The D&O Diary

The D&O Diary


Notes from the PLUS International Conference in Las Vegas

Posted in Blogging

caesersThis past week the annual PLUS International Conference took place at the sprawling Caesar’s Palace complex in Las Vegas. Given the mass of confusing pathways and corridors and vast distances between the various event venues at the hotel, it wouldn’t surprise me at all to hear that a few conference attendees are still wandering around inside the Caesar’s Palace grounds, dazed into a trance by the blaring music and the slot machines’ flashing lights. Just the same, it was unquestionably a very successful event.


The high point of the event for me was the presentation of the PLUS1 award to my good friend Aruno Rajaratnam, of the Ince & Co. law firm in Singapore, whom I interviewed in a Q&A I posted on this site last week. In the first picture below I am standing outside the conference ballroom with Aruno. The next picture shows Aruno delivering her acceptance speech. In the third picture, Aruno stands with incoming PLUS President Jim Skarzynski and immediate Past PLUS President Dave Williams. The final picture was taken at the dinner in celebration of Aruno’s award; shown from left to right in the picture are Dave Williams of Chubb; Aruno; Ann Longmore of Marsh; Shasi Gangadharan of Chubb (Singapore); Joe Montelone of the Rivkin Radler law firm; and me.










The PLUS International Conference is always a good opportunity to reunite with old friends. In the picture below, I am standing with my former colleague and good friend, Diane Parker of AWAC, together with Robert Chadwick of the Campbell Chadwick law firm in Dallas.




This final picture was taken at the opening night reception. From left to right, Corbette Doyle of Vanderbilt University; me; Pete Herron of Travelers; and Jeff Lattman of Beecher Carlson.



Guest Post: Evolutionary Change in the Liability of an Independent Director in India

Posted in International D & O, Uncategorized


burzinThe recent Satyam scandal and ensuing litigation put the duties of independent directors under scrutiny.  The recently enacted Companies Act of 2013 addressed a number of issues relating to the duties and liabilities of independent directors.  In the following guest post, Burzin Somandy of Somandy & Associates in Mumbai takes a look at the approach that had been taken under prior law with respect to independent directors’ duties and also at the standards that the Companies Act of 2013 has put in place. As discussed below, the primary purposes of the new Act’s provisions were to ensure transparency and independence.


Many readers will recall that Burzin is the author of the chapter about India in the recently published book, The Global Directors and Officers Desk Book (about which refer here). I would like thank Burzin for his willingness to publish his guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to readers of this blog. Please contact me directly if you would like to submit a guest post. Here is Burzin’s guest post:





The case law that has evolved under the erstwhile Indian Companies Act of 1956 and ancillary legislation which concerns the activities of a company has iterated that the Directors and Officers of a company can be held vicariously liable for the acts of the company, which liability may arise as a consequence of the involvement of the Directors and Officers in the act complained of, the breach of fiduciary duties, negligence or ultra vires acts.


However, the erstwhile Companies Act 1956 did not draw any distinction between a Director and an Independent Director. This concept was first introduced by the Securities and Exchange Board of India in the year 2000 under clause 49 of the Listing Agreement in respect of all companies who wished to list their shares on the stock exchange, whereby the term Independent Director came to be introduced. However, since there was no statutory recognition of this term under the erstwhile Companies Act of 1956, this led to a degree of confusion as to the extent of liability which could be fastened on an independent director wherein proceedings were initiated against the Board of Directors of a company. Post the Satyam scandal and the lawsuit that emanated thereafter, the role of Independent Directors has come under scrutiny, including in a host of judgments that have been pronounced by various courts on the extent of liability which could be fastened on an independent director for acts committed by a company or the remaining directors on the board of a company.  However, this raging controversy was ultimately laid to rest in the New Companies Act of 2013, which defines who an Independent Director is thereby providing statutory recognition to the concept of an Independent Director.


The main spotlight of this article is to analyse the evolving concept of the recognition of an Independent Director in listed companies and the emerging trends in their liability exposure, including the sea changes brought about by the new Companies Act of 2013.


Background – Evolution of the concept of an Independent Director :

The severity of Independent Directors was recognized with the prologue of Corporate Governance. The Securities and Exchange Board of India specified the principles of corporate governance and thereby introduced clause 49 in the Listing agreement of the Stock Exchanges which was predominantly formulated for the improvement of corporate governance in all listed companies and which mandates the appoint of Independent Directors in all listed Companies in proportion to the number of directors on the Board of a company.


In spite of the fact that Clause 49 of the Listing Agreement characterizes the concept of an Independent Director, ambiguity persisted until the 2013 Companies Act was enacted, especially in light of the extent of liability of an Independent Director in the event of any contravention of law, as there was no distinction between Directors and Independent Directors in the Companies Act 1956 and since for the most part, it was perceived that Independent Directors were not involved in the day to day affairs and management of a company and were appointed to ensure appropriate corporate governance. Consequently, in legal proceedings filed against the Company and its directors for contravention of law, Independent Directors were faced with the herculean task of establishing their innocence in the acts complained of and that vicarious liability for the commission of an offence could not be attributed to them merely by virtue of their being directors in a company, especially given their lack of involvement in the day to day affairs or management of the company being prosecuted.


This controversy was substantially dealt with in two landmark judgements of the Supreme Court. In the case of K.K. Ahuja v. VK Vora[1], the Supreme Court observed that to be liable for the commission of an offence, a person should fulfill the legal requirement of being a person in law responsible for conduct of the business of the Company and also fulfill the factual requirement of being a person in charge of the business of the Company. Consequently, the Supreme Court provided a two-pronged test — the first prong being a legal, statute-based test, where it is required to be proven that a person is responsible to the company for the conduct of the business of the company. The second prong is a fact-based test, where through specific averments the complainant has to establish that the particular person was in-fact in overall control of the day-to-day business of the company. Both the prongs need to be complied with. Hence, if a person fails to satisfy the first test, he is not required to meet the second test. Similarly in the case of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Another[2], it has been held by the Supreme Court that “The liability arises from being in charge of and responsible for conduct of business of the company at the relevant time when the offence was committed and not on the basis of merely holding a designation or office in a company.


These judgments came as a great relief to independent directors of companies who were facing prosecution alongwith other directors of companies merely by virtue of their being on the board, inconsequential to their involvement in the act complained of.


 Looking to the raging controversy on the liability of an independent director in the event of a complaint filed against a company and its directors and specifically post the revelation of the Satyam scam in January 2009 which raised serious doubts about the involvement of independent directors in the day to day working of a company, Independent Directors realised that their role was no longer going to be ceremonial which sparked a demand for better corporate governance. Corporate India during this period witnessed a marked increase in the number of resignations of Independent Directors from the boards of companies.  This period saw the issuance of a Circular[3] by the Ministry of Corporate Affairs, which sought to relieve non executive directors against penal action taken against them. This circular provided that directors should not be held liable for any act of omission or commission by the Company or by any officer of the Company which constitutes a breach or violation of any provision of the Companies Act, 1956 and which occurred without their knowledge attributable through the board process and without the consent or connivance of such director or where such director had acted diligently in the board process. The said circular, however, was issued in the context of action being taken by the Registrar of Companies for violation of provisions of the Companies Act 1956 and was not issued generically for all proceedings initiated against directors.


Should Independent Directors be held responsible if they did not smell a rat?

Independent directors are those not charged with the day-to-day affairs and management of the company and are usually involved in ensuring proper norms of corporate governance.


The recent scandals precisely ascertained the growing need for determining the liability of independent directors for prevention and detection of fraud, in view of the limited roles performed by them in the company. Under the 1956 Act and the judgements of the Supreme Court as referred above, an Independent Director can content that he should not be considered as an “officer in default” and consequently is not liable for the actions of the Board. The new Companies Act of 2013 however puts this controversy to rest and provides for the liability of an Independent Director to be limited to acts of omission or commission by a company which occurred with their knowledge, attributable through board processes, and with their consent and connivance or where they have not acted diligently. The said new Act thus saw a sea change and makes a considerable effort to bring the role of an Independent Director in line with the changing needs of corporate governance of India.


