New Global Risks Create Need for Expanded Directors & Officers Liability Program

The risk of lawsuits against senior executives has long been a major concern for businesses in the United States. But in the last few years it has become a much more serious global exposure as well.

The international legal and regulatory environment has been undergoing significant change in many parts of the world, creating new risks for businesses with international operations. In light of these changing conditions, a U.S.-issued global directors and officers (D&O) liability policy may no longer be enough to adequately protect the senior executives of these multinational organizations. A locally admitted D&O policy, which is a D&O policy issued by a carrier licensed in the local country, may be needed to supplement the global program. Unlike some types of insurance, however, D&O policies are rarely compulsory.

As a result, some subsidiaries may not have a locally admitted D&O policy, relying instead on their global program. What they may not realize is that even though D&O insurance is not compulsory, the local jurisdiction may require only admitted insurance. Therefore, the insurance provided under the global program will not be accepted in those jurisdictions where admitted insurance is required.

To ensure that senior executives are adequately protected, businesses should review their policies and examine their insurance needs to determine whether they should supplement their global D&O program with a locally admitted D&O policy.

The Changing D&O Environment

For years, D&O risk has been predominantly a U.S. concern. This has gradually changed in the past decade due to some significant new legal and regulatory developments. Four trends in particular stand out:

• An increasingly aggressive regulatory approach in Europe that is putting businesses at heightened risk of regulatory scrutiny and lawsuits.
• New legislation in countries such as Canada and the Netherlands, which are opening the door to more securities litigation.
• The advent of litigation funding companies that are helping to finance class action litigation in Australia.
• A recent U.S. Supreme Court decision that has put pressure on lawyers outside the United States to file lawsuits locally rather than bringing them to the United States.

European Regulation

In Europe, regulators have become much more active in their efforts to crack down on anti-competitive activities. In one recent, high profile case, the European Commission in October seized documents from several major banks as part of a probe into the Euro Interbank Offered Rate, or Euribor, according to a Wall Street Journal report. The Euribor probe itself was an offshoot of a broader investigation by prosecutors in the United States, Europe and Japan that centered on whether banks colluded to manipulate the London Interbank Offered Rate, known as Libor, according to the report. What this case demonstrated was that European officials have the power to enter buildings and seize documents in investigations of suspected abuse-of-competition laws.

New Legislation

New measures implemented in places such as Canada and in the European Union are granting shareholders more rights, but also expanding the liability risk.

In Canada, for instance, legislation known as Bill 198 created statutory civil liability for secondary market disclosures, in addition to granting expanded enforcement power of the securities commission. It also included new provisions about corporate disclosures and increased financial penalties under Canadian securities law. The legislation went into effect Dec. 31, 2005 in Ontario, with other Canadian provinces following Ontario’s lead by enacting comparable legislation.

In Europe, a shareholder program known as the Shareholder Rights Directive was scheduled for implementation into national legislation by member states by August, 2009. The directive has two aims: enhancing shareholder rights in listed companies and tackling hindrances to cross-border voting. It also enables greater shareholder access to relevant business information and the exercise of voting rights by proxy, according to a 2010 report from the Conference Board.

These developments, and others like them, could open the way to increased litigation and may create new risks for corporations with foreign subsidiaries.

Litigation Funding

A court ruling in 2006 in Australia opened the way for litigation funding arrangements, which create financial rewards for shareholder litigation that previously did not exist. Until this time there had been little financial incentive for pursuing security class actions. Law firms had been prohibited from charging contingency fees as is customary in the United States and instead received only a flat fee for their efforts.

Shareholders, meanwhile, were reluctant to come forward because of the risk of incurring significant litigation expense.

Under the litigation funding arrangements, litigation funding firms pay the cost of the litigation, including fees to the law firm, and they indemnify the litigant against the risk of paying the respondent’s costs if the case fails.

In return, if the case succeeds, the litigation funder is reimbursed for the costs of the litigation and receives a percentage of the proceeds. The percentage is contractually agreed with the litigation and is typically between 30 percent and 40 percent of the proceeds.

U.S. High Court Decision

A recent U.S. Supreme Court decision also is contributing to the growing liability exposure for corporations with foreign subsidiaries. In the 2010 case known as Morrison vs National Australian Bank, the court held that U.S. law against securities fraud does not apply to investment deals that occur outside the country, even if they have a domestic impact, according to the SCOTUSblog, which is provided by Goldstein & Russell P.C., an appellate boutique focusing on representation before the U.S. Supreme Court.

One of the consequences of this decision is that lawyers are now under more pressure to file lawsuits locally instead of bringing them to the United States as they had in the past.

Conclusion

These developments are examples of the growing risk exposure for executive liability in jurisdictions outside of the United States. Multinationals need to be sure not only that they have the appropriate insurance to protect their executives from liability, but that they have the proper policy structure to allow for payment of claims.

The world is becoming a much riskier place for executives of multinational businesses. Businesses may need to consider purchasing a local D&O policy to supplement their global program. A locally admitted D&O policy may be a worthwhile investment to protect executives from the increasingly worldwide liability and to avoid any difficulties with claims or taxes.

Topics Lawsuits USA Legislation Europe Australia Canada