Directors and officers of U.K. and European companies face an increasing personal risk of litigation or regulatory action, according to international law firm Fried, Frank, Harris, Shriver & Jacobson LLP. Fried Frank believes most directors and companies have failed to reassess their directors’ and officers’ liability insurance coverage with a view to the increased risks.
“Many companies focus on the cost of their D&O liability insurance coverage,” Fried Frank partner Robert E. Juceam told an invited audience of corporate general counsel at a conference co-hosted by Fried Frank and ACC-Europe, the European affiliate of the Association of Corporate Counsel. “But a cheap policy that doesn’t pay, and leaves directors exposed, is very expensive,” Juceam said.
Look here for conference materials: PowerPoint presentation and additional materials.
“Furthermore,” Juceam emphasized, “innocent directors who share coverage, particularly as part of a combined policy with their companies, may find that the coverage is not there when they really need it. Why? The company may have exhausted the limits, or the insurers may seek to avoid liability under the policy based on alleged misrepresentations on the application form or misconduct by other officers or directors.”
Directors should ask questions, and not wait until disaster strikes to investigate their coverage, Juceam said.
“The risk is not simply that of ultimate liability,” said Fried Frank partner Karen C. Wiedemann. “It is also the very high cost for directors of defending investigations and claims. As recent high-profile cases in the United States have shown, such costs easily can extend into the millions of dollars.”
“The United States continues to be the source of greatest risk,” said Wiedemann. “While much has been said about Sarbanes-Oxley (SOX), some may still not fully appreciate that SOX’s certification requirements, audit committee requirements, ‘up-the-ladder’ reporting provisions, and internal control provisions have placed directors squarely in the firing line.”
Moreover, said Fried Frank partner Robert P. Mollen, directors may find that SOX is the least of their problems. “Directors of non-U.S. companies have sometimes thought they were shielded from some of the more aggressive excesses of U.S. class-action litigation or regulatory action. Those days are clearly over, however. Non-U.S. companies and their directors are being pursued in the United States by the class-action bar, the SEC, Elliot Spitzer and other state attorneys general and securities regulators, and a host of others. Some may see non-U.S. companies and their directors as ‘soft targets’ because they are on unfamiliar turf and less well-equipped to deal with the issues.”
Mollen noted, for example, that U.S. securities class actions have already been filed this year against at least nine non-U.S. issuers and their officers and directors—while one of these issuers is Parmalat, others are such blue-chip companies as Royal Dutch Petroleum/Shell Trading, Nokia and Adecco. And regulators are a major threat as well. The U.S. Justice Department has announced that 50 sitting grand juries are considering allegations of violations of the U.S. antitrust laws by suspected international cartels.
Lest the conference attendees conclude that the only problems are in the United States, Fried Frank lawyers Laurent Assaya and Jochen Mann reviewed the risks that directors face under French and German law respectively.
“One need only consider cases like Equitable Life in the U.K., the Mannesmann prosecution in Germany and Royal Ahold in the Netherlands to realize that this is not just a U.S. problem,” Juceam said.