Another sea change are the provisions in the Companies Act which deals with the indemnification of a director. As per section 201 of the Companies Act, 1956, a company cannot indemnify a director till such time that she/he is found innocent by a court of law. However, section 197(3) of the Companies Act, 2013 provides that premium paid on an insurance policy shall be treated as part of the remuneration of a director only if such director is found guilty in respect of the violation for which indemnity is sought under a D & O policy. This would therefore mean that directors can now be indemnified and there is no prohibition on indemnification, as was the case with the Companies Act 1956.


Analytical review of Clause 49-Listing Agreement of the Companies Act, 1956 vis-à-vis Companies Act, 2013 :

Clause 49 of the Listing Agreement gives an inclusive definition of Independent Director, covering under its ambit non- executive directors who do not have a material pecuniary relationship with the company, its promoters, management and subsidiaries which may affect the independence of their judgment. Independent directors are those not charged with the day-to-day affairs and management of the company and are usually involved in ensuring proper norms of corporate governance. The Companies Act, 2013, sets to overhaul the provisions relating to Independent Directors and thus gives about a clear demarcation between a nominee director and an Independent Director.


Several other restrictions have also been built into the new act to ensure that there is no financial nexus between an independent director and the company. For instance, the new act prohibits independent directors from receiving stock options of the company. The Listing Agreement does not prohibit the issue of stock options. Rather it provides that the maximum limit on stock options to be granted to independent directors can be decided by a shareholders’ resolution. The new act limits the remuneration of independent directors to sitting fees, reimbursement of expenses for participation in the board and other meetings, and such profit-related commission as may be approved by the shareholders. This is yet another area of inconsistency with the Listing Agreement that will have to be clarified by the regulators.



The primary objective behind the new act’s provisions on independent directors are to ensure transparency and independence. The New Act casts great responsibility on the Independent Directors since it specifies that any decisions taken by the board in the absence of independent directors must be circulated to all directors and can be final only upon receiving ratification from at least one independent director. The Act has thus set high standards on the one hand and on the other ensured that Independent Directors are not privy to legal proceedings when they have no involvement in the act complained of.  It is expected that these changes would increase the pool of professionals into the stream of Independent Directors and restore the confidence in such persons to take up board positions knowing that they will not be frivolously prosecuted.


Reference :

[1] K.K. Ahuja v. VK Vora [(2005) SCC 89)]

[2] S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla and Another [(2009 (3) CC (NI) 194]

[3] (Circular no. 8/2011 No.2/13/2003/CL- V dated 25th March, 2011)

Q&A with PLUS1 Award Winner Aruno Rajaratnam

Posted in D & O Insurance

arunoOn Thursday November 6, 2014, at the Professional Liability Underwriting Society (PLUS) International Conference in Las Vegas, the PLUS1 Award will be conferred on my good friend, Aruno Rajaratnam. The PLUS1 Award is presented annually to a person “whose efforts have contributed substantially to the advancement and image of the professional liability industry.” I can’t think of anyone more deserving of this award than Aruno, one of the true legends of our industry.


Aruno, who is now with the Ince & Co. law firm in Singapore, has been a trailblazer and a leader in the professional liability insurance industry for nearly four decades. She has the distinction of having placed the first D&O insurance policy in Asia, and during her long and illustrious career she has served as an in-house claims manager, a loss adjuster, a specialist broker, a reinsurer, an underwriter and now as an Insurance /reinsurance lawyer. She has also been a mentor and a friend to an entire generation of industry professionals. It gives me a great deal of pleasure to see Aruno’s many contributions to our industry recognized through her receipt of the PLUS1 Award.


Because she has spent her career in Asia, many readers of this blog may not be acquainted with Aruno and her many contributions. I thought it would be a good idea to interview Aruno for this blog, in the form of a Q&A. I would like to thank Aruno for her willingness to participate in this Q&A, and to congratulate her again on the award. Here is the the Q&A (my questions are in boldface). Be sure to check out the news clippings below the Q&A.


1. You have had a long and storied career in the professional liability insurance industry. How did you first wind up in the industry? 


AR: I need to tell you a little background story first to set the scenario on my career.

I was born and brought up in a tiny village in North Malaysia. My parents were immigrants from the old Ceylon and we are called Ceylonese Tamils as a race.

We are a minority race in Malaysia and in Singapore too.

It was literally the norm for every Ceylonese Tamil child to be brought up to aspire to be a lawyer, doctor, accountant, engineer or a teacher if you are a female.

My village had electricity for only 12 hours a day. A rich neighbour had a television and allowed us to watch PERRY MASON for 1 hour a week. It was an awe inspiring experience.

I started dreaming about being a lawyer though I never met one in my village or the country!

I then met an American Peace Corp Teacher, Richard Johannessen, from Oregon, USA in my final year in school.

He became my mentor (still is my mentor) and opened my eyes to a whole world outside my village and school……he convinced me that I was smart and had talent and to look far.

That is how I went to Law School in Singapore.

When I completed law school and was admitted to practice as an advocate and solicitor in Singapore in FEB 1975, I was asked to do very uninteresting legal work.

Someone in my law firm told me about a new Insurance Co-Operative called NTUC INCOME that was looking for a trainee for their claims division.

I was told 90 people turned up for the interviews. After 3 rounds, I got the job.

When I wrote to my family in Malaysia to tell them of my new job, they had no clue as to what general insurance was….and still today do not really understand what I did and still do!

Even today, I am still asked to explain what I do at every family gathering we have.

And that was how it all began………..


2. I know that during your many years in the industry, you have worked on some very interesting matters and been involved in some of the landmark developments in the expansion of the industry in Asia. What are some of the most interesting matters and landmark developments in which you have been involved?  


AR: After a few years of doing motor, workmens’ compensation, marine cargo and personal lines claims, I joined an international Broker, Heath Langeveldt Rollins (A subsidiary of the UK C E Heaths) and had my very first experience of dealing with Medical Malpractice, Lawyers, Surveyors and Construction claims. The experience was tremendous and I started making a name for myself as a tough negotiator.

My very first claim involved a brain surgery that went wrong. The surgeon and the hospital (my client) were sued. We could not get any surgeon in the country to testify…the medical profession was a close knit group and would not testify against each other at that time. We finally had to bring in a surgeon from Holland to testify if the local surgeon did the right surgery. It was an emotional case as in the end, the victim got pittance. It made me very sad.

In 1982, one of the big US Insurers started holding workshops in Malaysia, Singapore and Hong Kong on the D&O Policy. I was fascinated with this product and spent a lot of time doing my own research.

It was a difficult sell in Asia and many brokers did not really understand it enough to talk to their clients.

I joined Citicorp Insurance Brokers (now called Locktons) in 1986 and sold the very 1st D&O policy in Asia.

It used to take me about a year to 18 months to convince a client to purchase the D&O Policy as nearly all companies in Asia believed that their Ds + Os cannot be sued!

It was a tough and uphill task. I used to term this period as the elephant’s gestation period!

I finally placed more and more D&O policies during the next few years (beating every other Broker)  and earned the nickname “D&O QUEEN” from my rival brokers!

In fact one of the brokers said ”The D&O Train came into town and only Aruno got on to it!”.

At the same time, my then Boss, Ian Lancaster, told me to work on a project to convince the Law Society of Singapore Executive Committee that they should consider a Mandatory Professional Liability Program for all their members.

After 2 years and several rounds of Broker presentations, we won the tender in 1989.

I was privileged to draft the policy, implement and manage this very prestigious project from inception.

My reputation gained momentum in Asia and apart from placing more D&O Policies, I also implemented and managed a few more Professional Liability Schemes around Asia for engineers, realtors, accountants, life agents, travel agents, stockbrokers, computer professionals.

I then earned the nickname “THAT SCHEME / SCHEMING LADY” from my rival brokers!

When I was the Deputy Financial Lines Regional Head in AIG, my staff from all over Asia would call me “Mother Of Financial Lines” and would actually send me a Mother’s Day Card every year.

