D&O insurance in a global context Have you got it covered? - PDF document

Feature: Risk management D&O insurance in a global context Have you got it covered? Jane Harte-Lovelace and Sarah Turpin consider the current climate for directors' and officers' (D&O) claims in Europe, and the issues of concern for companies when taking out D&O insurance cover in the UK market for the benefit of their global operations. In today’s highly regulated and litigious climate, directors and officers are sub- ject to increasing scrutiny , not only by shareholders but by regulators, govern- ment bodies and criminal investigators. The US has witnessed a proliferation of securities class actions in recent years Illustration: Domonic Li combined with follow-on ERISA (Em- ployee Retirement Income Security Act) lawsuits and shareholder derivative ac- tions. A number of the securities class actions filed in the US have involved Eu- ropean companies, including Parmalat, This article first appeared in issue 2 volume 4 of PLC Cross-border Quarterly and is reproduced with the permission of the publisher. For further details please visit www.practicallaw.com PLC Cross-border Quarterly ■ April-June 2008 ■ The journal for subscribers to www.practicallaw.com/crossborder 59 Find this article and related materials at www.practicallaw.com/1-380-2964

Risk management: directors’ and officers’ insurance � In France and Italy , there is no class ac- The NatWest Three tion procedure at present. However, in Italy there are options available for con- sumer groups and there have recently The “NatWest Three”, David Bermingham, Giles Darby and Gary Mulgrew, are three been political initiatives in both coun- British bankers who worked at NatWest’s investment banking arm. The three were ex- tries to introduce some form of class ac- tradited to the US in July 2006 on wire fraud charges involving collapsed US energy gi- tion procedure. ant, Enron. It was alleged that the three men had advised NatWest to sell its stake in Swap Sub, an investment company, to a company controlled by the Enron Chief Finan- The European Commission has also cial Officer, Andrew Fastow, for less than it was worth. Mr Fastow then sold Swap Sub voiced its support for the use of group on to Enron at its true value and paid US$7.3 million (GB£3.5 million or about EUR5.1 actions as a means of enforcing EC com- million) from the transaction to the three men. petition laws. The trio originally faced possible sentences of up to 35 years in prison but, following a The question being asked by many is recent plea bargain, this has now been reduced to around 37 months. They will also whether Europe is about to see securities have to pay the GB£3.5 million back to NatWest. class actions on the scale of those seen in the US. In practice, it seems likely that Royal Dutch/Shell, Vivendi and Daimler Class actions are not currently a feature of most European jurisdictions will seek to Chrysler. In 2005, two of the ten largest the litigation landscape in Europe and there avoid the excesses seen in the US by im- class action settlements involved foreign are good reasons for this. In Europe, the posing restrictions on the procedure for issuers: Deutsche Telecom AG (US$125 procedures available for bringing actions bringing class actions and on the type of million (about EUR85 million)) and on behalf of a group tend to involve “col- action that can be brought. In any case, Royal Ahold NV (US$1.1 billion (about lective” actions, by named individual plain- there are a number of factors present in EUR725 million)). tiffs or consumer associations, rather than the US legal system that have facilitated actions by a generic class. Claimants must the widespread use of class actions US government regulators and prosecu- expressly “opt in” to an action in Europe. In which are not matched in Europe. These tors, particularly the Securities and Ex- the US, potential claimants must “opt out” US features include: change Commission (SEC) and the De- of the class as certified by the court; if they partment of Justice (DOJ), have become do not do this then they will ordinarily be � The existence of contingency fees. increasingly active, and the long arm of bound by any judgment given in the action. US jurisdiction is such that directors of � The absence of the “loser pays” principle. non-US companies face heightened There has been much debate in some Eu- scrutiny , even where links to the US are ropean jurisdictions about whether there � The prospect of punitive damages. tenuous. The NatWest Three is the classic should be greater scope for class actions example of US prosecutors exerting juris- to be brought. At present, for instance: As matters stand at present, if there is diction over non-US citizens even where any connection with the US, sharehold- the allegedly criminal conduct took place � In the UK, the Group Litigation Order ers are likely to face greater prospects of outside the US and against a non-US com- (GLO), first introduced in 2000, enables recovery by joining securities class ac- pany ( see box, The NatWest Three ). a group of common claims to be man- tions in the US than by pursuing claims aged as a single case where there are com- within their own jurisdiction. This is de- It is clear that directors’ and officers’ mon issues of fact or law, but any spite the apparent jurisdictional hurdles. (D&O) claims are already an issue in the claimant wishing to participate in the US, but the extent to which such claims group action must “opt in” by a date In recent years, some US courts have al- and investigations are underway in Eu- specified by the court. The GLO proce- lowed non-US shareholders to partici- rope is less clear. This article considers: dure is designed mainly as a way of man- pate in securities class actions against aging group actions rather than specifi- foreign issuers: examples include � The current climate for D&O claims cally promoting the bringing of such Vivendi, Royal Ahold and Royal outside the US. claims. The take up of GLOs has been Dutch/Shell. In the latter case, which fairly modest since they were first intro- arose out of the restatement by Shell of � The issues of concern for companies duced. The procedure appears to have its oil reserves, the company filed a mo- when taking out D&O insurance in the been used mainly for product liability tion to dismiss claims by non-US share- UK market for the benefit of their global and personal injury claims. holders on the grounds of lack of subject operations. matter jurisdiction. The court allowed � In Germany , the concept of group ac- the non-US investors to remain part of D&O claims: the current climate tions was only introduced in 2005 when a the class on the basis that misstatements test case for group actions in capital mar- by Shell to analysts and investors in the There has been much talk in recent ket cases (Law on the Introduction of US affected both domestic and foreign is- months about the globalisation of class Capital Investor Representative Proceed- suers, US market activity having become action culture. It is perhaps no coinci- ings 2005 ( Kapitalanleger-Musterver- “an example for foreign investors and ex- dence that, while the number of securities fahrengesetz ) (KapMuG)) was enacted changes”. The court dismissed as “spec- class actions filed in the US is on the de- which, if accepted as part of the German ulative” the argument that there was no cline, US law firms are said to be gearing Civil Procedural Code, will apply to all guarantee any judgment given in the US up for class actions in Europe. civil claims. would be enforceable in the home coun- 60 60 PLC Cross-border Quarterly ■ April-June 2008 ■ The journal for subscribers to www.practicallaw.com/crossborder This article first appeared in issue 2 volume 4 of PLC Cross-border Quarterly and is reproduced with the permission of the publisher. For further details please visit www.practicallaw.com