Ex­ec­u­tives at risk from new li­a­bil­ity sce­nar­ios and anti-cor­po­rate lit­i­ga­tion cul­ture

Financial Nigeria Magazine - - Contents - Al­lianz Global Cor­po­rate & Spe­cialty (AGCS) CEO in Africa Del­phine Maï­dou

New risks such as cy­ber in­ci­dents or data pri­vacy, ris­ing reg­u­la­tory and share­holder ac­tivism, and the in­flu­ence of third party lit­i­ga­tion fun­ders are putting cor­po­rate lead­ers un­der more pres­sure than ever of fall­ing foul of in­ves­ti­ga­tions, fines or pros­e­cu­tion over al­leged wrong­do­ing, says Al­lianz Global Cor­po­rate & Spe­cialty (AGCS), a lead­ing provider of Di­rec­tors and Of­fi­cers (D&O) in­sur­ance glob­ally.

Di­rec­tors and of­fi­cers are walk­ing a man­age­rial tight-rope as ex­ec­u­tive li­a­bil­ity con­tin­ues to in­crease an­nu­ally. There is a grow­ing trend to­wards seek­ing puni­tive and per­sonal le­gal ac­tion against ex­ec­u­tives for fail­ure to fol­low reg­u­la­tions and stan­dards which could re­sult in costly in­ves­ti­ga­tions, crim­i­nal prose­cu­tions or civil lit­i­ga­tion putting the com­pany's as­sets, or their own, at risk, AGCS says in its new re­port, D&O In­sur­ance In­sights: Man­age­ment li­a­bil­ity pub­lished last month.

By Fi­nan­cial Nige­ria

In Nige­ria, the di­rec­tors of a com­pany can be held per­son­ally li­able for their ex­ec­u­tive ac­tions where such ac­tions are not in con­form­ity with the com­pany's char­ter as set out in its Me­moran­dum and Ar­ti­cles of As­so­ci­a­tion.

“While the le­gal land­scape dif­fers strongly from coun­try to coun­try, in­creas­ing share­holder or reg­u­la­tory ac­tion has be­come a global phe­nom­e­non that needs to be given top pri­or­ity within com­pa­nies' in­ter­nal risk man­age­ment de­part­ments,” said Bernard Poncin, Global Head of Fi­nan­cial Lines, AGCS.

D&O lit­i­ga­tion – length­ier and more costly

Ac­cord­ing to AGCS anal­y­sis, non­com­pli­ance with laws and reg­u­la­tions is now the top cause of D&O claims (AGCS an­a­lysed 576 claims be­tween 2011 and 2016) by num­ber, fol­lowed by neg­li­gence and mal­ad­min­is­tra­tion/lack of con­trols. The av­er­age D&O claim for breach of duty costs over $1 mil­lion (€1 mil­lion). How­ever, in large cor­po­rate li­a­bil­ity cases D&O claims can be val­ued in the hun­dreds of mil­lions of dol­lars. AGCS ob­serves a gen­eral trend for D&O claims to be dis­missed or re­solved more slowly, mean­ing length­ier lit­i­ga­tion, in­creased defence costs and higher set­tle­ment ex­pec­ta­tions. For ex­am­ple, the av­er­age US se­cu­ri­ties class ac­tion case takes be­tween three and six years to com­plete while le­gal defence costs av­er­age around $10 mil­lion, ris­ing to $100 mil­lion for the largest cases. In the past six years defence costs have al­most dou­bled for large D&O claims in the US. The in­flu­ence of third party lit­i­ga­tion fund­ing is also chang­ing the global lit­i­ga­tion map, with it be­ing piv­otal in the de­vel­op­ment of col­lec­tive ac­tions against fi­nan­cial in­sti­tu­tions and com­mer­cial en­ti­ties and their di­rec­tors and of­fi­cers.

Lit­i­ga­tion against com­pa­nies and their of­fi­cers is on the rise. In the US, the num­ber of se­cu­rity class ac­tion fil­ings is ris­ing and, at mid-year, was on course for its high­est an­nual to­tal for 12 years. Many Asian coun­tries such as Ja­pan, Hong Kong, Thai­land and Sin­ga­pore are also mov­ing to­wards a more liti­gious cul­ture. The in­crease in claims has also been pro­nounced in Ger­many where the num­ber of D&O claims for AGCS alone has tripled in the past 20 years.

D&O de­vel­op­ments in Africa

D&O in­sur­ance is on the rise in Africa as a re­sult of de­vel­op­ments in cor­po­rate gov­er­nance leg­is­la­tions and codes, which have cod­i­fied di­rec­tors' li­a­bil­ity. In gen­eral the di­rec­tors of a com­pany in most African coun­tries can be held per­son­ally li­able for their ex­ec­u­tive ac­tions where such ac­tions are not in con­form­ity with Me­moran­dum of In­cor­po­ra­tion. Be­cause a com­pany may not in­dem­nify its di­rec­tors and of­fi­cers, there is no guar­an­tee how­ever that the com­pany will pay the heavy fi­nan­cial bur­den of defence costs in pro­longed le­gal pro­ceed­ings or dam­ages awarded. The com­pany may also not have the fi­nan­cial

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