Years later, when I worked for the same Boss in Marsh and Willis, Roger Wilkinson, he would introduce me all over Asia as “MRS. FINPRO” (in Marsh) and “MRS. FINEX’ (in Willis).

These days, most of the Asian industry folks call me ‘GRANDMOTHER OF FINANCIAL LINES.” 


3.  In your many different roles, you have been a mentor for so many people. Who were your mentors and who were the people who were most influential in your career?  


AR: I have to go back a little to my Law School days when I did not have money for the fees and the books.

The President of the Singapore Rotary Club, Keki Medora, gave me a scholarship and also gave me a monthly pocket money from his own funds.

A mysterious gentleman (who heard about my dire straits) would leave new law books every year (for 4 years)  at my hostel reception counter  for me  with a note: “Do not look for me to thank me / I don’t need any thanks….just make sure you pass your exams  and then pass on these books to the next needy person”.

Then when I started my first day at the claims job in NTUC INCOME, my GM, Tan Meng Siang, told me: “In this job it is easy to be bribed by the insureds and the motor repairers. Even if you take a million dollars, you are telling the world you have a price and can be bought. You should be ‘priceless’ as a true professional!

At my next job in CE Heaths, my MD, Peter Comerford, told me on the first day: “You have come here as a professional……………I am going to give you a long rope. It is your prerogative to manage your responsibilities well or to hang yourself!”

Later, when I joined Reliance National as the Asian MD, my Boss, Joseph Graziano, told me ‘You must be firm as a leader, but remember that it does not hurt to also be nice.”

When Reliance National had to be put into run off, I was in a quandary.

Chubb Asia’s then former Head, Chris Giles and the CSI Asia Head, Steve Blasina, both came to my rescue and gave me a year’s consultancy project to draft all their Asia Pacific CSI Policies.

That was a wonderful gesture as it kept me still involved in the Professional Liability Market and still in the Asian  limelight.

Last but not least, I owe a lot to Elizabeth Kennedy, who is a good friend and a great Public Relations professional. She was instrumental in keeping me and my achievements in the news all over Asia. She made me famous!

On another note, I wish to say  I have always been a great believer in imparting knowledge and mentoring  / training as many young people as possible.

I started doing training courses for the Financial Lines people from 1985 and still conduct a number of workshops all over Asia in a year.

I have been berated by some former bosses for ‘training the enemy’ but I believe it is good to have more trained professionals around for the industry to progress. 


4. As a result of the many roles you have served, you have worn many hats. How would you compare your experiences as an in-house claims manager, a loss adjuster, a specialist broker, a reinsurer, an underwriter and now as an Insurance /reinsurance lawyer? What are your views of the various roles?


AR: Yes……. I have served many roles in the industry and am glad I did that….. though some people  would say I was job hopping!

I have done the right thing and can now speak with some authority about the various roles in the industry.

I am now often teased that the only role I have not done is to be a Regulator!

After 40 years of various insurance /legal industry experience, I would say that the reinsurance role is the best!

It is a B2B business and you do not have to deal with unreasonable (and sometimes really horrible) direct insureds or risk managers.

If God gave me back my life, I would never ever want to be a Loss Adjuster! It was my worst experience and you get badly treated by really ‘power crazed / stupid claims mangers’!

The most challenging and really tough role but also very rewarding was that of a broker.

Brokers have the best overview of the markets and definitely have better knowledge of what sells and what does not.

It is a pity we do not practice the concept of ‘quantum meruit’ in insurance broking as we do with legal work.

Brokers do a lot more work for the insureds than any others in the industry  but can get ‘kicked’ out without any payment for the  work done!

I found that very painful to bear …..coupled with the fact that clients had no loyalty or  proper appreciation of ‘true professionalism’.

They take your work and hand over to another broker without any qualms.

I also find it sad that in many Asian countries, except for Hong Kong, brokers are not free to go around the world to get the best coverage  and terms for their clients.

Insurance regulations forbid a broker from freely seeking terms outside the country.

This is no doubt from a market protectionist standpoint … even though a number of these countries are members of WTO and signatories to the GATS and should have Freedom of Services.


5. Your background and experiences in the Asian Financial Lines market are varied and deep. What do you think professionals in the U.S. and U.K. markets need to know about the Asian insurance market?  


AR: There are varying stages of development in Asia with regard to Financial Lines products like D&O, POSI, EPLI, Standalone Entity,  PI/E&O, BBB, Commercial Crime, Medical Malpractice Liability + Medical Defence Unions  , Cyber Liability , Multi-Media Liability, IP / Patent Infringement, Mandatory Professional Liability Schemes, etc.

I have always assessed the Asian markets as to how ‘developed’ they are not by the large premium base but by the availability of these Financial Lines products locally.

On this basis, the more ‘developed’ countries are Singapore, Malaysia, Hong Kong and India.

The second tier countries are China, Taiwan, Japan, Korea,.

The third tier ones would be Sri Lanka, Vietnam, Philippines, Thailand and Indonesia.

The fourth tier would be Myanmar, Cambodia, Bangladesh, Laos and East Timor.

The different languages, local /customary practices, strict policy registration regimes and legal systems can be a very challenging prospect for someone from USA or UK.

At the moment there seems to be a serious price war with a lot of capacity available in the market.

New companies from USA, Bermuda, UK and Europe are setting up in Asia  but they just ‘poach’ employees from the companies already operating in the market…….it seems to be a big round of musical chairs.

I am actually concerned that there is a lack of local talent in the Financial Lines arena……….and not many companies seem to invest in training.

I believe there should be more product development and less strict policy registration requirements. 


6. Many of the members of PLUS are young and are just starting out in the industry. Based on your experiences, what advice would you give to someone just beginning their career?  


AR: I have often advised the people I mentored and trained over the years that they should really stay and forge a career in Financial Lines.

This is the only Insurance sector with very exciting and challenging products.

The policies are always evolving to cater to new challenges.

The coverages actually stretch across all industries.

They must always keep abreast of happenings around the country and the world … is a global village.



























































Two Legal Surveys: Foreign Disputes in U.S. Courts and Fee-Shifting Bylaws

Posted in Securities Litigation

blumarbleAn ever-present anxiety for globally-active non-U.S. companies is the possibility that they might find themselves having to deal with litigation in U.S. courts. This concern is warranted because certain attributes of the U.S. legal system – including the absence of loser pays attorneys’ fee model and the availability of discovery and jury trials – provide substantial incentives for prospective plaintiffs to try to pursue their claims against foreign companies in U.S. courts.


However, there have been a number of significant recent legal developments that have reduced the ability of plaintiffs to subject foreign companies to litigation in the U.S. In addition, the possibility that corporate adoption of fee-shifting bylaws might mitigate the effects of the absence of a “loser pays” model has recently gained significant momentum.


These two subjects – the recent U.S. judicial developments affecting the exposure of foreign companies to U.S. litigation and the upsurge in the adoption of fee-shifting bylaws – are the topics of two recent legal surveys, discussed below.


Litigation in U.S. Courts against Foreign Companies 


An October 2014 U.S. Chamber of Commerce Institute for Legal Reform publication entitled “Federal Cases from Foreign Places: How the Supreme Court Has Limited Foreign Disputes from Flooding U.S. Courts”(here) takes a look at “the current and swiftly shifting legal landscape of federal claims by foreign plaintiffs in the federal courts.” The organization’s October 21, 2014 press release about the publication can be found here.


In the introduction to the publication, which contains a series of four essays by leading legal practitioners about recent developments in this area, the editors suggest that “the tide” against attempts to have U.S. courts adjudicate disputes that arose overseas “might finally be receding.” As detailed in the essays, several recent court decisions “restrict the territorial reach of U.S. laws and impose more rigorous standards for demonstrating personal jurisdiction over defendants.”


The first of the four essays in the publication, entitled “Morrison at Four: A Survey of Its Impact on Securities Litigation” and written by George Conway III of the Wachtell Lipton law firm, takes a look at the effects of the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank. Conway also summarized his essay about Morrison in an October 29, 2014 post on the Harvard Law School Forum on Corporate Governance and Financial Regulation (here).


