TARP WOES: Problems Caused by The Bailout
The year 2008 was marked by an extraordinary intervention by the US Government in its financial system. The EESA of 2008 which costs $ 700 billion was welcomed by most of the financial institutions, but it might cause significant costs for the affected companies.
The EESA might not create a plethora of fresh D&O claims. However, any duites and liabilities are not created by the Act, for directors of organizations participating in the TARP, but the participation in Troubles Asset Relief Program may have unfavorable consequences for the shareholders, and that may in turn raise Directors Liability claims.
The shareholders might file lawsuits if they believe that the price they have received for the troubles caused to assets is too low and there is a possibility that they allege that the directors were in a breach of their fiduciary duty to obtain the best price possible. The provision of taxpayer protection in TARP and the recent decision of the government to directly invest in the financial institutions might also cause shareholder lawsuits. If the value of the share of the company has falled, either because of the receipt of the stock exercise by the government, the shareholders might allege that the directors acted wrongfully by deciding to sell shares to the government. Shareholders of the companies which received separate bailouts might give similar arguments. Shareholders that are affected might allege that if they agree for the bailout, the directors and officers acted improperly and the fall in value which is created by providing the government large equity shares in the organization was a very high price in return for government help. It is worth mentioning that a smilar lawsuit has been filed already against directors and officersof AIG relating to the AIG bailout.
The situation will be interesting if the government decides to file lawsuits against the directors if they have shares in the company. Although, the Act does not provide the government with the voting rights, but it does not appear prevent it from filing shareholder lawsuits.
The companies participating in TARP or agreeing to receive bailout will certainly have strong defenses against any such lawsuits described above. It might at least distract the attention in the difficult times ahead, but defending and settling them could be potentially very expensive. It is thus important for such originations to insure themselves beforehand against any such lawsuits, so as to prevent huge losses which might create further problems for industries which are already suffering. The D&O insurance programs should thus be responsive against such claims, because it may prove to be the sole “bailout” for the executives.
