As companies extend their geographical reach, setting up operations in new territories or raising capital on new exchanges, their directors and officers are exposed to laws and regulations they may not be familiar with. To make matters worse, the legal and regulatory environment in most territories is constantly shifting. It is almost impossible for directors of multi- national companies to keep on top of all the potential liabilities they face globally.
One thing you can be sure of, however, is that there is more, not less, risk. The global trend is for growing recourse against company directors and officers by shareholders and regulators, and often by employees too. Corporate actions are also increasingly the subject of criminal rather than administrative proceedings.
Inevitably there is a time lag between exposure change, like the passage of new regulation, and an event that might result in claims. However, as D&O underwriters, we try to monitor such changes closely, and the claims we receive from our clients also give us advance warning of developing trends.
Here are some of the issues that we are currently interested in:
- Spread of demands for class action legislation in Europe and Asia
- Increased regulatory proceedings involving directors.
- Company pension fund issues affecting corporate performance
- The long reach of US courts
- New stock exchange listings.
Class actions
Class actions, which allow a single, representative plaintiff to bring a lawsuit on behalf of an entire group of claimants, have been the bane of US directors' lives, and pressure for enabling legislation elsewhere is spreading. For example, in France, President Jacques Chirac has asked the government to examine ways of widening the law that allows collective action.
In Germany, a new law, the new Capital Markets Model Case Act (KapMuG), came into effect on 1 November 2005 to provide better prospects for investors to claim damages due to false, misleading or omitted public capital markets information. It allows a regional court to decide a test case which then becomes binding on all other regional courts once there are 10 or more plaintiffs with similar cases. KapMuG is initially in force for five years after which time, the Federal Ministry of Justice intends to analyse its impact.
Regulatory proceedings
Regulatory actions are among the fastest growing sources of D&O claims notified to us. Any industry subject to official regulation, such as financial services, telecoms, transport operators, or utilities needs to be aware of the very substantial costs of dealing with regulators. You need expert legal advice, which could cost in the order of £250-400 an hour. These investigations can be time-consuming and distracting for management and can lead to outcomes which can have financial consequences for the directors.
Pension fund issues
Pension fund issues are high on the agenda in the US and UK, as companies reduce guaranteed benefits and increase qualification requirements. Worse still are the exposures of directors in cases where the pension scheme is in trouble and the company cannot add funds.
In the UK, directors have often also served as pension fund trustees, helping a body that is often comprised of lay people with technical or business knowledge. Under current legislation, this dual role potentially creates an almost untenable conflict of interest for these directors.
The long reach of US courts
Foreign companies do not need to have their shares listed on a US exchange for their directors to face proceedings in US courts; raising debt or owning a US subsidiary can be enough. What is more, disgruntled foreign shareholders are increasingly looking to become part of US class actions.
Securities class action settlements in the US reached record levels in 2005, according to a report by Cornerstone Research ( www.cornerstone.com ). Even excluding WorldCom's ($6.1 bn plus) and Enron's ($7.1 bn and rising) settlements, the total value of cases settled during the year rose to an all time high of $3.5 bn. Even more worrying is the 19% increase in the median settlement amount, which is a good indicator of what can happen in less exceptional cases.
Then, there is the spectre of extradition. The UK's 2003 Extradition Act, intended as an anti-terrorism measure, has been turned against business. It allows courts in the US and about 40 other countries, to extradite defendants without prima facie evidence of guilt. A number of British businessmen have already been subject to US extradition proceedings and at least one, Nigel Potter, former chief executive of Wembley, has been jailed for his involvement in a gambling hall bribery scheme by a US subsidiary company.
Final word of advice
The CEO, CFO and the company secretary have the primary responsibility for managing the liability exposure of a company's directors and senior managers, but it is nigh on impossible for a non-specialist to keep on top of all the corporate governance and regulatory requirements that are likely to apply to a company operating internationally. D&O insurance is the safety net that allows the directors and officers to get on with the business of running the company.
- Patrick Drinan is European D&O manager for ACE European Group.
