By Andrew Horne, partner, and Nick Frith, senior associate, Minter Ellison Rudd Watts
Company directors are facing increasing challenges. Substantial damages awards in the Mainzeal case, together with a greater presence of litigation funders and an increasing likelihood of class actions are increasing directors’ and their insurers’ risks.
In this article, we discuss our views of four key legal risks facing directors and their insurers in the near future, being:
Climate Change Risk
Climate change should be top of mind as giving rise to potential legal action against directors.
The Intergovernmental Panel on Climate Change’s recent Special Report on the impacts of global warming of 1.5°C above pre-industrial levels has created a large amount of interest in the impact of climate change from a number of angles.
While the focus has largely been on companies and consumer behaviour, there are some clear indicators that directors may be in the firing line of potential plaintiffs in claims for breach of duty arising from the climate impact of the companies they lead. In a recent extra-judicial article, three judges of the New Zealand Supreme Court wrote on Climate Change and the Law and specifically addressed corporate governance and litigation beginning with:
Directors have a duty to consider the ‘best interests’ of the company in all of the colloquium jurisdictions. It remains to be seen how climate change impacts that duty. There have already been cases in Australia and the United Kingdom relying on corporate governance and company law to hold companies to account for their climate impacts and actions.
While acknowledging that New Zealand legislation does not have an equivalent of the UK obligation on directors to consider the impact of the company’s operations on the community and the environment as part of directors' duties to promote the success of the company:
…academics have argued that, taken together, annual reporting obligations and the directors’ duties of care may mean that directors could breach their duty of care by failing to consider and respond to environmental risks that later harm the company. The same arguments could apply in other colloquium jurisdictions. Climate change is no longer simply an ethical issue. As a material financial risk, directors are accountable under care and diligence duties to take account of the financial consequences of climate change and this applies whatever model of corporate governance is subscribed to. Further, the “business judgement rule” would not protect directors where the legal risk stems from inadequate information or lack of inquiry.
These comments taken together make it clear that directors ought to be considering their risk profile in respect of potential climate change liability. Insurers will also need to consider the risk of climate change in the Directors and Officers (D&O) context, particularly from the potential class action perspective.
Securities Class Action Risk
In a recent article by Andrew Horne, Marsh, and the Institute of Directors, the authors explored the impact of Australian securities class actions on D&O cover:
The D&O insurance market for publicly listed companies (especially where Company Securities ‘Side C’ cover or Statutory Liability is included) has incurred the greatest scrutiny over the last two to three years. This change has been driven predominantly by the impact of Australian securities class actions claims on insurers’ financial performance, where the losses incurred greatly outweigh the premium pool available and have done so for a number of years.
While class or group actions in New Zealand have been relatively rare, they are on the rise (e.g. actions against Southern Response, James Hardie and the Ministry of Primary Industries). In 2018, the plaintiffs in a group action against the former directors of Feltex obtained a ruling in the Supreme Court that a forecast in a prospectus was untrue, opening the door to substantial claims against the directors.
We see the Court of Appeal’s recent decision in the Ross v Southern Response case (discussed from page 5) is likely to produce a significant rise in class actions in New Zealand, particularly against D&Os, assuming it is not overturned by the Supreme Court. REGULATORY RISK Directors are well-aware of the increased focus on conduct and culture. In its 2019/2020 Corporate Plan, the Financial Markets Authority (FMA) identified two of three sector activities for banking and insurance:
(a) Bank conduct and culture and incentives follow-up
(b) Life insurance conduct and culture follow-up The FMA’s focus will clearly remain on the conduct of directors and senior management. Following the review of bank conduct and culture in November 2018, the FMA and the Reserve Bank of New Zealand (RBNZ) said that they would:
… be expecting to see much deeper accountability of boards, executives and senior managers. We will be looking for progress and clear evidence of change and want to see this become part of the ethos of all banks in New Zealand.
This presents a clear risk for directors and senior management to take into account when assessing their insurance needs. And for insurers when assessing whether, and on what terms and limits, they are prepared to insure against D&O regulatory investigation costs and liabilities.
Continuous disclosure risk also remains top of mind for directors of listed companies.
Disclosure to Insurers
Directors will need to be vigilant in their disclosures to insurers in the current environment of heightened risk from multiple disparate angles.
Close attention should be paid to circumstances that may give rise to claims, to minimise the risk of allegations of late notification. Insurers will also be looking more closely at insureds’ records to determine whether they had knowledge of potential claims prior to the policy years in which claims arise.
