FI and D&O

OverviewJames Cooper, Partner, London Laura Cooke, Partner, London

If you drop a stone into a pond it causes ripples; the extent and effect of those ripples depends on the size of the stone and the size of the pond. What happens if the stone is a financial crisis and the pond the D&O and financial lines market? The fourteen articles which follow are authored by Clyde & Co’s UK and international offices and go some way to answering this question as they provide snapshots of the current issues of interest in the market in each jurisdiction.

As the financial crisis was global in nature there is no surprise that it has had a global effect, but one ripple which seems to have gained momentum in most jurisdictions is the enhanced focus on regulatory oversight. In the UK a raft of consultations, reviews and reports into the banking industry have resulted in proposals for, amongst others, new legislation making directors personally liable for failed companies and a new criminal offence of ‘recklessly mismanaging a bank’. Hong Kong and India have both seen a complete overhaul of their company laws and Spain proposes to do the same under its Commercial Code Bill. What all this proposed new legislation has in common is the marrying up of corporate decision making and accountability; to a greater or lesser extent depending upon government and regulator appetite for change and how developed the market is. In the new Indian Companies Act, 2013 D&O insurance has been accorded statutory recognition for the first time.

The global market has also shrunk as the ripple becomes cross jurisdictional in effect. The Federal Court of Australia’s decision that Standard & Poor’s (S&P) AAA rating of certain investment products was misleading and deceptive and involved negligent misrepresentations to investors has paved the way for filings against S&P in Europe and the US. The jurisdiction of the Canadian courts to prosecute corporate corruption and bribery has also been extended to allow it to bring charges against illicit acts that have taken place overseas.

To some extent the above may reflect the increasingly global nature of companies and consumers of their services. The recent decision by the Court of Appeal in Dubai that Barclays was one legal entity so its “onshore” and “offshore” branches had no separate legal identity perhaps reflects this (but also raises a concern as to the extent to which financial institutions and companies operating in the United Arab Emirates might find themselves caught between two regulatory frameworks).

International reviewOctober 2013

Keeping you in touch with international developments

ContentsOverview Page 1

The AmericasPage 3

EuropePage 7

Asia PacificPage 13

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Despite the above, the global market is not a level playing field. Differences remain between the established and emerging markets which can cause tensions in relation to the scope of cover and the treatment of claims. In Latin America the position on company indemnification varies greatly between jurisdictions. The USA is still one of the few jurisdictions with case law on the meaning of ‘direct loss’ in Fidelity Bonds and whilst this can provide some guidance for other jurisdictions it is not binding and, of course, much will depend upon the policy wording of the bond.

There are also the smaller domestic ripples. In France class actions do not exist, but there appears to be a shift in attitude in relation to class actions for consumer associations. The Singapore Court of Appeal has questioned the extent to which financial institutions can rely on disclaimer provisions in their standard form terms and conditions, especially in relation to “linguistically and financially illiterate and unwary customers”.

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Blurring the line between third party liability and direct loss in fidelity coverageNed Kirk, Partner, New York Theresa M Biedermann, Associate, New York

In the recent case of New Hampshire v MF Global a midlevel appellate court in New York blurred the line between first party coverage offered under fidelity bonds and third party liability insurance.

Until the New York Court of Appeals addresses this issue, this decision will create uncertainty regarding the causation standard applicable to fidelity bonds subject to New York Law.

The “direct loss” requirement in fidelity bondsGenerally, fidelity bonds provide first party coverage for an insured’s losses resulting directly from specified perils, rather than the insured’s liability for losses suffered by a third party. In order to trigger coverage, an insured must first show that it had a legal interest in assets that were misappropriated or decreased in value as a direct result of dishonest or fraudulent acts or other covered conduct.

US courts interpret “loss resulting directly from” and similar wording in fidelity bonds as a causation requirement. The majority of US courts follow a narrow “direct means direct” approach, requiring the insured to demonstrate that it suffered an actual depletion of funds as a direct and immediate result of covered conduct. Some courts, however, have applied a broader proximate cause test requiring the employee’s conduct to be a substantial contributing factor to the harm suffered, despite the express direct loss requirement in the bonds and even though proximate causation is drawn from inapplicable tort law and liability insurance.

MF Global’s claim and coverage litigationMF Global’s claim arose when a commodity broker, associated with one of its offices (there is a separate argument as to whether the broker was an employee of MF Global) traded on the Chicago Mercantile Exchange (CME) for his own account using MF Global’s electronic trading system. The broker traded in excess of his available margin credit and sustained a loss of more than USD 141 million overnight. As a Clearing Member of the CME, MF Global assumed complete responsibility for all trading activity routed through its trading systems and had to settle with CME for

all losses on trades cleared through MF Global accounts, regardless of whether the customers initiating those trades were able to meet their payment obligations. In accordance with this arrangement and following a request from CME, it transferred approximately USD 150 million from its settlement bank to the CME on the same day the loss became known. MG Global then sought coverage under its fidelity bonds for the USD 141 million trading loss.

Under the fidelity bonds, the insurers agreed to indemnify MF Global for “loss sustained at any time for…any wrongful act committed by an employee …which is committed… with the intent to cause the insured to sustain a loss or with the intent to obtain financial gain for themselves or another person or entity…” Loss was defined as “the direct financial loss sustained by [MF Global] as a result of a single act, single omission, or single event, or a series of related or continuous acts, omissions or events”. The bonds also excluded coverage for “[i]ndirect or consequential loss”.

The insurers filed a declaratory judgment action and argued in a motion for summary judgment that MF Global did not sustain a “direct financial loss” because the broker did not directly embezzle from MF Global, and its payment for liability for the CME’s losses was an indirect loss that did not trigger the insuring agreement and was specifically excluded from coverage.

The trial court denied the insurers’ motion for summary judgment and granted summary judgment to MF Global, finding that MF Global incurred a “direct financial loss” and the broker was an “employee”. The insurers appealed the decision.

