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Wednesday, 24th April 2024 |
| Directors & Officers liability - an increasingly perilous landscape for Irish directors |
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| Directors of Irish companies are increasingly at risk from claims brought against them for so-called 'wrongful acts', writes Breege Lynn, which can put their own private assets in jeopardy and the financial viability of their companies at risk. Moreover, legislation currently finding its way through the Oireachtas in the form of the Criminal Justice Mutual Assistance Bill 2005, will have far reaching consequences, she adds. |
The corporate governance environment facing Irish directors is becoming increasingly stringent, so it is important to know the background and key issues raised by both recent legislation and proposed legislation particularly in the form of the Criminal Justice Mutual Assistance Bill 2005 due to be enacted later this year. Directors of Irish companies are increasingly at risk from claims brought against them for so-called 'wrongful acts' which can put their own private assets in jeopardy and the financial viability of their companies at risk. | | Breege Lynn |
Twelve pieces of Irish Companies legislation over the past 40 years - including the Companies (Auditing and Accounting) Act 2003 and the more recent Safety, Health and Welfare at Work Act 2005 have increased the onus of responsibility on company directors and officers. In addition, the multitude of European and global regulations have also contributed to an increasingly litigious landscape for all directors. As a result, Directors & Officers liability protection is high up on the agenda of every company at present, be they public, private or a not-for-profit entities.
In addition, legislation currently finding its way through the Oireachtas in the form of the Criminal Justice Mutual Assistance Bill 2005, will have far reaching consequences. Under this legislation, the powers of the United States will be greatly enhanced to pursue Irish companies and their executives suspected of having committed business misdemeanours in contravention of US laws.
Much of the recent legislation has meant further dilution of the protection once afforded by the corporate veil. This legislative trend, together with further litigation in Ireland increasingly targeted at directors & officers, is a cause for understandable concern.
Directors and officers act as agents for their organisation; this however does not mean that they are necessarily exempt from liability. Every director and officer is personally exposed to claims against him/her arising out of their activities. Directors and officers have numerous obligations both at common law and also under statute. Some of these are strict liability offences for directors.
Generally, claims can be brought by any party with an interest in the affairs of the company. Primarily, the directors owe a duty to the company who are ultimately the present and future shareholders; but on insolvency this includes creditors as well.
Non-executive directors are also exposed to potential liabilities, as they are perceived to strengthen corporate governance and act as some form of check and balance on the executive directors.
The ultimate effect of the legislative and regulatory changes, either proposed or already in effect, is to make directors' responsibilities more transparent and set in law. This gives potential plaintiffs a clearer path to seeking legal redress. It is also likely to speed up the claims process, particularly in Ireland where we more recently have our commercial court.
Directors are particularly exposed following merger and acquisition activity, capital raising and company liquidations. Employee actions against directors are another frequent source of claims in areas such as racial discrimination, sexual harassment and unfair dismissal. Claims can also arise as a result of regulatory proceedings under various statutes, including the Company Law Enforcement Act, 2001 which enforces the requirements of the Companies Acts 1963-2003 in the public interest.
In particular, the 2001 Act established the Office of the Director of Corporate Enforcement(ODCE) and transferred investigations and company law prosecution powers to them in numerous areas. The Financial Regulator has also become increasingly active since it was established in May 2003. The Central Bank and Financial Services Authority of Ireland Act, 2003/2004 gives the Financial Regulator powers to impose sanctions. It should also be borne in mind that the scope of the Financial Regulator's disciplinary powers is broad and frequently targeted on individual directors & officers.
Additionally, the possibility of Irish executives being extradited to face charges in a foreign jurisdiction has increased significantly over the last number of years. Once the Criminal Justice Mutual Assistance Bill has been passed into law, authorities from the US such as the FBI or the Securities Exchange Commission (SEC) will find it much easier to gather information on Irish executives under their radar via access to their bank accounts and phone tapping and other types of surveillance. They will be able to force wrongdoers to submit themselves to interview and make the necessary depositions in this country. Most importantly, such wrongdoers could find themselves being extradited to the US to face charges in a similar fashion to the British 'Natwest 3', the CEO of Cologne Re Dublin and other Irish resident directors who have recently found themselves mounting defenses against alleged wrongdoing against US laws.
Prudent directors and officers from companies of all types need to take note of the changes taking place around them. It is in their own interest to fully brief themselves on the potential risks and find out exactly where their personal exposure lies. In this context, it is important that directors understand how to mitigate against such exposures through ensuring their companies operate to the best standards in corporate governance. In addition, a particularly valuable mitigation tool is that of directors and officers liability insurance, often simply referred to as D&O.
D&O Insurance is valuable because it helps to mitigate the impact on a company's bottom line(if and when a company can actually indemnify a Director or Officer) but more importantly the direct impact on an individual's personal assets. It also provides protection in the event that the solvency of the business is threatened.
D&O covers the liability (including the legal costs and expenses incurred in the defense of a claim for actions alleging losses) from claims brought against Directors or Officers for 'wrongful acts' (actual or alleged), including breaches of duty or trust, neglect, error, mis-statement, misleading statements, employment practices claims, omission, negligent act or any other act wrongfully committed.
More recently, D&O insurers have been reacting to the changing legal landscape for directors and officers and introducing clearer wordings to make sure the D&O insurance is adequate for resisting extradition proceedings.
Like any asset, D&O insurance has certain limitations and, in order to maximise the asset, one must be sure to take certain steps. The first step to maximise the D&O asset is to understand the nature and the scope of the D&O policy being purchased. For instance, individual directors and officers and their boards should take steps to have cover affirmed by their Insurers for resisting extradition proceedings. Companies should also check their coverage with respect to US exposures and defense costs for US claims and ensure policy limits are adequate. This should be done even where the company does little or no business in the US because this does not put them entirely out of danger.
Clearly, more than ever before, directors of companies (irrespective of size and type) need to take the time to understand their D&O liability exposure and the relevant mitigation measures they can put in place. In the context of insurance a recent survey of the top FTSE companies by law firm Herbert Smith showed that 77 per cent of participants questioned said the most important concern when purchasing D&O insurance was the range of cover followed by policy limits (20 per cent) and cost of premium(16 per cent).
This highlights the need to ensure that your advisers have the requisite skill and knowledge to deliver the right advice to enhance the value of your D&O insurance asset. The value under your D&O insurance policy can be enhanced by thoughtful and deliberate handling of the insurance placement and claims handling but must ultimately be based on the right advice at policy initiation. |
Breege Lynn is a specialist in the area of D&O liability, professional indemnity and other management liability covers in leading insurance advisory firm Marsh Ireland. E-mail: breege.lynn@marsh.com
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| Article appeared in the March 2007 issue.
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