D&O exposures increasing in Europe

The trend towards increased exposures for directors and officers in Europe is continuing, with corporates seeing large regulatory fines and further shareholder actions in recent months. In January, Rolls-Royce agreed a record £671m settlement with UK regulators over bribery and corruption allegations. Shortly after, telecoms group BT saw its shares plunge when it revealed the extent of accounting irregularities at its Italian business. This was followed by talk of potential shareholder litigation. These were just the latest in a string of such actions against leading European companies. VW, Tesco and RBS are already facing regulatory investigations and/or shareholder actions in Europe. Recent years have seen an increase in regulatory actions and the emergence of class action-style litigation across the continent and further afield. “Since the financial crisis there has been an uptick in regulatory activity and government enforcement actions across the globe,” said George Melides, head of management liability – Europe, Middle East and Africa at Zurich. Shareholder activism is also an emerging issue for European companies and their directors, according to Mr Melides. “There is demand for greater shareholder engagement, while at the same time, shareholder activism is being expressed through more active participation in securities class actions and derivative actions,” he said. “A greater focus on shareholder engagement, and the continuous focus on executive accountability for their actions, point to a possible uptick in shareholder actions. Whether this will be in the form of shareholder class actions or derivative actions remains to be seen, but there are signs of an increase in activity,” added Mr Melides. “When you put it all together, this is an exposure trend that directors will need to handle with care. They cannot just sit behind closed doors. Directors will need to be more open and communicate more frequent with shareholders,” he believes. The legal landscape appears to be shifting and a number of countries have been making it easier for shareholders to bring collective actions, noted Mr Melides. The arrival of private equity litigation funders in Europe could also lead to greater access to justice for shareholders. Litigation funder Bentham is behind ongoing shareholder action against RBS and Tesco in the UK. “As these cases evolve – and if they have a positive outcome for the litigation funders – I would expect to see more litigation funders come to Europe and lobby for processes to bring collective actions in other parts of Europe,” said Mr Melides. “Collective action processes in Europe are still not as well developed as they are in the US, but there are voices from private and institutional investors to introduce mechanisms to bring litigation in the form of US class actions,” he added. Leslie Kurshan, leader of Marsh’s client solutions unit, is also watching the progress of European shareholder actions. “There appears to be more of a trend towards European class actions. It is still not of the same magnitude as the US, but there is some traction,” said Ms Kurshan. “The plaintiff bar is testing the mechanisms to bring collective actions in Europe, but it has yet to be determined how much of a factor this will be for D&Os going forward,” she added. However, despite the increase in shareholder activity, regulatory actions are probably the biggest single concern for European companies not exposed to US Securities and Exchange Commission reporting requirements, according to Ms Kurshan. “We see greater regulatory activity and expect this trend to continue,” she said. For example, UK-based banking group HSBC said recently that it faced around 37 separate regulatory investigations and lawsuits for various allegations of misconduct, including unfair hiring practices, tax fraud and price fixing. It also announced that the UK’s Financial Conduct Authority had launched a fresh investigation into HSBC’s money laundering controls. Recent years have seen a trend towards increased regulatory investigations in the UK, said Mark Sutton, partner at Clyde & Co, and Karen Boto, legal director at the firm. Regulators are more aggressively investigating and prosecuting companies, while also looking to hold individual directors to account, they said. An increase in regulatory investigations means heightened probability of civil and shareholder actions against companies, as well as criminal prosecutions against individual directors, believes Mr Sutton. For example, as part of a recent bribery settlement between the UK’s Serious Fraud Office (SFO) and engineering firm Rolls-Royce, the deferred prosecution required the company to assist the SFO in pursuit of individuals. Civil actions against the company and prosecutions of directors now look likely, said Mr Sutton. The increase in regulatory investigations is coinciding with a rise in ‘ambulance chasing’ by claimant solicitors and the arrival of litigation funders in Europe, according to Ms Boto. “Increased media publicity and a heightened regulatory environment go hand in hand with litigation funders and specialist claimant law firms,” she said. In the UK, all eyes are on a shareholder action against banking group RBS and its former chief executive, over alleged misrepresentation during a $12bn rights issue. Some claimants settled last year, but one group representing around 30,000 RBS shareholders is seeking damages of £1.2bn in a trial that is expected to start in May. Litigation funder Bentham is also spearheading an attempt to bring a group action against Tesco, which admitted overstating first-half profits in 2014 by $263m. In October, more than 110 institutional investors bought a legal action against the retailer, seeking damages of £100m. In January, a second action against Tesco was launched by Manning & Napier. According to the Financial Times, the US investment firm is reportedly claiming $212m for losses related to 2014 accounting irregularities. Bentham is also reportedly looking at whether it can fund a shareholder action against UK telecommunications company BT, which saw its share fall 20% after it revealed improper accounting at its Italian arm. Media reports said BT investors had been approached by Bentham, while law firm Quinn Emanuel Urquhart & Sullivan says it is looking at whether to bring a case on behalf of investors under Section 90 of the Financial Services and Markets Act (FSMA). Civil claims directly against individual directors are still uncommon in the UK. But Sections 90 and 90A of FSMA open the door to shareholder group actions against directors if they can be shown to have made untrue or misleading statements, or omitted certain published information relating to securities, explained Ms Boto. A report from Marsh in 2016 found that D&O claims in the UK have risen steadily during the past decade and are now four times higher than pre-financial crisis levels. The increasing volume and complexity of regulatory activity in the UK and the EU, as well an increasing level of cross-border cooperation between regulators and a shift towards class or collective actions across Europe, was a major driver of this trend, according to Marsh. Directors can end up significantly out of pocket when drawn into an internal or regulatory investigation, even if they are innocent of wrongdoing or unfairly accused, explained Ms Kurshan. There can also be complications with criminal investigations because D&O cover has been more focused on civil actions. “We have worked to make provisions in D&O policies more appropriate for internal investigations and potential criminal charges,” said Ms Kurshan. According to Ms Kurshan, European companies have also been showing more interest in buying side-A difference in conditions cover, which provides broader protection for regulatory investigations, especially in the early stages. The majority of Marsh FTSE 100 clients now purchase side-A difference in conditions cover, she said. Increased regulatory actions and potential for class action-like litigation in Europe has, however, not altered conditions in the D&O insurance market. “There is so much capacity available there has not been any impact on terms or pricing,” said Ms Kurshan.

D&O exposures increasing in Europe

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