The Appellate Division’s decisionThe Appellate Division noted that the term “direct financial loss” was not defined in the bonds. It also determined that “a direct loss for insurance purposes

The Americas

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has been analogized with proximate cause” based on inapposite cases interpreting other types of insurance and third party liability. The court therefore employed a proximate cause analysis and found that the broker’s unauthorized trading “was the direct and proximate cause of MF Global’s loss”.

Instead of analyzing the nature of the loss and whether MF Global actually incurred a loss when the broker made his unauthorized trades, the court focused on the relatively short period of time between the broker’s conduct and MF Global’s payment to the CME, noting that the broker’s trading activity resulted in “a near instantaneous shortfall for which MF Global … was automatically and directly responsible”. It was also persuaded that the loss could not be “fairly viewed as simply satisfying a contractual liability to the CME” given the immediacy of the payment and the regulatory scheme under which it was made.

The Appellate Division distinguished its prior ruling in Aetna v Kidder Peabody, where it found that settlement payments by the insured to its shareholders did not directly result from the employee’s insider trading scheme. In Kidder Peabody, “the losses stemmed from the employee’s misconduct, which caused pricing irregularities in the stock, which led to losses to the investors, which led to litigation which concluded in settlement years after the employee’s misconduct.” The court contrasted the lengthy delay and multiple intervening factors in Kidder Peabody with the relatively short amount of time before MF Global was required to pay a loss.

By relying on the tort principle of proximate cause, rather than the clear and unambiguous terms of the insurance contracts, the Appellate Division concluded that the insured’s liability for a third party’s loss was a direct financial loss to the insured.

Developing Issues in the Canadian D&O marketRod McLauchlan, Partner, Toronto Trevor McCann, Partner, Montreal

The Canadian FI and D&O market has avoided major disturbances in the last twelve months, but a number of important issues are developing.

Company Creditors Arrangements Act (CCAA) powersTo achieve finality and avoid lingering litigation the broad release powers of the CCAA may become more common in CCAA proceedings involving insolvent companies. An example of the court flexing the CCAA muscles can be seen in the Sino-Forest class action in Ontario against Ernst & Young (E&Y) which settled for the sum of USD 117 million (making this the largest payment by an auditor firm in Canada). The settlement was reached in the context of the company being in insolvent creditor protection under the CCAA. The Court determined that it had the power to approve a release in respect of all claims against E&Y involving Sino-Forest, even to have potential effect in parallel US proceedings. The release was affirmed on appeal.

Prosecution of corporate corruption and bribery at home and abroadSNC-Lavalin, the international consulting firm based in Quebec, faces numerous high profile investigations at home and abroad into alleged bribery. In the

Charbonneau commission, an official enquiry into the Quebec construction industry, executives of consulting and contractor firms and municipal officials have made shockingly candid admissions about illicit payments. These matters will lead to legal developments about the implications for insurance coverage of such conduct and such statements, not only in the official proceedings but in related civil claims.

Besides civil liability exposures, the federal government has followed the global anti-graft trend by substantially amending the Corruption of Foreign Public Officials Act (CFPOA). The amendments, now in force, extend the jurisdiction of Canadian courts to bring charges where the illicit acts have taken place overseas. A books and records offence has been created. The “permitted in the foreign jurisdiction” saving provision has been removed. Penalties have increased, with maximum imprisonment raised to 15 years. Fines can be unlimited. The exception for ‘routine’ facilitation payments will be removed, although that part of the law is not yet in force. Canada has also finally seen a first conviction at trial under the CFPOA in R v Karigar (aka

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Cryptometrics). Until now, all penalties under the CFPOA have been imposed further to admitted bribery.

Overlap between government regulatory action and civil proceedings Some important decisions will be made later this year on this point in the context of securities claims:

• The Supreme Court has agreed to hear the appeal in Fischer v IG Investment Management, which held that a payment of USD 205 million by mutual funds to investors as part of a regulatory settlement did not preclude investors bringing their own civil claims

• The Ontario Securities Commission is exploring the use of “no contest” settlements of regulatory prosecutions

When does limitation start in securities class litigation?Under the Ontario Securities Act, secondary market misrepresentation claims require the leave of the court to commence an action. However the Ontario Class Proceeding Act only tolls the claims of class members from the date of the filing of an ‘action’. In the case of Timminco, the Court of Appeal adopted a harsh but literal approach to the statute, and determined that the class

members were time-barred from continuing their action as leave had not been obtained in three years. Since then contradictory judgments have been rendered.

Over the summer an expanded panel of the Ontario Court of Appeal heard conjoined appeals on limitation in a trilogy of cases, Green v Canadian Imperial Bank of Commerce, Trustee v Celestica, and IMAX. Their decision is eagerly awaited as the outcome will affect class size and settlement value, not just for the affected claims but also for the future. In the meantime claimants are negotiating tolling agreements with defendants, wherever possible.

When can a company cease to indemnify directors?The Ontario Court of Appeal ruled that indemnity can be withdrawn from directors under the Canada Business Corporations Act if the company can show a strong prima facie case of dishonesty (Cytrynbaum v Look Communications), despite seemingly bulletproof indemnification language in corporate bylaws and individual indemnification agreement. By contrast, D&O policies invariably provide that indemnity will be given up until there is a final adjudication of dishonesty or criminal conduct. Insurers will need to consider the impact of this decision on Side B cover and retentions.

Know your Latin American market!Liliana Veru-Torres, Partner, London Stuart Maleno, Associate, London

The Latin American market is catching up to more developed markets like the US and Europe, but for the unprepared there are pitfalls.

Although D&O insurance is a relatively new product across Latin America, largely due to the fact that it was relatively difficult to bring claims directly against directors and officers, there is an appetite for cover and a growing market driven by the following:

• Changes in legislation have made D&O claims easier to bring (and consequently more common)

• Ever increasing exposure to global markets and a high level of M&A activity

• D&Os undertake more risk, as the amount of capital under their management grows

• D&Os of institutions operating in the region are increasingly under more scrutiny by the local regulators and fiscal authorities

Whilst this clearly offers reinsurance underwriting opportunities, there can also be unexpected outcomes, not just for foreign reinsurers, but also for local insurers. Some of the pitfalls to be aware of are noted below.