As Conway notes, the U.S. Supreme Court’s decision in Morrison “reemphasized the presumption against extraterritoriality,” and reestablished “the traditional understanding that Congress ordinarily legislates with respect to domestic, not foreign, matters,” consistent with principles that would “avoid the interference with foreign regulation that the extraterritorial application of U.S. law would produce.”


Conway also notes that lower courts applying Morrison have effectively extinguished “two species” of cases that had ensnared foreign companies in U.S. lawsuits for damages under the federal securities laws. First, Morrison has put an end to so-called “f-cubed” cases, involving claims by foreign domiciled plaintiffs who purchased their shares in foreign companies on foreign exchanges. Second, Morrison has also put an end to “f-squared” cases, involving the claims of U.S. plaintiffs who purchased their shares in foreign companies on foreign exchanges.


Conway then goes on to review more recent cases where the lower courts have applied Morrison to cases involving other kinds of transactions, such as derivative securities transactions. As discussed here, in its August 2014 decision in the securities class action lawsuit involving Porsche, the Second Circuit held that a domestic transaction is a necessary but not necessarily a sufficient condition for a claim to fall within the territorial scope of Section 10(b).


Conway concludes by noting that as case law under Morrison continues to develop, courts will “increasingly face the harder cases, the marginal cases, cases in which the question whether the proposed application of law is extraterritorial is less clear and that turn on thorny factual disputes about where particular events occurred.” These difficult cases will “pose interesting questions of line-drawing and fact-finding,” but their difficulty should not undermine the “the wisdom of the presumption against extraterritoriality.”


The U.S. Chamber of Commerce’s publication concludes with an afterword noting that despite important recent developments, “plaintiffs’ attorneys continue to try to drag nonresident companies into their favorite forums” and that “opportunities for global forum shopping endure.” Nevertheless, the editors conclude, the recent legal developments outlined in the publication “should help courts and defendants more efficiently week out international lawsuits that never should have been imported into the United States in the first place.”


Developments Involving Fee-Shifting Bylaws


One of the most significant recent developments in the world of corporate and securities litigation has been the rising numbers of companies adopting fee-shifting bylaws. These moves followed quickly after the Delaware Supreme Court’s May 2014 ruling in the ATP Tour, Inc. v. Deuscher Tennis Bund case (discussed here) upholding the validity of a non-stock organization’s bylaw requiring an unsuccessful litigant in an intra-corporate dispute to pay his adversary’s legal fees. Many companies have moved to adopt similar bylaws even though legislation is pending in the Delaware legislature to restrict the use of fee-shifting bylaws to non-stock companies. As I recently noted, an increasing number of IPO companies completing their public stock offerings have these types of provisions in their bylaws.


The widespread adoption of fee-shifting bylaws could work a fundamental change in what has been called the “American Rule,” which provides that in the U.S. each party to a lawsuit bears its own costs. The fee-shifting bylaws institute something closer to the “loser pays” model that prevails in many countries outside of the U.S. 


The recent rise and implications of fee-shifting bylaws is the subject of a “roundtable” in the November 2014 issue of the Bank and Corporate Governance Law Reporter (here). The roundtable includes a series of four essays discussing the fee-shifting bylaw phenomenon.


The first essay is by Columbia Law School Professor John C. Coffee Jr. and entitled “Fee-Shifting and the SEC: Does it Still Believe in Private Enforcement?” The essay is the written form of testimony Coffee provided at an October 9, 2014 SEC Investor Advisory Committee. The essay was previously published in an October 14, 2014 post on The CLS Blue Sky Blog (here).


In his essay, Coffee notes that as a result of the sudden upsurge in the adoption of fee-shifting bylaws, corporate law is now in the midst of a period of “rapid change,” and he notes that the pace of the change is “accelerating.” Coffee clearly has concerns with this development, and he contends that even if Delaware acts to limit the restrict the adoption of fee-shifting bylaws, the SEC should still act to curtail the adoption of these types of measures.


As Coffee sees it, the adoption of these kinds of bylaws has several faults. First, he says, the bylaws often are one-sided in that they reimburse successful defendants but not successful plaintiffs, and they require fee-shifting even in cases that were reasonable or even meritorious but that were lost on a technical legal defense. He also notes the perverse incentives the bylaws create, in that the stakes for an unsuccessful plaintiff increase the harder and the longer the plaintiff fights, possibly encouraging early settlements of meritorious cases.


Coffee also sees the bylaws as inconsistent with Congressional attitudes against fee-shifting in class action cases, which, Coffee contends, evince a preference for two-sided fee-shifting subject to judicial review rather than an automatic system of one-way fee-shifting.


Coffee concludes by saying that “Delaware alone cannot solve the problem” because even if Delaware restricts the practice, other states might allow it (as, for example, Oklahoma already has), which could trigger a “race to the bottom.” Coffee states that unless the SEC acts, these kinds of provisions “could become prevalent.”


Coffee suggests that there are a number of steps the SEC could take, including, for example, refusing to accelerate the registration statements of companies that have fee-shifting bylaws (as the agency previously has done with companies that have bylaws with mandatory arbitration clauses). He also suggests that the agency could require registrants to state in the registration statements that the SEC believes the federal securities laws are inconsistent with fee-shifting bylaws. The SEC could also require disclosure of these kinds of bylaws in companies’ risk factors, “thereby raising the ‘embarrassment cost’ to the issuer.”


In the second essay in the roundtable, Widener Law School Professor Larry Hamermesh argues that while fee-shifting bylaws may have a legitimate purpose of “deterring litigation,” the Delaware legislature should preclude broad bylaws adopted after shareholders have invested because those shareholders did not consent to the bylaw adoption and because the bylaws run against traditional shareholder expectations to be able to enforce fiduciary obligations.


In the third essay, the rountable editor, Neil Cohen, argues that shareholder “consent” to fee-shifting bylaws can only be determined by shareholder vote. He also argues that shareholder should have a legal remedy when wrongdoing occurs but that a fee-shifting bylaw could prevent meritorious cases from being filed. In order to allow meritorious cases to proceed but to discourage frivolous lawsuits, Cohen suggests that the Delaware legislature require that fee-shifting bylaws are invalid after plaintiffs have survived a motion to dismiss and requiring that defendants should be required to pay plaintiffs fees when plaintiffs prevail.


In the roundtable’s final essay, former SEC Chairman Harvey Pitt suggests that fee-shifting bylaws should remain the province of state law and of the board. He suggests that the Delaware legislature should require boards to appoint special committees to consider a host of key factors and to enlist the assistance of experts in order to arrive at fair bylaws. Pitt also argues that a shareholder vote should be required for the adoption of a fee-shifting bylaw and that one-sided fee shifting should not be allowed.


Special thanks to Neil Cohen for sending me a link to the fee-shifting roundtable. 


Another Accounting Scandal-Related Securities Suit

Posted in Securities Litigation

arcp_logoEarlier this week I wrote about the accounting scandal that has hit the UK-based grocer, Tesco, and the securities class action lawsuit against the company that followed in its wake. Now another company has reported accounting irregularities – and the company involved has also been hit with a securities class action lawsuit.


On October 29, 2014, before the markets opened, real estate investment trust American Realty Capital Properties issued a press release (here) in which it disclosed the existence of an accounting error and subsequent cover-up relating to its financial statements for this year’s first two quarters. The company announced that adjusted funds from operations had been overstated for the first quarter. (“Adjusted funds from operations” is a key metric of a REIT’s performance and cash flow.) The press release stated that the “error was identified but intentionally not corrected,” and that other adjusted funds from operations and financial statement errors “were intentionally made,” resulting in an overstatement of adjusted funds from operations and understatement of net loss for first three and six months of the year. In the press release, the company also said that its audit committee is investigating the company’s 2013 financial statements as well.


The company further announced that the company’s audit committee’s discovery of these accounting errors had forced the resignation of Brian Block, the company’s CFO, and Lisa McAlister, the company’s chief accounting officer.  


