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D&O risks and the implications

26 July 2021 Myra Knoesen

During an iTOOsday webinar, a panel of experts discussed Directors & Officers’ (D&O) liability, and the implications on D&Os in this changing environment.

FAnews spoke to Christopher MacRoberts, Legal Director at Clyde & Co, about what is happening in the D&O liability space and the evolving scope of a director’s duty.

The 2021 D&O insurance market

“The D&O market has entered a ‘hardening’ phase where greater frequency and severity of claims, as well as the emergence of new risks, have led D&O insurers to revisit their pricing and the breadth of terms offered. This has been a long time coming but it is happening at a difficult time, given the COVID economy, where so many additional financial and management pressures have been applied to companies and directors,” said MacRoberts. 

“The ‘hardening’ D&O market and tougher terms being offered by D&O insurers undoubtedly make D&O renewal negotiations tougher in 2021, together with greater rates increases than have been seen in recent years,” said MacRoberts. 

“Claims history is always an important factor and an organisation with a demonstrable track record of sound corporate governance and risk management should be well placed to manage the market in 2021,” he concluded. 

Trends to watch out for in 2021

MacRoberts said the D&O trends to watch out for in 2021 and beyond include increased insolvency claims in the COVID economy, cyber security and privacy breaches, employment-related wrongful acts (#MeToo Movement), delinquency proceedings (against directors, e.g., OUTA versus Dudu Myeni) and climate change risks. 

“Climate change claims may focus on a breach of fiduciary duties in failing to comply with legislative reporting requirements, publishing false or misleading information on climate risks and the company's steps to deal with those risks, failing to properly assess the impact of climate change and subsequent damage to company assets (e.g. Australian bush fires) and failing to meet agreed climate change mitigation targets,” he said. 

Responsibilities into sharp focus

“In South Africa we have seen a high volume of claims for legal defence costs relating to state-owned enterprises, given the Zondo Commission and various other processes in which current and former directors of SOEs are being held to account. This is coupled with a shift towards more frequent litigation against directors by companies, creditors and other stakeholders. There have also been a couple of significant cases involving directors, such as the OUTA versus Dudu Myeni delinquency proceedings, which have brought the responsibilities of directors into sharp focus and which have demonstrated the potential for litigation against directors,” emphasised MacRoberts. 

MacRoberts said a claim may be brought against a director or an officer by: 

  • The company itself;
  • Shareholders (in limited circumstances in South African law, such as via a derivative action);
  • Regulators, such as the FSCA;
  • Employees;
  • Creditors;
  • Customers;
  • Competitors; and
  • Business rescue practitioners or liquidators of the company. 

“If a director or officer is found to have breached a duty or obligation, he/she may have a liability to pay compensation (damages), a fine or a penalty. This amount is in addition to bearing their own legal defence costs and the legal costs of the regulator or the party that brought the claim,” he said. 

Evolving scope of duty

“The Companies Act, 2008 provides a framework for the duties and responsibilities of directors. The Companies Act does not displace the body of established precedent, and the common law in respect of directors' duties, but codifies a number of the common law duties applicable to directors,” said MacRoberts. 

“At the heart of these duties is the concept of the fiduciary duty owed by a director to the company. A fiduciary occupies a position of trust and must act in good faith in his/her dealings with or on behalf of the company,” added MacRoberts. 

According to MacRoberts, the examples of directors' duties that are codified under the Companies Act (sections 75 & 76) include the duty to: 

  1. act in the best interests of the company;
  2. exercise independent and unfettered judgement and discretion;
  3. exercise one's powers in good faith and for a proper purpose;
  4. not exceed one's powers (acting ultra vires);
  5. account for profits, and not make secret or undisclosed profits;
  6. not place oneself in a position of conflict with the company, and not to act on behalf of the company in any matter where such conflict exists; and
  7. act with the degree of care, skill and diligence as would reasonably be expected of a person carrying out the same functions in relation to the company as those carried out by that director, and having the general knowledge, skill and experience of that director. 

“Importantly, there is no distinction in the Companies Act between directors' duties as they apply to executive and non-executive directors. Non-executive directors are subject to all of the same duties as executive directors,” he said. 

“The evolving scope of a director's duties includes not only their fiduciary duties towards the company at common law, and in terms of the Companies Act, but also other sources of responsibility,” he added. 

MacRoberts said these include: 

  • The Company's Memorandum of Incorporation;
  • Sector –specific legislation (e.g., in the mining sector, or in healthcare);
  • Tax legislation;
  • Employment and labour laws;
  • Data protection and privacy legislation;
  • Environmental legislation; and
  • The King IV Code on Corporate Governance. 

“It is, therefore, important for a director to be informed not only about their duties in terms of the Companies Act, but also for the industry /sectors in which they operate,” concluded MacRoberts. 

Writer’s Thoughts
As MacRoberts said, given the COVID economy, there are so many additional financial and management pressures to companies and directors, with a couple of significant cases which have brought the responsibilities of directors into sharp focus. Do you believe the scope of a director’s duty has evolved extensively? And, is there a shift towards more frequent litigation against directors? If you have any questions please comment below, interact with us on twitter at @fanews_online or email me - [email protected]

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