Side A/Side B claimsClaims against directors in the region have historically been treated as Side A claims, regardless of whether or not company indemnity is available. Consequently, local insurers have not tended to apply a deductible to the claim, which can lead to tensions with international reinsurers who regard the claim as Side B. Some recent policies have sought to resolve this issue by removing the deductible from Side B claims, therefore making the distinction irrelevant in practice.

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Part of the reason for the Latin American approach appears to arise from a misunderstanding as to how company indemnity agreements function. There have been examples where tribunals have ruled that a company cannot indemnify a director for a claim (even though there is a clear indemnity agreement) because there would be a conflict of interest as the director would be deciding on whether to indemnify himself.

This reasoning obviously fails to understand the fact that companies operate through boards and that the relevant director would not be involved in the process of deciding whether indemnity should be afforded, but it may take some time for local courts to understand this and amend their practice.

Company indemnificationThe issue of company indemnification and its impact on how a claim is treated is an important one. The position can vary significantly between Latin American jurisdictions as noted in the table below which sets out the different legislation that can be found across the region:

Position 1 Position 2

Legislation providing for company indemnification as long as the insured acts in good faith and in a manner it believes to be in the best interest of the company

Legislation providing for company indemnification based on similar principles to 1 but on a narrow basis

Position 3 Position 4

Legislation prohibiting company indemnification

No legislation at all

Of particular concern to reinsurers are those jurisdictions that are silent on the issue, as this raises ambiguity as to whether company indemnification is possible or not and in jurisdictions as insured-friendly as Latin American jurisdictions, the likelihood is that such ambiguities will be construed against reinsurers.

Reinsurers should therefore familiarise themselves with the different indemnification provisions of each jurisdiction in order to tailor the D&O policy accordingly. In particular in relation to jurisdictions with no legislation on the issue, it may be appropriate for reinsurers to use policy wording to specifically and clearly address any possible ambiguity that may arise.

Cover may be broader than the reinsurance market intendedAs the local market continues to develop, there are certain areas where cover may be broader locally than would be expected in the international reinsurance market. One such example is the case of regulatory fines. Whilst fines are usually excluded, certain policies in the region offer endorsements that cover settlements with regulators, and these endorsements would cover any payments that do not relate to intentional wrongful acts.

Some jurisdictions have also expressed opinions suggesting that insurers cannot deny coverage for defence costs on the grounds of reasonableness and cannot interfere with the insured’s instruction of lawyers on that ground, as the level of expenditure is a matter for the insured and its lawyers. This can obviously lead to greater exposure than anticipated, as well as possible tension between the international and local markets.

Reinsurers need to be are aware of such local differences, and how the policy would be construed locally, so that such considerations can be factored into risk assessments and pricing, as well as amending wordings accordingly where possible.

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Reckless mismanagement of a bank – a crime?Laura Cooke, Partner, London Stuart Maleno, Associate, London

The Parliamentary Commission on Banking Standards (PCBS) published its long-awaited report, entitled ‘Changing Banking for Good’, in June 2013 (the Report). Although the Report runs to several hundred pages and contains numerous recommendations, perhaps the one that has grabbed the most attention is the proposal to create a new criminal offence of reckless mismanagement of a bank, which the Government has accepted in its July response to the Report.

The new offence will apply only to those individuals falling within the recommended new Senior Persons Regime (SPR).

The Senior Persons RegimeThe PCBS recommends replacing the Approved Persons Regime (APR) with a new two tier system that will consist of:

1. A SPR to replace the Significant Influence Function (SIF) element of the existing regime; and

2. a Licensing Regime.

The new SPR is to apply to a more limited number of individuals than the current SIF regime. Under the SPR, which will apply to all banks and bank holding companies operating in the UK (it is not yet clear if it will apply to mutuals or other bank-like institutions), such individuals will be assigned specific regulatory responsibilities. Whilst tasks can still be delegated, ultimate responsibility will always remain with the Senior Person. This is designed to assist in more targeted enforcement action against senior decision-makers.

The Licensing Regime will cover anyone working in banking “whose actions or behaviour could seriously harm the bank, its reputation or its customers”. Such individuals (including Senior Persons) will have to adhere to new Banking Standards Rules (to replace the existing APER Statements of Principles) and details of any enforcement action will be maintained on a Licensing Register. The Register will hold additional details on Senior Persons.

The new criminal offenceThe Report recommended a new offence of “reckless misconduct in the management of a bank”, to be limited to Senior Persons. In respect of a maximum custodial sentence the Report suggested (rather than formerly recommended) that:

• There would be little purpose to the offence if penalties are limited to fines, which are already available as civil sanctions

• Sentences should be comparable to the offence, the intention being to act as a deterrent against reckless management

These recommendations have been reflected in the Government’s amendments to the Financial Services (Banking Reform) Bill (the Bill), which were published on 1 October 2013. The Bill proposes a maximum custodial sentence of 7 years and/or an unlimited fine. The offence will be limited to Senior Persons of banks and building societies; it will not apply to senior management of insurers or credit unions. The Report also recommended that penalties for the crime should include claw back of any financial benefits obtained by the guilty party as a result of the offence, although this does not appear to be reflected in the current draft of the Bill.

Although no examples of the type of behaviour that might fall foul of the offence are provided in the Bill (or Report), the offence will only apply to conduct which falls far below what could reasonably be expected of a person in their position. The conduct can include the taking of a decision on behalf of a bank, or failing to prevent a decision being taken. In either case, the individual must be aware that the decision may cause the bank to fail. Further, the Bill sets out the circumstances in which a bank will be considered to have failed.

The Report recognised the difficulties that will be faced in obtaining successful prosecutions, and although the Bill does provide some additional clarity on the requirements needed to prove the offence, it still seems that prosecutors are likely to face a battle proving certain management decisions were reckless, particularly where a substantial

Europe

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custodial sentence is possible, the higher burden of proof required for criminal cases, and whilst certain decisions may in hindsight appear reckless, it will be more difficult to prove the same taking into account only the considerations available to the Senior Person at the time.

