Court Enron 11(e) Ruling Also Aids Good Governance

The federal court ruling (SD Tex) awarding fees and costs under Section 11(e) of the Securities Act against the plaintiff’s law firm is also a very important opinion for corporate governance. In fact, Judge Harmon’s opinion may ultimately be best remembered for what it did to promote sound corporate governance. The court found that the fact that a financial services company employed an individual who was also an Enron outside director was not enough to establish the power to control his role as an independent director for purposes of controlling person liability under the federal securities laws. Newby v. Enron Corp., 01-cv-03624, 11-30-06,

In the post-Sarbanes-Oxley era, independent outside directors are critical to sound corporate governance and many people are concerned that there may not be enough good ones. Importantly, the court said that, if mere approval of a corporate officer’s request to serve as an outside director on another company’s board would be held to be control person liability, the effect would be to chill the willingness of qualified individuals to serve on boards of public companies as independent directors. This result would be a detriment to business, and the court could not countenance it.

In my view, this part of the ruling should be applauded in corporate governance circles. The specter of not being able to get enough qualified people to serve as outside directors of public companies haunts the corporate community. This ruling partially lifts the cloud of controlling person liability and makes it easier to get the qualified independent directors who can make the Sarbanes-Oxley reforms work.