The D&O Diary was on assignment in Europe last week, with first stops in Dublin and London. Late January may not seem like the ideal time to visit Ireland and England. Though the weather was chilly and darkness gathered early in the afternoon, it turned out not to be a bad time to visit after all.
Continue Reading Dublin and London
Governance Issues frequently are the heart of corporate and securities lawsuits. For that reason, the testimony in this type of litigation of corporate governance and management practices experts can be indispensable. In the following guest post, Dr. Stephen Grace, President and Founder of H.S. Grace & Company, Inc., Alvin H. Fenichel, CPA, Senior Advisor at H.S. Grace & Company, Inc., and Joseph P. Monteleone, Esq., the Principal in Catamount Services LLC, take a look at the ways in which the testimony of these experts can be utilized in these kinds of lawsuits, as well as the related question of who is qualified to serve as a governance expert. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
Continue Reading Guest Post: Is It Ever Too Early To Engage A Corporate Governance Expert?
Portions of the U.K. Economic Crime and Corporate Transparency Act 2023 went into effect just after Christmas 2023. Who are the senior manager that the Act affects and how worried should they be? These are the questions Francis Kean, Partner in Financial Lines Team at McGill and Partners, asks in the following guest post. A version of this article previously was published online by The Chartered Governance Institute for UK and Ireland. I would like to thank Francis for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article.
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On 26th December 2023, the attribution rules relating to corporate criminal responsibility for economic crimes were extended to senior managers under The Economic Crime and Corporate Transparency Act 2023 (ECTA). So, who are senior managers for this purpose, and should they be worried? ECTA also introduces a new corporate offence of failure to prevent fraud which will come into force when the Government publishes relevant guidance (expected early 2024). What are the implications of this for companies and their employees?
Background
The Serious Fraud Office and other prosecutorial authorities in the UK have long been campaigning for reform of the so called identification principle. The position in common law dating back to a House of Lords decision in 1971 is that only if those persons identified as the “directing mind and will” of a company commit an offence (and have the requisite guilty mind to commit such offence), will the company be guilty of it.
The problem here is that companies are legal constructs. For those corporate offences which require knowledge or intent, prosecutors must establish that such knowledge or intent resides with one or more individuals. That proved a challenge especially for companies with large executive teams which presided over complex businesses. (English courts, unlike the counterparts in the US, do not permit knowledge or intent to be aggregated between individuals.) Therefore, by expanding the net of individuals whose acts and knowledge can be attributed to the company, ECCTA addresses this issue for certain categories of crime while the common law rules are preserved for the rest.
Who are senior managers?
For better or worse, ECTA borrows the definition from the Corporate Manslaughter and Corporate Homicide Act 2007 (CMCHA) under which “senior management” means any person who plays a significant role in:
(a) the making of decisions about how the whole or a substantial part of the company or partnership’s activities are to be managed or organised, or
(b) the actual managing or organising of the whole or a substantial part of those activities.
The Explanatory Notes to the CMCHA state that this covers both those in the direct chain of management and those in, for example, strategic or regulatory compliance roles. Whilst directors and officers are plainly and deliberately in scope, it is less clear whether all those involved in taking decisions relating to corporate strategy and policy in areas such as finance, risk management and legal affairs will also be. Much will depend on the size and structure of the company concerned.
An obvious question is as to the meaning of “substantial” in this context. This has yet to be litigated under the CMCHA but prosecutors are likely to look at what an individual’s role and responsibilities are within the organisation and the level of managerial influence they exert, rather than solely their job title. A further fact-sensitive question (and requirement under ECTA) is whether the particular senior manager has acted within the scope of his or her “actual or apparent authority.”
The new offence of failure to prevent fraud
In addition to the expansion of the scope of corporate criminal liability to all companies and across a long list of offences based on economic crime including fraud and theft, Section 199 of ECTA introduces a new criminal offence of failure to prevent fraud. This is modelled on the equivalent offence created under Section 7 of The Bribery Act 2010 and applies to “relevant bodies” who are guilty of an offence when “a person associated with that body commits a fraud offence intending to benefit the relevant body.”