As such, it is foreseen that the offence will be pursued only rarely and “only in the most serious of failings”, with the example given in the Report (and referred to by the Government in its notes to the Bill) being “where a bank failed with substantial costs to the taxpayer, lasting consequences for the financial system, or serious harm to customers”. It is also proposed that it should not be used predominantly against smaller operators that are easier targets, but where the harm caused is less – the implication being that it would be reserved for failings at larger banks or those that have caused or contributed to systemic failure.

The FCA and Bank of England published their responses to the Report on 7 October 2013. Although they broadly agree with the proposed changes to the Approved Persons Regime, neither appear to have yet directly commented on the proposed new criminal offence.

Although defending charges under the new offence (should it reach the statue books in its present form) will be hard-fought and costly, with insurers potentially footing the bill, it does appear that the intention is to use the offence sparingly so there may not be a glut of criminal prosecutions exposing insurers to defence costs. Whether that intention remains in the long term may depend on how successful prosecutors are in overcoming the substantial hurdles in proving guilt, as well as public opinion on the offence and the state of the banking system in general.

The UK Directors Disqualification Regime – making directors personally liable for failed companies Laura Cooke, Partner, London Keira Carver, Senior Associate, London

In the wake of company failures and banking scandals, which dented public confidence during the financial crisis, the Department for Business Innovation & Skills (BIS) has published a discussion paper entitled “Transparency & Trust: Enhancing the Transparency of UK Company Ownership and Increasing Trust in UK Business”. The paper outlines a range of proposals to enhance transparency of UK company ownership and increase trust in UK businesses.

The paper, which was published on 15 July 2013, remained open for feedback until 16 September 2013. On the final day of the consultation, Business Secretary Vince Cable announced his intention to push for legislation of the proposals set out in the paper. Part A of the paper concerns improving transparency around who owns and controls UK companies, whereas Part B addresses increasing trust in UK businesses and sets out proposals to make directors more accountable for failure to fulfil their duties. This article focuses on the second half of the paper.

DisqualificationAs matters currently stand, it is BIS (acting through the Insolvency Service) which usually undertakes investigations and seeks disqualification orders from the courts pursuant to the Company Directors Disqualification

Act 1986. Apart from the Insolvency Service, and depending on the circumstances, others who can currently apply to disqualify a director include Companies House, the OFT, the Courts and a company insolvency practitioner.

The proposals include extending authority to sector regulators, such as the Financial Conduct Authority’s (FCA), to disqualify directors in their sector by making an application to court or accepting an undertaking from directors. The FCA already has the ability to ban individuals from holding positions of responsibility in a financial institution and prohibit individuals from working in that sector, but only for sector-specific breaches, not for breaches of company law.

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CompensationThe proposals include placing greater personal liability on directors for misconduct by exploring the availability of compensation for creditors who have suffered a loss as a result of a director having been fraudulent or reckless. It considers the following possibilities:

• Giving the court powers to make compensatory awards against directors in favour of creditors at the same time as making a disqualification order, so as to improve confidence in the insolvency regime. The aim is to increase the likelihood of culpable directors being called to account for their actions, while providing better recourse to funds for creditors who have suffered a loss. Provisions for holding reckless directors personally liable already exist in other jurisdictions, such as the United States

• Granting liquidators and administrators the right to sell or assign fraudulent and wrongful trading actions to creditors or possibly a third party. At present, such claims can only be brought by the liquidator for the benefit of the insolvent company. The paper recognises that

safeguards might need to be implemented to prevent a director or person connected to them from acquiring the right to an action in order to extinguish it. Such safeguards would, in practice, be difficult to implement

These proposals (if enacted) would likely impact on the volume of fraudulent or wrongful trading claims pursued against directors. The frequency of disqualification proceedings may increase also, particularly given that it is also proposed that the time limit for bringing disqualification proceedings be increased beyond the current two years.

Moreover, directors may look to their D&O policy to indemnify them for any additional liability they might personally face. While one would anticipate that compensation orders (if introduced) would be limited to circumstances where the director’s conduct would trigger existing policy exclusions, D&O insurers should closely monitor the progress of this consultation as wording amendments may need to be considered depending on the final shape and detail of any proposals arising.

Fiduciary duties of investment intermediaries - to be or not to be?Laura Cooke, Partner, London Amanda Voss, Associate, London

The legal concept of fiduciary duties is usually a concern of the courts rather than Parliament, but this may change following the recommendations in the Kay Report on Equity Markets and Long Term Decision Making which has instigated a Law Commission consultation into fiduciary duties as applied to investment intermediaries.

Amongst other issues addressed, the Kay Report (published in July 2012) was critical of the conduct rules of the existing financial services regime, and recommended a shift towards fiduciary standards requiring prudence and loyalty to the customer. However, the Kay Report found that there was little agreement about what the legal standard of fiduciary duty is, and how such duties apply to intermediaries investing on behalf of others (including investment managers and pension scheme trustees) and those providing advice or other services to those undertaking investment activity.

Law Commission consultationIn order to assess and progress this strand of the Kay Report recommendations, the Law Commission has been instructed to consider the extent to which fiduciary duties currently apply to investment intermediaries and to examine the application of these duties to those who advise such intermediaries; in other words, to examine how far down the investment chain these duties apply. The Law Commission published a short paper in March 2013 setting out its terms of reference, together with its initial views. Its remit encompasses:

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• Considering whether fiduciary duties, as established by law or applied in practice are conducive to investment strategies that are in the best interests of the ultimate beneficiaries

• To assess what fiduciary duties permit or require investment intermediaries to consider when developing or discharging an investment strategy, including whether fiduciaries can, or indeed should, consider a wider scope of factors when making investment decisions, such as environmental, social and governance issues

• Identifying areas where changes to fiduciary duties are required, and to make recommendations accordingly

It has identified at the outset that “fiduciary duty” is a phrase with two meanings, which can be used to refer to those duties which attract equitable remedies, or more widely to refer to all duties owed by a fiduciary to a beneficiary. For the purposes of the review it will be looking at the wider meaning.

