Chartis: Held to account – Géraud Verhille

In the wake of the global financial crisis, legal action is on the rise and is increasingly being targeted not just at companies, but also at individual executives. Géraud Verhille of Chartis discusses the legislative changes that have facilitated this, the implications they have for executives and boards of directors, and what they can do to protect themselves.

The global financial crisis of 2008 set off a wave of litigation activity that is gathering pace with each passing year. Grievances related to the ethical conduct of directors, alleged anti-competitive behaviour (anti-trust or corruption) and bankruptcy proceedings are being pursued to the fullest degree. Such cases are not only a cause of concern for corporations; they increasingly target individual executives. -

The number of claims brought against company directors in Europe is running at 20% above 2009 and 2010 levels, which were already considered 'peak years', and this pattern looks set to continue. The introduction of legislation such as the Dodd-Frank Act in the US and the Anti-Bribery Act in the UK is likely to underpin this pattern in the future, as it further empowers regulatory bodies and criminal courts to place past and future actions of corporate board members under intense scrutiny.

"There is a greater push for transparency in what corporations do, especially in the financial markets, and a drive for a more ethical business conduct across the globe," says Géraud Verhille, vice-president, Financial Lines Europe at the insurer Chartis. "This is aided by legislation such as the Dodd-Frank or Bribery Acts but also by the allocation of government resources, the existence of bodies such as the Enterprise Chamber in the Netherlands, or quite simply by historically active regulators like the Corte dei Conti in Italy or the AMF in France. In a way this has been an existing trend for a number of years but the crisis has provided a renewed political drive that has accelerated the process."

Shareholder power

This increased power to hold individuals to account manifests itself in a number of ways. Many direct or derivative shareholder actions are being launched out of anger and disillusionment with recent events. In certain instances this is for financial recovery, but in many others it is about governance. For example, new 'say on pay' rules have given shareholders greater powers of governance and a higher volume of motions are being tabled at company general meetings. "This is at times even supported by social media, which gives people the ability to drum up support and frame an issue in a certain way," Verhille says.

There has been a rise in the number of cases related to corporate bankruptcy proceedings, impropriety in the context of mergers and acquisitions, including instances of aiding and abetting or simple breach of fiduciary duty. This is observed in many countries, including Spain where the burst of the real estate bubble - a sector rife with acquisitions - has had far-reaching consequences including bankruptcy proceedings and shareholder litigation.

"On the litigious side, where there have been financial losses, shareholders are quite simply trying to bring directors to account," Verhille says. "Allegations based around the way organisations make representations to the market are also very common at the moment. CFOs have personal liability for this, which is why regulators and shareholders are going after the individual, not just the company."

Another noteworthy change is the increase in collective action suits in European courts. The US has long been seen as the most favourable forum for such disputes, leading many foreign investors to join US actions even if their case did not directly relate to that jurisdiction. The US Supreme Court decision in the Morrison case has strengthened the hand of judges to push such cases back into more geographically relevant arenas.

"The number of claims brought against company directors in Europe is running at 20% above 2009 and 2010 levels." 

"They may not be full-blown class action suits like we see in the US yet, but multiple party actions involving groups that have suffered common losses or share common problems are emerging in Europe," Verhille explains. "What also contributes to this is US courts telling holders of foreign shares 'there is an alternative forum for your class - you did not purchase your shares on the US stock exchange' and redirecting the case to an indigenous forum. As a consequence we see the foreign component of existing US actions being pushed back into Europe and litigated here."

A class act

This must also be seen in the context of the increased strength of regulatory and legal authorities in a number of different countries. In the UK, for example, the recently introduced Bribery Act has given the Serious Fraud Office potential access to a much greater number of companies and individuals. The terms of the legislation mean that the onus of guilt has shifted, placing greater pressure on the executive boards of companies to prove that no wrongdoing has taken place. Recent years have also seen a noted increase in cross-border cooperation between regulators, an acknowledgement of the global impact of how modern business is conducted.

"Before the Bribery Act the criminal prosecution had to prove that there was a 'directing mind' within a company that led to an act of bribery," Verhille explains. "Now, once an act of bribery has been discovered, a company can be liable unless it can demonstrate that all possible measures had been put in place to prevent it. It makes it so much more difficult for company directors and so much easier for the authorities to enforce and fine."

"The increase in the budget allocation to ensure enforcement in the US and a review of plans to consolidate regulatory bodies in the UK for fear of losing effective enforcement are strong political signs," Verhille explains. "The changes in the legal landscape regarding whistle-blowing and self-reporting are also helping to allocate enforcement resources more efficiently. As a result, we are now seeing that when regulators and subsequently investors decide to litigate, the action tends to go further. It's an issue that sticks."

"The number of claims brought against company directors in Europe is running at 20% above 2009 and 2010 levels."

In addition, some of the key deterrents to civil action are eroding in Europe. The 'loser pays' rule made many possible claimants think twice about launching action, wary of the need for a watertight case if steep costs were to be avoided. The rise in the amount of litigation funding available in certain European countries mitigates this and the local implantation of law firms used to US-style class actions, as well as the relaxing of contingency fee limitation (e.g. in the Netherlands) has provided extra impetus to pursue claims.

Ensuring transparency

There are things that finance officers can do to mitigate two of the largest risks they might face; one with respect to representations to markets and the other to bankruptcies.

If companies are to ensure the correct representation of information to the markets, systems must be put in place that allow for real-time, cross-company visibility of both operational performance and liquidity levels. This includes subsidiaries and sub-groups, which are being targeted more and more.

"Most CFOs are clearly aware of these risks and their consequences, which is the first major step," says Verhille. "In terms of mitigation, many have been moving in the right direction for years, changing the way organisations are run to make more accurate representations to the market. There is also a lot of risk associated with providing guidance, as altering it tends to affect your share price. Should we provide it? How should we do it? These questions need to be assessed rigorously.

"When it comes to liquidity and solvency, CFOs must monitor all parts of the group. Bankruptcies of subsidiaries or affiliated companies can lead to tough litigation against individuals - allegations of late notification or asset-stripping are typical. You have to try to stay abreast of these situations to build up as strong a defence as possible should anything happen," he adds.

Private vs public

In this environment, steps need to be taken not just by large public firms, but by private companies as well. In Verhille's view there has been a misconception that directors of private companies have a much higher immunity to claims. The reality is that cases lodged against executives of private companies now outnumber those brought against their public counterparts.

"Of course, most private companies don't have to worry about cases related to misrepresentation to financial markets," he explains. "But they are at the mercy of a whole range of claims, not least brought about by state attorneys. For example, with respect to health and safety, anti-trust issues, or cases related to the environment, executives of private companies are just as accountable. On the civil side they face cases brought by their stake-holders related to breach of fiduciary duty which may have led to financial losses. All of these are on the rise."

Defence industry

For all the doom and gloom, strong defence of directors and officers against litigation often proves successful. Even if initial decisions prove unfavourable, recent history suggests that many appeals lead to the dismissal of a case or the reduction of an award or fine. Comprehensive, road-tested directors and officers (D&O) insurance combined with strong claims-handling experience and a global footprint can go a long way to mitigating risk. Court action is always costly and stressful, but strong defences can make it much less so.

"There just needs to be that risk awareness," Verhille says. "When it comes to criminal or regulatory investigations and prosecution, a powerful defence is expensive but paramount. Whether you are big or small, strong defence is critical because the ultimate consequences to a practice, or as a director or officer, be it fines, imprisonment or disqualification, could be considerable."

Géraud Verhille, vice-president, Financial Lines Europe, Chartis.