“Person” for this purpose is not limited to senior managers but extends to all employees and arguably also to other entities within the company’s supply chain.
“Relevant Body,” however, is limited to large organisations i.e. ones which in the year preceding the fraud:
As with the Bribery Act offence, a defence is available if the relevant body can demonstrate that it had in place fraud prevention measures that were reasonable in all the circumstances (or that it was reasonable not to have any). The Government has promised to publish guidance on what it considers constitutes “reasonable fraud prevention measures” early in 2024 and the new offence will come into force after that. It is nevertheless likely that large organisations will already be conducting reviews of their systems and controls aimed at preventing fraud and that this issue will (or should) be finding its way onto boardroom agendas in the near future.
Conclusion
A bit like London buses, after waiting a long time, two significant criminal legislative changes have come along at the same. Interestingly there does not seem to have been much discussion so far of the potential interplay between the two. It is now unquestionably, easier to bring a prosecution for fraud (among other economic crime offences) directly against virtually any company based on the extension of the identification principle to senior managers. At the same time, an additional weapon has been added to the prosecutors’ arsenal but only in respect of large organisations for failing to prevent fraud. It seems not impossible, however, that prosecutors may opt to pursue both options on the same set of facts.
What does this mean in practice for companies and senior managers? It is likely that companies will be taking advice from HR consultants, lawyers and others as to which categories of employees in a large organisation might qualify as “senior managers” and thus be potential vehicles for the new corporate offence. (It is worth emphasising that under the new attribution rules, prosecutors do not need to establish that the senior manager was seeking through his or her conduct to benefit the company in any way). Additionally, they may wish to focus on the particular job and role descriptions of such individuals and especially on the question as to their “actual or apparent authority” within the relevant company on which corporate criminal responsibility also rests.
Whilst the legislative changes may not directly increase personal liability of senior managers or other employees for any new substantive offences, they do place a new spotlight on the conduct of such individuals and make it perhaps more desirable than ever before that such individuals have access to independent legal advice before submitting to what may turn out to be a gruelling series of external and internal interviews regarding their conduct. In that context, it may be desirable to ensure that such advice is covered and paid for under any directors and officers (D&O) liability insurance.
Finally, a potential effect of this increased scope for corporate criminal liability in respect of future prosecutions is the corresponding increase in scope for deferred prosecution agreements between prosecutors and companies. Here, the scope for pursuing separate subsequent criminal proceedings against individuals based on their own conduct is usually expressly preserved. Again, in this context,
D&O insurance is likely to be of prime importance to senior managers, not least because the company may have little interest in indemnifying the individuals concerned.
This article is intended to highlight general issues and benefits relating to its subject matter and does not take into account the individual circumstances or requirements of individual recipients. Specific advice about your particular circumstances should always be sought separately before taking any action based on this publication.
Most readers of this site are acquainted with or at least aware of the Illinois Biometric Information Privacy Act (BIPA). In the following guest post, written by Jennifer Weinstein, Senior Claims Manager, Management Liability Claims, Intact Insurance Specialty Solutions, and Jamie Filipovic, Partner, O’Hagan Meyer, LLC, the authors explain that we are now likely going to have to be come familiar with the Illinois Genetic Information Privacy Act (GIPA), and for many of the same reasons. I would like to thank Jenn and Jamie for allowing me to publish their article as a guest post on this site. I welcome guest post submission from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is the authors’ article.
Continue Reading Guest Post: What you Need to Know about Illinois’ Genetic Information Privacy Act
Section 533 of the California Insurance Code provides that an insurer is not liable for loss caused by an insured’s willful act. The applicability and impact of Section 533 are frequently litigated issues in insurance coverage cases to which California law applies. The following guest post surveys the recent significant case law involving Section 533. The article’s authors are Marisa DeMartini, Vice President, Management Claims Liability Manager, Ascot Insurance Company, James Talbert, Associate, Bailey Cavalieri LLC and Elan Kandel, Member, Bailey Cavalieri LLC. I would like to thank the authors for allowing me to publish their article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is the author’s article.