An October 30, 2014 Wall Street Journal article about these developments (here) reported that the SEC intends “to launch an inquiry into the accounting irregularities” at the company. According to the Journal article the total amount by which the adjusted funds from operations was overstated in the first quarter was $12 million, or 8.8%, and for the second quarter was $10.9 million, or 5.6%. The Journal article also quotes a statement from the company’s CEO that the audit committee began its investigation of the company’s accounting in September after “an employee altered the company’s audit committee about the irregularities.”


When I read the Journal article, I wondered how long it would be before plaintiffs’ lawyers filed a securities class action based on these developments at the company. I didn’t have to wait long to find out the answer.


Within a few hours, on October 30, 2014, plaintiffs’ lawyers filed a securities class action lawsuit in the Southern District of New York against the company. Block, and McAlister. A copy of the complaint in the action can be found here. The complaint relies heavily on the company’s October 29 press release and also cites the Journal article cited above. The complaint also relies heavily on the fact that the company released its now withdrawn first quarter financial results on May 8, 2014, just days before the company’s May 28, 2014 secondary offering, in which the company raised net proceeds of approximately $1.59 billion.  The plaintiff’s lawyers October 30, 2014 press release about the complaint can be found here.


Another sharholder filed a second complaint yesterday, as well, The second complaint, which can be found here, names deendants the company’s founder and its CEO as wel as Block and McAlister.


It is interesting to note that in this case, as was also the case with Tesco, the account problems first came to light as a result of an internal whistleblower. As I also noted with respect to Tesco, it is interesting that the whistleblower chose to report the concerns internally rather than reporting the issue to the SEC and potentially lining up a whistleblower bounty payment.


In any event, this new  lawsuit along with the one filed against Tesco late last week represent the latest examples of a something that I think we will be seeing a lot more of — that is, securities class action suits being filed after a whistleblower’s revelation of accounting or other improprieties. As I noted in an earlier post (here), particularly in light of the incentives that the Dodd-Frank whistleblower bounty provides, we will likely see many more securities suits following after whistleblower reports.


One final thought has to do with larger patterns in securities class action lawsuit filings. The ebb and flow of securities class action lawsuit filings is the source of a great deal of discussion as commentators (including even this blog) attempt to explain what may be driving a reported increase or decrease in the number of securities class action lawsuit filings. One thing is for sure about the number of lawsuits, if more companies are reporting accounting miscues, there will be more lawsuits. While it is far too early based solely on this case and the Tesco case to proclaim that there has been an increase in the number of companies reporting accounting problems leading to lawsuits, it is nevertheless interesting  to note that these two high-profile accounting-related suits have arisen in quick succession.


The problems at the two companies are obviously entirely unrelated, but if there were to be more companies reporting accounting issues (perhaps as a result of increased whistleblower activity), it could certainly lead to an accompanying upsurge in securities suit filings.  

Three Astonishing Things

Posted in Blogging

drc2Here at The D&O Diary we read everything so you don’t have to. It was in this spirit that we read the article on page C-3 of yesterday’s Wall Street Journal that in the print version was entitled “Congo Opening Its Doors to Agribusiness” (here) and that contained the single most astonishing sentence I have ever read in my entire life.


The article states: “The Democratic Republic of Congo plans to lease farmland covering an area larger than France in an attempt to attract capital and technology capable of boosting jobs and food productivity in one of the world’s poorest countries.”


Larger than France? What? What in the world are we talking about here?


Let’s put this in perspective — the next sentence in the article says “Congo may lease as much as 650,000 square kilometers (247,000 square miles) or more than one quarter of the central African nation.”  For those Americans that have never traveled around France, let me use a point of comparison that may be more meaningful — 247,000 square miles is an area only slightly smaller than the state of Texas.


And because I know that even this comparison still doesn’t mean anything to people on the East Coast of the United States (who think it is a long way from Manhattan to Connecticut), let me add further than we are talking about a geographic area larger than the combined size of the states of New York, Pennsylvania, Ohio, Michigan and Virginia, with a lot left over. We are talking about a massive amount of real estate.


How can they possibly have a slug of arable farm land larger than the geographically largest country in Europe that they (and in this instance who really is “they”) can just lease out? Doesn’t it seem likely that if there is farmland of any value that someone is already farming it? Might not the current farmers object to, say, for example, the Chinese, coming in and agribusinessing their farmland? As I said before — what?


While contemplating this, you will want to stop everything you are doing and watch the new video from the group OK Go. Many readers may be familiar with the group’s prior videos including their iconic treadmill video. With this new video the group has outdone themselves. Watch this video and be prepared for things to get way more complicated and astonishing than you think at the beginning that they could possibly be.


This video won’t answer any questions about farmland in the Congo, but the choreography will blow you away. While you are sitting gape-mouthed over the precision of the people movement, use of props, and optical illusions, take a moment to contemplate the camera work. The video was filmed as single, continuously shot long-take that I will not spoil for you by describing how it finishes. (You must watch it ALL THE WAY TO THE END.)  I haven’t the slightest idea how the filming of this video was physically possible. The song itself is light and inconsequential. The video, however, is astounding.  


The third astonishing thing: Madison Bumgarner. To pitch five shutout innings on two days rest in the seventh game of the World Series? Astonishing. Is there anything better in sports than the seventh game of the World Series, a one-run lead, bottom of the ninth, two outs, runner on third base, and two strikes on the batter? Amazing. By the way, the poor guy from Chevrolet that gave Bumgarner the MVP award probably will calm down, say, in a month or two. With therapy.

O.K., So Here’s the First Ebola Outbreak-Related D&O Lawsuit

Posted in Securities Litigation

ibioLike everyone else, I have been following the Ebola outbreak news with a mixture of horror and fascination. I never in a million years imagined that I would have occasion to write about the Ebola outbreak on this blog. Perhaps due to a lack of imagination on my part, I never foresaw that there might be an Ebola outbreak-related D&O claim. As it turns out, though, late last week plaintiffs’ lawyers filed a securities class action lawsuit against iBio, Inc. for allegedly misrepresenting its role in manufacturing an experimental Ebola vaccine.


As reflected in their October 24, 2014 press release (here),  plaintiffibiocomplaint lawyers have filed a securities class action lawsuit in the United States District Court for the District of Delaware against iBio and its Chairman and CEO, Robert B. Kay. The complaint (a copy of which can be found here) was filed on behalf of investors who acquired the company’s shares during an unusually short class period – that is, between October 13, 2014 and October 23, 2014, during which period there was a flurry of media activity about the company’s ostensible involvement in the manufacture of ZMapp, an experimental Ebola virus fighting drug.


There is a shortage in the supplies of ZMapp, which is manufactured by Mapp Pharmaceutical and Kentucky BioProcessing. The federal government is helping the current manufacturers of ZMapp to find additional facilities affiliated with Texas A&M to increase the supply of ZMapp. Caliber Biotherapeutics is affiliated with the Texas A&M center and is one of the companies being considered to help manufacture additional supply of ZMapp.


The gist of the complaint’s allegations is that the defendants allegedly misrepresented the company’s relationship with Caliber.  The plaintiff alleges that the defendants misled investors by suggesting that iBio’s relationship with Caliber has to do with ZMapp production. The complaint alleges that “in truth, iBio’s relationship with Caliber does not concern the production of ZMapp.”


In the complaint’s substantive allegations, the first alleged statement to which the complaint refers is from an October 11, 2014 newspaper article, which stated (and was quoted verbatim in the complaint) as follows:


Caliber Biotherapeutics “is by far the largest facility in the world” for producing pharmaceuticals in tobacco plants, said Robert Kay, CEO of iBio Inc., a Newark, Delaware-based biotechnology company that owns one of the technologies used to make drugs in tobacco plants. “If anybody is going to produce this, it is almost axiomatic it has to be with Caliber involved.” Caliber didn’t immediately return a phone message left at its offices.


