc. Shareholders Litigation, the Delaware Chancery Court concluded that a director with substantial experience in investment banking matters had not properly discharged his fiduciary obligations because he failed to bring to bear his "specialized financial expertise" when evaluating a going-private transaction.

In that case, a special committee of the board had engaged a financial adviser to provide a fairness opinion on the transaction, a standard approach under the circumstances. In the ensuing litigation, the entire transaction was challenged, including the fairness opinion, which was alleged to have endorsed a stock valuation that was too low (a conclusion the court agreed with). The court said that because this particular director "was a principal and general partner of an investment advising firm, with significant experience in finance and the [industry, he] ... possessed a specialized financial expertise and an ability to understand [the company's] intrinsic value, that was unique to...

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