One of the vestiges of the global financial crisis is that company directors and officers now face more scrutiny than ever. This scrutiny, in turn, has led to a greater liability exposure for corporate officials, as well. This increased scrutiny and amplified liability exposure applies not only in the U.S., but in other countries, including, in particular, in Europe, according to a recent report. The report, issued earlier this week by the European Confederation of Directors’ Associations (ecoDa) in conjunction with AIG and entitled “Guide to Directors’ Duties and Liabilities” (here) examines the risks facing directors of European countries and highlights the specific risks in a number of countries. As the report details, the nature of directors’ duties and liabilities and the manner in which they are enforced can be affected by the differences in legal environments and board structures across Europe. The report also discusses the role of D&O insurance in helping to address these risks. The October 5, 2015 press release from ecoDa about the report’s publication can be found here.
Changing Legal Standards: As the report explains, the duties and liabilities of corporate directors at companies in Europe is a factor both of the companies’ home countries’ company law and directives from the European Commission. Among other things, these directives have introduced a series of recommendations to harmonize and improve governance regimes across Europe and also to further strengthen the rights of shareholders. Domestic and European legislation has also added depth and scope of directors’ duties; increasingly, directors must consider not only the legal standards embodies in the home country’s company law but also duties arising from legislation pertaining to the environment, health and safety, competition, data protection, and anti-bribery. Moreover, directors’ duties are also evolving as a result of cross-border issues as well.
Board Structures: While these general trends apply broadly across Europe, important country-specific aspect of company law also matter as well. The most important of these country-specific factors are the board structure requirements in the various countries. The board structures generally may be classified into one-tier and two-tier arrangements, which evolved, respectively, from the laws of England and Germany. Currently, seven EU member state (Austria, the Czech Republic, Estonia, Germany, Latvia, Poland and Slovakia) require a two-tier board. Eight states (Belgium, Cyprus, Greece, Ireland, Malta, Spain, Sweden, and the United Kingdom) provide for a one-tier structure. 14 EU countries offer a choice of structure.
Regulatory Enforcement Activity: One of the consequences of the financial crisis is that regulators have stepped up their enforcement activity. Regulatory action remains one of the biggest sources of litigation against corporate directors and officers in Europe and investigations alleging regulatory violations “are on the rise as newly-empowered supervisors seek to flex their muscles.” This more robust regulatory enforcement has been felt most acutely in the financial sector, but other industries – such as energy, high tech, telecommunications, pharmaceuticals, manufacturing, and real estate development and construction – are seeing an increase as well. The regulatory scrutiny relates not only to companies’ financial disclosures, but also other areas, including anti-corruption and bribery, health and safety, pollution and the environment, data protection, competition and cartel activity. Cross-border cooperation between regulators has expanded as well; for many companies, “their most significant risk may lie outside their home country” (which is a point I have previously made on this blog, here). Directors’ liabilities may “extend well beyond the borders of the country in which they are located, particularly where a company has U.S. interests.”
The Rise of Collective Action Litigation in Europe: The report also notes that “there is an impression that European culture is growing more litigious.” The economic environment coming out of the financial crisis “as made it more likely that directors and officers of publicly listed companies will be the target of lawsuits brought by groups of disgruntled shareholders.” Moreover, in the wake of the U.S. Supreme Court’s decision in Morrison v. National Australia Bank, which closed off access to U.S. courts for shareholders who purchased shares in non-U.S. companies outside of the U.S., “a growing number of EU jurisdictions are providing collective redress mechanisms” – while at the same time “there has not been the expected surge in European shareholder litigation since Morrison.”
The Continuing Importance of Bankruptcy Related Claims: With all of these developments, insolvencies remain a leading cause of D&O claims in Europe. Bankruptcy trustees in most countries have a duty to investigate the root cause of an insolvency and consider whether the directors and officers were to blame. They are also “becoming increasingly aggressive in their pursuit of claims alleging personal liability.” There is a potential in some countries – including France and the U.K. – for directors to be personally liable for losses suffered as a result of continuing to trade while technically insolvent. In France, for example, it is common for directors to be held personally liable for wrongful trading (in around 10% to 12% of the cases)
Criminal Liability Exposures: Criminal liability also remains a concern. In the past, criminal prosecution tended to follow where there were clear cases of fraudulent activity and financial crime. However, in the current environment, regulators and prosecutors are increasingly likely to pursue criminal proceedings in their enforcement of laws ranging rom health and safety to anti-bribery and corruption. Within Europe, countries such as Germany and the U.K. are more inclined than others to threaten liability in an effort to motive director behavior.
Cybersecurity-Related Exposures: Changing privacy and data protection laws have also the increasing potential to add to directors’ liability exposure. While the examples cited in the report are all drawn from the U.S. (including Wyndham Worldwide, Target, and Home Depot), the report also notes that emerging potential for similar claims in Europe.
Among the report’s more interesting features are the case examples that the report provides with respect to each of the areas of liability exposure that the report identifies. The report also sets out some practical steps directors can take to try to reduce their liability exposure. The report concludes with a brief discussion of the ways that D&O liability insurance provides directors protection from their liability exposures.
Upcoming Webinar to Discuss Volkswagen Securities Litigation and Other Litigation Developments Involving Non-U.S. Companies: On Thursday October 15, 2015, I will be participating in a webinar entitled “Volkswagen and the Emergence of D&O Litigation Involving Non-US Companies.” The free one-hour webinar, which is being sponsored by Advisen, will take place at 11 am EDT. The webinar will focus on the issues raised by the investor lawsuit recently filed in the U.S. against Volkswagen, as well as by the efforts to launch investor claims against Volkswagen in the Netherlands and Germany. The webinar will also discuss investor litigation that has been filed both inside and outside the U.S. in the wake of scandals involving Petrobras, Tesco and Toshiba. The other speakers at the webinar will include Alexander Reus of the DRRT law firm (which has offices in the U.S. and in Germany); Albert Knigge, of the Houthoff Buruma law firm (Amsterdam); and Kimberly Cole of the Kobre & Kim law firm (New York). Jim Blinn of Advisen will moderate the panel. Information about the webinar, including registration instructions, can be found here.