The complaint alleges that iBio issued an October 16, 2014 press release captioned “iBio Responds to Inquiries About its Role in Emergency Response to Ebola Virus Disease Outbreak” (here). The press release describes iBio’s relationship with Caliber, noting that the company has a licensing agreement with Caliber to collaborate on commercial opportunities for recombinant antibodies and antibody-related proteins. In a separate paragraph, the press release also states that iBio has offered to assist the U.S government in connection with manufacturing drugs that address the Ebola outbreak.


The complaint also refers to an October 17, 2014 online article that cites an unnamed iBio spokesperson as having said that “any lab that wants to make ZMapp vaccine using plant-based technology would have to license it from iBio; Caliber has License from iBio”


The complaint alleges that iBio’s representations about its “purported involvement in the emergency response to the Ebola virus outbreak” were misleading because “iBio’s relationship with Caliber had nothing to do with the production of ZMapp or combating the Ebola virus.” The complaint quotes extensively from two Seeking Alpha articles dated October 20, 2014 (here) and October 23, 2014 (here) which raise questions about iBio’s supposed involvement in the production of Ebola-related drugs, and point out that its license with Caliber is not in connection with Ebola drugs but instead, according to iBio’s prior SEC filings, relates to an oncological indication. After the publication of the first Seeking Alpha article, the company’s share price fell 32%, and the share price fell an additional 8% after the second article.


On first reading of the complaint, I wondered why it had referenced the October 11, 2014 newspaper article, because the article doesn’t say anything suggesting that iBio is involved with producing the Ebola medication or that iBio’s license relationship with Caliber has to do with Ebola. Then I read the stock purchase certification the plaintiff attached to the complaint. It shows that the plaintiff bought iBio shares on October 14, 2014 (7872 shares @1.89/share), October 17, 2014 (8400 shares @ 2.29/shre) and again on October 17, 2014 (15050 @ 2.20/share). Now I know that the complaint refers to the October 11 newspaper article in order to try to take the beginning of the class period back to a time prior to the plaintiff’s first purchase of iBio shares on October 14.


The first statement by iBio that the complaint cites in which the company referred to its relationship with Caliber is the October 16 press release. Unless the plaintiff can come up with some other statements from the company prior to October 16, the plaintiff will have difficulty pushing the start of the class period before October 16.


In addition, it is not going to be easy for the plaintiff to make of the October 16 press release what he attempts to make of it in his complaint. The press release itself does not say that iBio’s relationship with Caliber has anything to do with the Ebola drug. The press release does, two paragraphs after the mention of iBio’s license relationship with Caliber, refer to the iBio’s offer to help the federal government with the Ebola drug. The plaintiff is in effect seeking to argue that the subsequent reference in the press release is connected to the earlier reference to Caliber. The difficulty the plaintiff will have is that, as the complaint itself states, the company’s own prior SEC filings state that iBio’s licensing relationship with Caliber relates to an oncological indication.


In preparing this blog post, I trolled through a lot of the chatter that has been taking place on various Internet investment sites about the available alternatives for Ebola medication. It is obvious that there is a segment of the investment marketplace convinced there is money to be made out of the Ebola outbreak, by trying to pick the winners on the Ebola drug derby. Whatever one might make of this macabre attempt to attempt to profit from the Ebola outbreak, it is clear that among the companies that got caught up in the frenzy was iBio. Indeed, that appears to explain the plaintiff’s purchase of iBio shares. Where the plaintiff may struggle in this lawsuit, at least based on the allegations presented in the complaint, is showing that the iBio got caught up in the frenzy because of statements by iBio itself.


The one statement on which the plaintiff seeks rely that comes closes to linking iBio up to the Ebola drug efforts of  Caliber is the October 17 Internet article that supposedly said that an “iBio Spokesperson Says Any Lab the Wants to Make ZMapp Vaccine Using Plant-Based Technology Would have to License it from Bio; Caliber has License.” Even this statement doesn’t quite deliver the alleged misrepresentation on which the plaintiff purports to rely (that is, that Caliber’s license arrangement with iBio has to do with Ebola). For what it is worth, I wasn’t able to find this statement on the website to which the complaint refers, and even then, I am not sure how far the plaintiff will be able to get relying on a third party’s account of what an unidentified spokesperson may have said.


The Ebola outbreak presents a complicated and frightening public heath threat and involves a terrible affliction for the individuals infected by the virus. I never anticipated that a D&O claim would be among the things that would follow in the wake of the outbreak. Having failed to foresee the possibility this claim, I am not going to attempt to predict whether there will be other Ebola-related D&O claims. As long as I have been doing this, nothing should surprise me any more. I will say, it is always something new and different.

Perhaps This Really Is the Last Round of Mug Shots?

Posted in Mug Shots

mugshot4-300x224I know I have previously declared (twice now) that we have reached the end of the publication of readers’ mug shots, but the pictures just keep arriving. I have been holding some late arriving pictures on the chance that still others might appear, but rather than let the pictures in hand to go stale, I decided to go ahead and publish them now. I don’t expect any more pictures to arrive, but you never know. There may yet be more pictures to come – and if any of you out there have pictures, please do send them in – but in the meantime here is the latest final round of pictures.


Readers will recall that early last year, I offered to send out a D&O Diary coffee mug to anyone who requested one – for free – but only if the recipient agreed to send me back a picture of the mug and a description of the circumstances in which the picture was taken. In previous posts (here, here, here, here, here, here, here, here , here, here, here, here, here, here, here, here, here, here and here), I published prior rounds of readers’ pictures. I have posted the latest round of readers’ pictures below.


The first picture is from Glenn Dockery, of Paragon Risk Management in Lakeland, Florida.. Glenn reports that the dog’s name is Petey, and that he is “a blue nose pit bull my son rescued from a shelter six years ago.” He adds that “we have had Petey since he was six weeks old and despite his very menacing look, he is very affectionate and social with people and other dogs.”




The next pictures are from Kevin Ishizu, Sharmila Mahendra and Kris Martin of Wells Fargo Insurance Services in San Francisco. Their D&O Diary mug shots were taken at the San Francisco History Museum located at Wells Fargo’s world headquarters. The pictures were taken in front of an authentic Concord Stagecoach used by Wells Fargo in the 1860s.







Thanks to everyone sent in a mug shot as part of this long-running series. It has been great fun receiving the pictures and seeing the amazing diversity of locations where people have taken their mug shots. There is still time for anyone who still wants to send along their own mug shot; I would be delighted to be able to publish yet another round of pictures.    


Cheers to everyone who helped make this series so much fun.

Tesco Accounting Scandal Draws Securities Class Action Lawsuit

Posted in Securities Litigation

tescoWhen Tesco PLC announced on September 22, 2014 that its previously forecast first-half profit had been overstated by £250 ($408.8 million), the news of the accounting irregularities was “serious,” as Tesco plc’s CEO of less than a month’s standing at the time put it.  The company also announced that the overstatement, first flagged when an informed employee alerted the general counsel about the booking of income and the booking of costs, was under investigation by the Freshfields law firm and by the Deloitte accounting firm. The company also suspended four senior executives. A September 23, 2014 Wall Street Journal article about the company’s disclosures can be found here.


As bad as the initial announcement was, the news soon grew worse. On October 1, 2014, the company announced that the U.K.’s financial watchdog, the Financial Conduct Authority (FCA), has “commenced a full investigation” of the accounting irregularities at the company. An October 1, 2014 Reuters article about the FCA investigation can be found here.


The situation grew bleaker still on October 23, 2014, when the company announced that the amount of the overstatement was actually £263 million pounds ($422 million), rather than the previously announced £250, and that the company’s Board Chair, Richard Broadbent, would be stepping down. An October 23, 2014 Bloomberg article describing the company’s interim results and the Chair’s resignation can be found here.


The accounting woes follow a period of tumultuous change in the company’s executive offices. The new CEO, Dave Lewis, just assumed the CEO role on September 1, a month earlier than expected, after the former CEO, Phillip Clarke, was dismissed in July. For several months, the company had no CFO after the former CFO, Laurie McIlwee, stepped down in April. The new CFO designate, Alan Stewart, had not been scheduled to take up the role until December; however, on September 23, 2014, immediately after the initial disclosure of the overstatement, the company announced that Stewart’s starting date had been moved up and that he would take up the CFO role that same day. 