In order to advance its consideration of the questions posed, the Law Commission has identified a number of questions it wishes to explore, including the question of whether fiduciary duties constitute a moral code, and whether fiduciary duties can encourage investment intermediaries to “follow the pack” and do as others do or over diversify a portfolio, in order to appear to be acting prudently.

The review is still at an early stage, and the Law Commission’s consultation paper is expected to be published this month, October 2013, with a final report

to follow in June 2014. However, the House of Commons Business Innovation and Skills Committee has recently published its response to the Kay Report, and is pressing the Law Commission to speed up this consultation, with a final report possibly in the first quarter of 2014.

Industry reactionOf course this is not the first time that the Law Commission has considered the law on fiduciary duties. A consultation looking at the relationship between fiduciary duties and financial services regulation was undertaken in the early 1990s: at that time the recommendation was that it would be impractical to attempt to codify fiduciary duties.

However, uncertainties remain as to the nature of fiduciary duties and their application to those making financial decisions on behalf of others. For example, certain judgments of the Court have led to uncertainty about whether a fiduciary has an unqualified duty to invest funds in the most profitable investment available, without reference to environmental, social and governance issues.

The review has already attracted some debate amongst the investment industry, although most commentators and action groups are cautious of exactly how much certainty any review will provide. In the interim, however, this consultation will undoubtedly raise interesting questions for investment intermediaries, their advisers and insurers to consider.

Looking to the future – class actions in FranceDavid Méheut, Legal Director

For a number of procedural reasons, class actions do not yet exist under French law and therefore recognition of foreign class action judgments or settlements can potentially create inextricable difficulties in France. Two recent developments may indicate a shift in this position although there is unlikely to be an immediate impact on the D&O insurance market.

Consumer class actionThe Lower House of Parliament recently voted a bill introducing a form of “class action” under French law for the benefit of consumers. That bill still needs to be voted on by both Houses of Parliament and may be subject to the review of the French Constitutional Council, but there is a good chance that it will become law in the near future.

The new bill does not concern shareholders’ claims against management of listed companies but the mechanisms it introduces may inspire evolutions in the specific rules that currently apply to such disputes. These specific rules are currently quite restrictive when it comes to collective actions, for example:

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• Minority shareholders holding a defined percentage of shares in a listed company for at least two years, may create an association to represent their interests (art. L.225-120 Code of Commerce). Any association representing the collective interest of its members, subject to its articles of incorporation, may be appointed as agent by its member minority shareholders to bring a legal action for compensation of the losses sustained by those appointing shareholders

• Such actions may also be exercised by licensed investors’ associations (art. L.452-2 Monetary and Financial Code). Again, the action exercised by the investors’ associations is restricted to the recovery of losses of those investor members who have expressly empowered the association to act on their behalf

The new bill exclusively concerns actions arising out of consumer contracts for sale of goods or services or out of breaches of competition law. Only licensed consumer associations may bring the action. However, the major difference is that they will not have to be empowered in advance by the consumers to bring the action. Subject to subsequent amendments, the association will first bring the action and the judge will decide on liability, the scope of the class, the publicity of the judgment and the way in which the losses will be indemnified. It is only thereafter that consumers will have to bring their individual claims following the procedure defined by the judge. This is not

a class action in the US sense but would constitute a major evolution of French law. The channelling of actions through licensed consumer associations is seen as a way of avoiding the perceived risk of opening litigation floodgates.

If the reform is passed and works well in practice, there is some chance that it could be extended to fields outside consumer protection. Since there are licensed associations dedicated to investors’ protection, claims by shareholders of listed companies could be a potential extension.

French Financial Market Regulator’s powersThe evolution may also come from a different source. Since 2010, the Autorité des Marchés Financiers (AMF – French Financial Markets Regulator) can conclude settlements with certain financial intermediaries for minor offences (art. L.621-14-1 Monetary and Financial Code).

The AMF’s powers in relation to settlement essentially concerns the amount of the financial sanction incurred but may also include obtaining an undertaking from the operator to indemnify the clients. This last possibility was applied for the first time in a settlement signed by the AMF on 26 October 2012. This is a bit of a revolution as the AMF would not normally have jurisdiction to rule on compensation of claims. It is still not clear how that undertaking will be implemented in detail, however, if the efficacy of this technique is proved in practice, it could also be extended to other breaches.

Spain’s Commercial Code Bill impacts regulation of directors’ liability Ignacio Figuerol, Partner, Spain

The proposed Commercial Code Bill (CCB) applies to all commercial companies and introduces provisions that recognise the controlling role of directors and ensures some form of redress is available for corporate decisions whether those decisions are made by general managers, entities or parent company directors.

It was presented to the Spanish Ministry of Justice in June 2013 so is still in its very early stages, but the provisions relating to directors’ liability are unlikely to suffer any significant amendments. The proposed provisions likely to have the most impact on the Directors and Officers market are noted below.

List and description of duties remains the same but the scope is extendedDuty of diligent management: the new proviso modulates the scope of the duty of diligence to accommodate it to the nature of the post and the functions of the respective director. It also establishes that directors

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shall apply proper levels of dedication and shall take the necessary measures for the good running and control of the company. The CCB specifically imposes the duty to attend the meetings of the Board of Directors and duty to control and supervise the officers of the company. This reinforces the principle that directors must apply the same levels of care, prudence, dedication and competence as a businessman who puts his own assets at risk.

Duty of loyalty: that is the duty to act in the interest of the company, not in the personal interest of the directors, is extended to controlling shareholders and de facto directors. This provides direct locus standi (ie not subsidiary to the company) to minority shareholders to claim against directors, and confirms that the penalty for breach of the duty of loyalty may include the return of the unjust enrichment obtained by the infringer.

Scope of Directors’ liability Reimbursement of claimant shareholder’s expenses: when a corporate liability action is brought by shareholders of the company and where there is total or partial success, the company shall be obliged to reimburse the claimant shareholder the necessary expenses incurred, unless such claimant shareholder has obtained from the defendant directors full reimbursement of the said expenses. Directors of a company continue to be jointly and severally liable, and there remains a distinction between a “corporate liability action” (action against the directors by the company or shareholders for damage caused to the company), and an “individual liability action” (claim against the directors by shareholders or third parties for damages directly caused to such shareholder or third party).