Continue Reading Guest Post: 2023 Survey of Significant Decisions Involving California Section 533
The number of securities class action lawsuit filings increased in 2023 for the first time in four years, according to a new report from NERA. According to the report, the number of filings increased more than 10% in 2023 compared to 2022. On the other hand, the number of cases resolved in 2023 declined during the year. The January 23, 2024 report, entitled “Recent Trends in Securities Class Action Litigation: 2023 Full-Year Review, can be found here.
Continue Reading NERA: 2023 Fed Court Securities Suit Filings Increased for the First Time in Four Years
If the underlying insurers have paid their limits, you would generally expect that the next-in-line excess insurer would also have to pay its limit as well for losses within its layer. However, in an appellate decision with what is arguably an unexpected twist, an appellate court has held – in reliance on express policy language – that an upper layer excess carrier is relieved of its obligation to pay because the underlying carriers, all of whom paid their full limit, did not admit liability. The Third Circuit’s January 19, 2024, decision, marked “not precedential,” can be found here. A January 21, 2024, LinkedIn post about the decision by Paul Curley of the Kaufman, Borgeest & Ryan law firm can be found here.
Continue Reading Excess D&O Insurance Coverage Barred Because Underlying Insurers Didn’t Admit Liability
A few days ago when I published a post discussing a new COVID-19-related securities lawsuit I expressed my surprise that pandemic-related suits were still being filed in 2024, particularly after the pace of new coronavirus-related suits tailed off completely in the latter half of 2023. Well, it appears that the recent new case filing not just a single anomaly, as this past week yet another new pandemic-related securities lawsuit was filed.
On January 19, 2024, a plaintiff shareholder filed a securities suit against BioVie, a developmental stage biotech company, after the company reported that clinical trials for its Phase 3 drug candidate produced results the company concluded deviated from protocols and Good Clinical Practice (GCP) because the pandemic had limited patient access to clinical trial sites. A copy of the new complaint can be found here.
Continue Reading Biotech Hit with Securities Suit After Pandemic Impact on Clinical Trials
In my recent wrap-up of the top D&O stories of 2023, I noted that one of the key developments during the past year was California’s adoption of new climate change disclosure requirements, which were enacted at a time when there was the added prospect that the SEC would finally release its own climate change disclosure guidelines by April 2024. While the California requirements have not yet been implemented and the final SEC disclosure guidelines have not yet even been released, there are growing signs that these climate change-related disclosure requirements may face significant hurdles and challenges.
It is not news that the SEC disclosure guidelines, whenever they are finally released, likely will face significant legal challenges, as I have previously noted on this site (here). However, this past week, in a Congressional hearing before a House Financial Services subcommittee, as reported in a January 18, 2024, Law360 article (here), spokespersons for conservative and business interests reiterated their belief that the SEC’s climate change disclosure guidelines, as proposed, reflect “several deficiencies,” and likely will face significant legal challenges.
Continue Reading Climate Change Disclosure Requirements Face Hurdles and Challenges
Many readers may have seen the recent news that the New York Times had sued Microsoft and OpenAI alleging that OpenAI’s use of New York Times content to train their AI tool’s database infringed the newspaper’s copyright. The lawsuit raises its own set of issues but lawsuits of this type relating to AI development also pose an interesting set of insurance coverage related issues. In the following guest post, Sarah Abrams, Head of Professional Liability Claims at Bowhead Specialty, takes a look at the insurance questions that these kinds of lawsuits present. The views of the author are her own and not necessarily that of Bowhead Specialty Underwriters. I would like to thank Sarah for allowing me to publish her article on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.
Continue Reading Guest Post: Can There Be “Misappropriation of Trade Secret[s]” in the Age of AI?’