These kinds of events involving a U.S. company would almost automatically attract a securities class action lawsuit. However, Tesco is a UK-based company. Its shares trade primarily on the London Stock Exchange. Under the U.S. Supreme Court’s July 2010 decision in Morrison v. National Australia Bank, the U.S. securities laws would not apply to the claims of any investors who had purchased company’s shares on the LSE. Just the same, the company has attracted a securities class action lawsuit filed in a U.S. court because, in addition to the shares trading on the LSE, the company also has American Depositary Receipts that trade over the counter in the U.S.


On October 23, 2014, plaintiffs’ lawyers initiated a lawsuit in the Southern District of New York on behalf of investors who purchased Tesco ADRs in the U.S. between February 2, 2014 and September 22, 2014. The complaint (which can be found here) was filed on by the Irving Fireman’s Relief and Retirement Fund, a pension fund for the Irving, Texas firefighters. The complaint names the company, McIlwee, and Clarke as defendants. The complaint alleges that through a variety of misrepresentations during the class period, the defendants violated the U.S. securities laws. The complaint asserts that the company’s share price dropped 12% following the disclosure of the accounting irregularities on September 22, and fell a total of 43% from its high during the class period. The plaintiffs’ lawyers’ October 23, 2014 press release can be found here.


At one level it is hardly surprising that developments of this kind have attracted a securities class action lawsuit. There are, however, a number of interesting things about the lawsuit that was filed. The first has to do with the plaintiff class. I suspect that the vast majority of the company’s shares trade on the London Stock Exchange. I can’t tell what percentage of the companies securities trade over the counter as ADRs in the U.S., but I am guessing it is a small percentage compared to the percentage of shares that trade on the LSE (I recognize that there is probably a very easy way to determine this from publicly available information, but the research staff resources are pretty thin here. I welcome input from any reader that can shed any light on this topic.) The U.S. plaintiffs’ lawyers could not under Morrison file claims on behalf of the LSE purchasers, but that still begs the question of how big the class of U.S. ADR purchasers might be. I could be wrong of course, but it wouldn’t surprise me to find out that the class of ADR purchasers is relatively small.


UPDATE: A reader notes as follows:  ”Based on average trading volume, trading in London far exceeds trading in the US OTC market.   Yahoo finance, for instance, shows average daily trading volume in London over the past 3 months of ~37,000,000 compared to just 900,000 ADRs in the OTC market (each ADR is convertible into 4 ordinary shares).”


The other interesting thing to me about the new securities suit against Tesco is that it represents yet another securities class action lawsuit filed in U.S. court against a non-U.S. domiciled company. After the U.S. Supreme Court’s decision in Morrison, it might have been expected that securities suits involving non-U.S. companies would be rare. As it has turned out, securities litigation involving non-U.S. companies has continued to be filed at a relatively brisk clip. The new lawsuit against Tesco represents, by my count, the nineteenth lawsuit filed so far during 2014 involving a non-U.S. company, out of an informal overall tally of 136 filings so far this year, or just about 14% of all securities suit filings.


While the rate of filings against non-U.S. companies so far this year is down slightly from last year (when 16.9% of all securities suit filings involved non-U.S. companies), even the lower rate so far this year is elevated compared to historical levels; during the period 1997 to 2009, the annual average percentage was around nine percent. So contrary to what you might have expected after the Supreme Court’s Morrison ruling, the filings against non-U.S. companies have consistently been up since the decision.


Another interesting thing about this lawsuit is the specific individuals that are named as defendants. Though the two individual defendants, Clarke and McIlwee, served as CEO and CFO respectively during the class period, McIlwee was long gone from the company and Clarke had already been terminated by August 29, 2014, which was the date of the guidance that the company later had to revise on September 22, 2014. The problem for the plaintiffs is that, at least as far as I can tell, on August 29, the company had no CFO and a CEO who had already been terminated and who was stepping down in favor of Dave Lewis, owing to the tumult in the company’s executive offices. To be sure, the company did state in its October 23 earnings release that the irregularities started prior to this year, and the plaintiffs do allege that there were other misrepresentations during the class period. But the heart of this lawsuit is the alleged overstatement of projected profits in the company’s August 29 guidance. The individuals the plaintiff named as defendant arguably are not the most logical defendants for a case that really has to be built around the company’s August 29 profit forecast. .


The final interesting thing to me about this case is that the accounting issues first came to light as a result of a whistleblower’s report. The public information about the whistleblower report is fairly scant, but it appears that someone with knowledge approached the company’s general counsel with information about the accelerated recognition of income and the delayed accounting of costs. An interesting question is why the whistleblower chose to report internally rather than reporting the improprieties to the SEC, and thereby trying to qualify for a whistleblower bounty award. Whether a report to the SEC about Tesco, a U.K. based company whose shares only trade OTC in the U.S., would have garnered a whistleblower bounty is an interesting question, but it is worth noting that the recent record $30 million whistleblower bounty award was made to a foreign domiciled individual.   


In any event, the lawsuit filed against Tesco represents the latest example of a something that I think we will be seeing a lot more of — that is, a securities class action being filed after a whistleblower’s revelation of accounting or other improprieties. As I noted in an earlier post (here), particularly in light of the incentives that the Dodd-Frank whistleblower bounty provides, we will likely see many more securities suits following after whistleblower reports.


Eleventh Circuit Vacates Dismissal of Integrity Bank Lawsuit, Remands Case to District Court: In a July 2014 opinion, the Georgia Supreme Court answered certified questions in The Buckhead Community Bank case having to do with the availability of the business judgment rule under Georgia law and whether bank directors and officers could be liable under the state’s law for claims of ordinary negligence. The Buckhead Community Bank case had been submitted to Georgia’s highest court on certified questions by Northern District of Georgia Judge Thomas W. Thrash, Jr. Similar questions were also certified to the Georgia Supreme Court in the Integrity Bank case by the Eleventh Circuit. The question certified was in both cases nearly identical – that is, the courts sought to determine whether or not under Georgia law a bank director could be held liable for claims of negligence or whether liability for those claims would be precluded by the business judgment rule.


As discussed here, in its July 2014 opinion in the The Buckhead Community Bank case, the Georgia Supreme Court ruled that that the common law of Georgia recognizes the business judgment rule — but while the rule insulates directors and officers from claims of negligence concerning the wisdom of their judgment, it does not foreclose negligence claims against them alleging that their decision making was made without deliberation or the requisite diligence, or in bad faith.


On October 24, 2014, the Eleventh Circuit issued a per curiam opinion in the Integrity Bank case, based on the Georgia Supreme Court’s response to the federal appellate court’s certified questions. The Eleventh Circuit recited that in light of its opinion in The Buckhead Community Bank case, the Supreme Court of Georgia “now advises us that a bank director may violate the standard of care” under applicable Georgia statutes “even where he acts in good faith, where, with respect to process by which he makes decisions, he fails to exercise the diligence, care and skill of ordinarily prudent med action under similar circumstances in like positions.” (Citations omitted).


The per curiam opinion vacates the order of dismissal the district court had entered in the case and remands the case back to the district court for further proceedings in light of the Georgia Supreme Court’s opinion.


faithandwhiseyIt’s All Part of My Rock and Roll Fantasy: Prior to this past weekend, about the only thing I knew about the Grog Shop, a music club in the Coventry neighborhood in Cleveland Heights, is that when they still lived at home my kids used to go there for concerts. However, this past Saturday night, my wife and I were part of the crowd at the Grog Shop bar, there for some live music. We had come to hear the local rock and roll bank Faith & Whiskey (“If you don’t have one, you’d better have the other”) play a righteous round of classic rock music. Among the band members was our good friend Jerry Kysela, of AON Cleveland, on rhythm guitar. (That’s Jerry on near side in the pictures above and below)  It was also a costume event for Halloween, so the crowd was in high spirits. In all honesty, the D&O Diary doesn’t rock out that much any more, but I can still enjoy a good rock and roll band. I have to say that watching the (mostly middle-age) guys rocking out on the stage, it looked like they were having a heck of a lot of fun.