Extending Directors’ liability to: General Manager: when there is no permanent delegation of the powers of the board in favour of one or more managing directors, the provisions about directors’ liability shall apply to the person who has been conferred with powers for the management of the company.

Directors of the parent liable to subsidiary and visa versa: if instructions from a parent company cause damage to a subsidiary, the parent company shall adequately compensate the subsidiary within one year. The parent company and its directors shall be jointly and severally liable for the damage caused to the subsidiary. Likewise, the directors of the subsidiary will also be jointly liable together with the directors of the parent company, unless they prove that they have complied with the relevant information duty, that there are objective elements to consider that compensation was adequate and possible, and that the execution of the instructions has not placed at risk the solvency of the company

Joint and several liability of entity directors: where the director of a company is an entity (in which case, it has to appoint an individual as permanent representative for the performance of the post), the CCB provides for the joint and several liability of the legal entity director and the natural person designated to represent it.

Liability for company’s debtThe CCB maintains the joint and several liability of directors for the debts of the company but limits this to situations where the cause of dissolution was a situation of “qualified losses” (losses that reduce its net equity to less than a half of the stock capital, unless the stock capital is then increased or reduced accordingly). In the event of other causes of dissolution, directors shall not be jointly and severally liable for the debts of the company, as per the current Companies Act 2010.

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Asia Pacific

Standard & Poor under fire in Australia and around the worldJenni Priestley, Partner, Sydney

On 5 November 2012 the Federal Court of Australia handed down a landmark decision, believed to be the first of its kind in the common law world. In Bathurst Regional Council v Local Government Financial Services Pty Ltd (the S&P Decision), the Court ruled that Standard & Poor’s (S&Ps) AAA rating of certain investment products was misleading and deceptive and involved negligent misrepresentations to investors.

ABN Amro had engaged S&P to rate its “Rembrandt notes” products being a type of structured financial product known as constant proportion debt obligations (CPDOs). The court found that ABN Amro had “sandbagged” the S&P’s representatives, and that S&P had adopted ABN Amro’s assertions without making necessary and important calculations independently. ABN Amro and S&Ps were ordered to pay damages of AUD 30 million for losses caused to investors.

S&P have filed an appeal from the Federal Court decision which is expected to be heard by the Full Federal Court in early March 2014.

Further proceedings were commenced in April 2013 in Australia against S&P’s owners on behalf of about 90 investors (primarily local councils, charities and self-managed super funds) who purchased CDOs distributed by the now collapsed Lehman Brothers. The CDOs received AAA and AA ratings from S&P’s. These new proceedings are being funded by IMF, the same litigation funder responsible for funding the plaintiffs in the S&P Decision.

Impact of the Australian S&P Decision worldwideIt was a combination of specific factual circumstances which led to the Australian Federal Court’s significant findings in the S&P decision. However, around the world ratings agencies have come under heavy scrutiny as a result of their rating of complex financial products before and during the global financial crisis.

Although S&P was found liable to investors in the S&P Decision under misleading and deceptive conduct legislation which is peculiar to Australia, S&P and ABN Amro were also held to have breached duties of care owed to investors under common law negligence principles. It is this aspect of the decision which will potentially be relevant in many other jurisdictions around the world.

Australian proceedings pave the way for filings in EuropeApproximately EUR 2 billion worth of CPDOs are said to have been sold by ABN Amro (now a subsidiary of the Royal Bank of Scotland) and rated by S&P in Europe – known as Castle Finance or Chess notes. IMF has stated that it intends to approach investors around the world (including in the UK, Netherlands, Germany and France) to discuss potential similar lawsuits over the rating of CPDOs.

IMF executive director John Walker has said: “… filing in Australia will pave the way for further filings in Europe funded by IMF, on behalf of European pension funds, banks and other investors, seeking compensation for losses suffered after investing in complex financial products”.

In the Netherlands, IMF has established The Ratings Redress Foundation through which it intends to pursue RBS and S&P. In the UK, IMF is said to be investigating bringing proceedings against S&P and Moodys.

United StatesProceedings against S&P have also been commenced in the United States.

In February 2013, the United States Department of Justice filed a USD 5 billion lawsuit against S&P, alleging that it had engaged in a scheme to defraud investors through the issue of inflated ratings on mortgage-backed bonds and CDOs prior to the global financial crisis. The complaint also alleges that S&P’s desire for increased revenue and market share led it to favor the interests of certain investment banks over investors.

Fourteen US states and the District of Columbia have also commenced proceedings against S&P’s. These proceedings have been consolidated into a single proceeding before the US District Court in Manhattan.

S&P has expressed its intention to vigorously defend the lawsuits.

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Disclaimer provisions no longer provide full immunity in SingaporeIan Roberts, Partner, Singapore

There have been two recent court decisions in Singapore which have brought into question the extent to which financial institutions are able to rely upon disclaimer provisions found in their standard form terms and conditions. They indicate a potential shift in the courts’ approach to disclaimer provisions of this kind.

The first is a decision of the Court of Appeal in the case of Als Memasa v UBS AG which arose out of a claim brought against UBS following the loss of a USD 3.8 million investment in Russian Bonds. The case involved an appeal from the lower courts decision to strike out the claim which involved, amongst other things, the question of whether the non-reliance disclaimer provisions prevented the claimant from relying upon alleged misrepresentations by the bank in order to pursue his claim.

The Court of Appeal ruled that the claim should not be struck out and that the case should be heard. The decision was based on various grounds. However, of note, the Court of Appeal made the point that, when re-hearing the case, the courts would need to consider two specific issues.