We took a few pictures and I asked Jerry if it was OK if I wrote about his band on my blog, and he said “You can do whatever you want.” So along with the pictures of the event, I will invoke the lyrics of the Bad Company song “Rock and Roll Fantasy,” which go like this: “Here come the jesters, one, two, three./It’s all part of my fantasy/I love the music and I love to see the crowd/Dancing in the aisles and singing out loud.” It’s all part of my rock and roll fantasy.


My son says “Now that you and Mom have been to the Grog Shop, anything might happen.” Seriously.




In addition to some great rock and roll, there were some great costumes.




These pictures don’t have anything to do with Rock and Roll or the Grog Shop, but it wass such a beautiful weekend here it seems like a shame not to drop them in here as well. Taken on Sunday at Lower Shaker Lake, Shaker Heights, Ohio.









D&O Insurance: Contractual Liability Exclusion Precludes Coverage for Negligent Misrepresentation Claims

Posted in D & O Insurance

floridaIn an October 20, 201 opinion (here), Middle District of Florida Judge Roy B. Dalton, Jr., applying Florida law, entered summary judgment for a D&O insurer, holding that the insurer was not liable for the stipulated judgment its insured had entered because the policy’s broad contractual liability exclusion precluded coverage for the underlying claims of negligence and misrepresentation that had been asserted against the insured.




Land Resources LLC (LRC) was a land development company that eventually went bankrupt.  James Robert Ward was an executive of LRC. In connection with certain land development projects in Georgia, Tennessee and North Carolina, two bond companies issued subdivision bonds on behalf of LRC to guarantee the completion of the projects. As part of the bond issuance, Ward and LRC executed a General Agreement of Indemnity (GAI) under which they indemnified the bond companies for liabilities and costs the bond insurers incur in relation to the bonds.


LRC defaulted on the bonds and the bond issuers sued Ward alleging that he was liable for the bond issuers’ losses. The bond issuers alleged that Ward had caused LRC to default by negligent acts errors and omissions (the negligence claim) and had induced the bond issuers to issue to bonds by negligently failing to disclose LRC’s financial condition to the bond issuers (the misrepresentation claim). The bond issuers’ initial complaint also included a claim against Ward for indemnification under the GAI, but the bond issuers’ amended complaint omitted the indemnification claim.


Ward submitted the lawsuit to LRC’s D&O insurer. The D&O insurer denied coverage for the claim under the policy’s contractual liability exclusion. Ward entered into a settlement of the underlying lawsuit whereby he agreed to a stipulated judgment of $40 million and assigned his rights under the policy to the bond issuers. The bond issuers then sued the insurer seeking to recover the amount of the judgment.  The D&O insurer moved for summary judgment, arguing that there was no coverage under its policy for the bond issuers’ claims against Ward.


Exclusion 4(h) of the policy provided that the insurer “shall not be liable to make any payment for Loss in connection with a Claim made against an Insured … alleging, arising out of, based upon or attributable to any actual or alleged contractual liability of the Company or any other insured under any express contract or agreement.”


The October 20 Opinion


In moving for summary judgment, the insurer argued that Exclusion 4(h) precluded coverage for the claims against Ward because the losses claimed in the underlying action arose out of Ward’s and LRC’s breaches of their contractual obligations under the GAI and the bonds.  The bond issuers argued that the defendants’ arguments take construction of the Policy “to a tortured extreme, arguing that the mere utterance of the word ‘bond’ or ‘contract’ by Plaintiffs in this action sucks the claim in the protective ambit of the exclusion” and ignores the “legal legitimacy of Plaintiffs’ tort claim which stand independently of any contractual liability.”


Judge Dalton agreed with the insurer, saying that “this court finds that the phrase ‘arising out of’ as used in Exclusion 4(h) is unambiguously broad and preclude coverage for purported tort claims that depend on ‘the existence of actual or alleged contractual liability’ of an insured ‘under any express contract or agreement.’”


He added that the insurer had introduced evidence that the “purported negligent misrepresentation claim” in the underlying lawsuit “depended on (and was not merely incidental to) Ward’s and LRC’s contractual liability under the GAI, the Bonds and the various developmental agreements.” He also noted that the bond issuers conceded that their tort claim arose out of defaults on the Bonds, their losses arose from the contractual liability of Ward and that they would have suffered no losses had Ward performed his obligations. He also found that the bond issuers’ argument that “there never would have been any contracts” were it not for Ward’s negligent misrepresentations “finds no support in the cited deposition testimony and interrogatory responses.”


Although he did not need to reach the issue, he went on to rule that even if there were coverage under the policy, the insurer would be entitled to summary judgment because the settlement of the underlying lawsuit (which took the form of a so-called Coblentz agreement between the claimant and the insured and involved the insured’s assignment of policy rights) “was reached by collusion or an absence of effort to minimize liability.”  He noted a “plethora of evidence indicating that enforcement of the Coblentz agreement in this case would be contrary to Florida law.”


In reaching this conclusion about the settlement agreement, Judge Dalton noted, among other things that Ward obtained benefits “beyond the mere conclusion of the Underlying Action”; that Ward had not “endeavored to minimize the amount of the judgment” (and noting that Ward had settled with two bond issuers for relatively nominal amounts); and that Ward had defenses to the underlying action.




I suspect that many readers will find the outcome of this case surprising, as claims of negligence and negligent misrepresentation are the very sorts of claims for which policies of this type are purchased. But as I noted in a prior post discussing an earlier decision in which another court held that the contractual liability exclusion precluded coverage for a negligent misrepresentation claim, the outcome of the coverage analysis is attributable to the sweeping breadth of the exclusion’s omnibus preamble. In the prior case as in this case, the courts held that coverage was precluded because of the breadth of the “based upon, arising out of” language.


The disconcerting thing about this application of the exclusion is that it implies that the exclusion could preclude coverage for any claim in which any sort of a transaction is involved. The trouble is that many of not most D&O claims involve some sort of a transaction that includes some sort of a contract or agreement or understanding. If the “based upon, arising out of language” sweeps as broadly as Judge Dalton’s opinion seems to imply, the exclusion potentially could block the coverage for which the policy was intended.


One remedy for the potential over-breadth of the exclusion would be to substitute the word “for” in lieu of the “based upon, arising out of language.” However, many carriers will insist on using the broad preamble for the contractual liability exclusion and will refuse the narrower “for” language. Given the extent of the preclusive effect that courts have found in interpreting contractual liability exclusions with broad omnibus preambles, policy forms using the narrower “for” wording are, in this respect, superior  from the policyholder’s perspective, particularly if carriers whose policies have the broader wording try to apply the exclusion to preclude a broad range of types of claims.


As I suggested in my earlier post, I think the “for” wording is more consistent with the purposes for including a contractual liability exclusion in a D&O policy. An exclusion with the “for” wording makes it clear that insurers do not intent to pick up the insured company’s contractual liability, without extending the exclusion’s preclusive effect to a broad range of tort claims alleging different types of wrongful misconduct.


From my days as a coverage attorney on the insurance company side, I retain a basic dislike for the kind of settlement Ward entered with the bond insurers. These kind of deals always felt like an attempt to try to set up the insurer. Just the same, I found Judge Dalton’s conclusion that the settlement agreement here was collusive a little unexpected, and not just because he didn’t need to reach the issue. While I see his point about the $40 million amount of the stipulated judgment, the rest of his reasoning to me seems off the mark.


The insurance company had denied coverage, Ward had to look out for his own interests as best he could, no thanks to the insurer. What obligation did he have to try to negotiate a better deal for the benefit of the insurer? What possible expectation could the insurer have in that in reaching a settlement he should have to “minimize” the amount of the settlement or try to assert defenses he may have? Why shouldn’t he be able to extract as many benefits out of the settlement as he could? The amount of the settlement arguably may support a conclusion that the settlement was conclusive, but I am not as persuaded by the other grounds on which Judge Dalton relied support his conclusion that the settlement was collusive.


An earlier post in which I set out a broader overview of the contractual liability exclusion can be found here.