• Whether such non-reliance clauses are subject to the Unfair Contract Terms Act. That Act only permits terms which restrict liability if they can be demonstrated to be reasonable

• Whether the courts should consider moving away from the common law principle in contract that a party is generally bound by his signature even if he is unaware of the existence or effect of some particular term. The court noted that the starting position is that a party is not bound only if he can successfully establish the defence of non est factum, i.e. although he signed the agreement, his mind did not go with his signature, for example because he was mentally incapacitated or he was misled into signing it. Save for those exceptions, linguistic illiteracy is a disability not a privilege

It is worth quoting the judge as it gives an insight in to the courts’ attitude in Singapore to these developing trends:

“… in the light of the many allegations made against financial institutions for “mis-selling” complex financial products to linguistically and financially illiterate and unwary customers during the financial crisis in 2008, it may be desirable for the courts to reconsider whether financial institutions should be accorded full immunity for such “misconduct” by relying on non-reliance clauses which unsophisticated customers might have been induced or persuaded to sign without truly understanding their potential legal effect on any form of misconduct or negligence on the part of the relevant officers in relation to the investment recommended by them”

These comments were subsequently referred to by the High Court in the case of Deutsche Bank v Chang Tsw Wen, a case in which the Court held, on the facts, the disclaimer language did not operate to negate the bank’s pre-contractual duty of care. The case was fact specific, with the bank’s failure to bring the disclaimers to the claimant’s attention seemingly being determinative, but the outcome also appeared to be influenced by the Court of Appeal’s comments in Als Memasa. This decision was appealed.

Stop press: At the time of going to print, the Court of Appeal had just overturned the High Court’s decision in the Deutsche Bank case. That was on the basis that no duty of care had been made out. The Court of Appeal therefore did not need to consider the disclaimer issue. However, whilst not ruling definitively on the point, the Court of Appeal did observe that non-reliance and non-representation clauses may be caught by the Unfair Contract Terms Act.

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Hong Kong’s New Companies Ordinance has implications for DirectorsMun Yeow, Partner, Hong Kong

The New Companies Ordinance (the New Ordinance) is the most comprehensive overhaul of Hong Kong’s company law in the past 20 years. It has four objectives, namely, to enhance corporate governance, ensure better regulation, facilitate business and modernise the law. The principal changes relating to directors in the New Ordinance, which will come into operation in 2014, are highlighted below.

Codification of directors’ dutiesCurrently, directors duties, namely fiduciary duties and duties of care, skill and diligence, are primarily governed by common law. To keep in line with international standards, the New Ordinance codifies a director’s duty of care, skill and diligence. The fiduciary duties of a director, however, remain subject to common law.

The New Ordinance adopts a mixed objective and subjective test in the determination of the standard of care, skill and diligence expected of a director. A director must exercise the reasonable care, skill and diligence that would be exercised by a reasonably diligent person with:

• The general knowledge, skill and experience that may reasonably be expected of a person carrying out the same function as the relevant director (objective standard)

• The general knowledge, skill and experience that the director has (subjective standard)

Accordingly, in deciding whether a director has breached the duty of care, the additional experience and knowledge of the director as well as the standard of a reasonable director holding the same office will be taken into consideration.

Restricting corporate directorsThe New Ordinance also enhances accountability and transparency by requiring a private company to have at least one director who is a natural person. At present, public companies and private companies that are members of a group of companies of which a listed company is a member are prohibited from appointing a body corporate as their director. There are no restrictions regarding other private companies.

Companies will have six months to comply with this new requirement. The Registrar of Companies has the power to direct a company to appoint a director who is a natural

person. If a company fails to comply with such direction, the company and its responsible person commit an offence and each is liable to a fine.

Indemnification of directorsThe rules governing the indemnification of directors are also clarified. Previously, it was not clear whether a company could indemnify a director for his/her liability to third parties.

The New Ordinance provides for this for the first time. A company is allowed to indemnify its directors against liabilities to third parties in the course of performing directors’ duties and exercising power. The following liabilities, however, cannot be covered by the indemnity:

• Criminal fines or penalties imposed by regulatory bodies

• Defence costs of criminal proceedings where the director is convicted

• Defence costs of civil proceedings against the director by or on behalf of the company or a related company in which judgment is made against the director

To enhance transparency, there is also a requirement for a company to disclose the indemnity provisions in the directors’ report and make them available for the members to inspect upon request.

Ratification of directors’ conductThe New Ordinance further provides that a director’s act may only be ratified by disinterested members of a company passing an ordinary resolution in a general meeting. This scope of ratification includes acts or omissions of a director amounting to negligence, default, breach of duty or breach of trust. The rationale behind this initiative is to prevent conflicts of interest and possible abuse of power by interested majority shareholders in ratifying the unauthorised conduct of directors.

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Impact of Companies Act, 2013 on insurance claims in India Sakate Khaitan, Partner, Clasis Law Satyendra Shrivastava, Senior Associate Clasis Law

The law relating to companies is witnessing a significant overhaul with the enactment of the Companies Act, 2013. Alongside fulfilling its mandate of amending the existing company law, the 2013 Act is also expected to have an impact on the insurance industry. Directors’ & Officers (D&O) insurance and commercial general liability lines are expected to see new products, increase in business and correspondingly insurance claims may also witness an increase.

Set out below are some of the provisions which are likely to impact these markets:

• More senior employees to be ‘officers in default’. Like the Companies Act, 1956 Act (1956 Act), and now the 2013 Act, most laws in India provide for a person in charge of the company to be prosecuted for offences committed by the company. The 2013 Act has gone a step further as it broadens the term ‘officer who is in default’ to expressly include the CEO, CFO, share transfer agent and merchant banker within its ambit

• Increases directors’ accountability and the quantum of penalties for their breach. While the duties of a director are not specifically codified under the 1956 Act, the 2013 Act categorically lists the duties of a director, breach whereof can entail a minimum fine of INR 100,000 extending up to INR 500,000

• D&O insurance has been accorded statutory recognition. It particularly ensures that the amount paid for such insurance is deducted from director’s remuneration, in case the director or other officer is found guilty of negligence, default, misfeasance, breach of duty or breach of trust. This is a drastic shift from the position under the 1956 Act, which made any provision indemnifying the officers for any liability in case of action against them void, unless such director was proved innocent in the relevant proceedings, bringing the legislation in line with the market practice

• Introduction of class actions suits. In line with the intention of the legislature to strengthen the enforceability of rights of shareholders, is the

introduction of the concept of class actions suits. The members and depositors have been conferred with the right to file suits against the company, its directors, auditors or any expert, advisors or consultants, on behalf of a group of shareholders or depositors, to protect their rights and claim compensation. Yet another instance of this intention is increased powers of the registrar of companies with respect to inspection, inquiry and investigation of the records of a company, and the power of search and seizure, establishment of Serious Fraud Investigation Office

• Impact on GCL market: As the 2013 Act seeks to make not only the directors and officers, but also the companies more accountable to their shareholders and other stakeholders, it would not be out of place to expect a rise in the general commercial liability of companies. Consequently, akin to the impact on PI, the GCL insurance of companies can also be expected to rise in the wake of a more accountable legislative regime

The provisions under the 2013 Act will be phased in. Straightforward definition clauses and some other sections became operative on 12 September 2013, but it is not clear when the provisions noted above will be in force.

This 2013 Act further integrates India into the global market. The change in the manner in which courts view tortious acts by directors and professionals associated with companies is likely to result in demands for greater accountability from them, thereby perking up the demand for appropriate insurance cover.

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Are you onshore or offshore? Developments in the regulation of financial institutions in the UAE and QatarMark Beswetherick, Partner, Dubai Laura Chicken, Associate, Dubai

Financial regulation will be an area to watch in both the United Arab Emirates and Qatar in the coming years as their Governments seek to bolster their reputations as leading financial centres, both regionally and globally.

Both the UAE and Qatar are well known in the region and internationally for their innovative financial free zones, formed within the last 10 years. Establishing “offshore” within either the Dubai International Financial Centre (DIFC) or the Qatar Financial Centre (QFC), which offer 100% foreign ownership, is an attractive proposition for many financial institutions in contrast to the ownership restrictions imposed “onshore”. Both the DIFC and QFC also have their own common law courts and legal system, in contrast to the onshore civil law regime. The trend looks set to continue, with Abu Dhabi currently in the process of establishing its own financial free zone, the Abu Dhabi Global Market.

However, a number of firms operate both offshore and onshore, leading to dual supervision and regulation, with the DIFC and QFC regulators traditionally being perceived as being more proactive and stringent than their onshore counterparts.

This perception may be set to change with both the UAE and Qatar onshore authorities looking at areas for improvement. Indeed, both countries were upgraded from Frontier Markets to Emerging Markets status by MSCI Inc this year in recognition of improvements made to their markets.

The regulatory frameworkThe UAE currently has no one financial services regulator for the provision of onshore financial services. The UAE Central Bank is the main body responsible for regulating banking and investment business, while certain aspects of investment business are overseen by the Emirates Securities and Commodities Authority (ESCA).

ESCA has become increasingly active in the last 18 months, with one of its most significant accomplishments being the passing of Board Decision No. 37 of 2012, concerning the Regulations as to Investment Funds (Regulations). The Regulations have vastly increased the requirements and supervision of local UAE funds but have also removed the uncertainty that prevailed prior to the Regulations’ introduction as to what conditions applied to foreign funds.

The Regulations also perhaps signal the start of more of a ‘twin peaks’ approach in the UAE by dividing responsibility for the oversight and inspection of funds between the UAE Central Bank for prudential supervision matters and ESCA for investor protection matters. This is a trend which we expect to see continue.

Dual supervision concernsA relevant concern for financial institutions and companies operating in the UAE is the extent to which they could find themselves caught between two regulatory frameworks. A good example of the perils of operating across both jurisdictions is the 2012 DIFC Courts’ decision in Corinth Pipeworks SA v Barclays Bank PLC. Corinth sued Barclays in the DIFC Courts for USD 24 million in damages resulting from alleged faults and misleading representations made by an employee of an onshore Barclays’ branch. Corinth argued that an action could be brought against Barclays in the DIFC in respect of claims occurring outside the DIFC, as Barclays was just one legal entity and its DIFC branch had no separate legal identity. The Court of Appeal agreed, holding that Barclays Dubai and Barclays DIFC were not separate legal entities but branches of the same indivisible entity, thereby allowing Corinth’s claim to continue in the DIFC Courts.

Around the same time as this case, there was also an amendment to DIFC law, with Dubai Law No. 16 of 2011 also now allowing parties to contractually agree to resolve commercial disputes between them in the DIFC Courts without first having to establish whether the dispute falls within the DIFC’s previously limited jurisdiction. The Barclays decision is likely to have raised concern among financial institutions about the possibility of being sued in the common law DIFC Courts for acts and advice that took place in their onshore branches, but the floodgates do not appear to have opened as yet. Indeed, for those institutions more familiar with common law systems, some may decide they want to opt into the DIFC’s jurisdiction, but only time will tell.

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Further information If you would like further information on any issue raised in this newsletter please contact:

UK and EuropeJames Cooperjames.cooper@clydeco.com

Laura Cookelaura.cooke@clydeco.com

James Robertsjames.roberts@clydeco.com

David Meheutdavid.meheut@clydeco.fr

Ignacio Figuerolignacio.figuerol@clydeco.com

Pablo Guillenpablo.guillen@clydeco.com

Hong KongSimon McConnellsimon.mcconnell@clydeco.com

Mun Yeowmun.yeow@clydeco.com

SingaporeIan Robertsian.roberts@clydeco.com

CanadaRoderic McLauchlanroderic.mclauchlan@clydeco.com

Mary Margaret Foxmarymargaret.fox@clydeco.ca

John Nicholljohn.nicholl@clydeco.ca

Catherine Tyndalecatherine.tyndale@clydeco.ca

USNed Kirkedward.kirk@clydeco.us

Bill Lutzwilliam.lutz@clydeco.us

Kim Westkim.west@clydeco.us

Middle EastMark Beswetherickmark.beswetherick@clydeco.com

AustraliaJohn Edmond john.edmond @clydeco.com

Jenni Priestleyjenni.priestley@clydeco.com

Oscar Shub oscar.shub@clydeco.com

Jenny Thorntonjenny.thornton@clydeco.com

South AmericaLiliana Veru-Torresliliana.veru-torres@clydeco.com

Peter Hirstpeter.hirst@clydeco.com

Lee Baconlee.bacon@clydeco.com

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