Reforms to corporate law mean that class actions are spreading across the world

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Multinationals’ D&O exposures are increasing across the world, as class actions are becoming more common outside North America. At the same time, European regulators are introducing reforms that are codifying the duties of directors.

Speaking to StrategicRISK ahead of yesterday’s workshop on D&O exposures, Dan Holloway – D&O product manager financial lines, overseas general insurance at Chubb – said: “Historically, everyone assumed the biggest D&O exposures were going to lie in North America, but after the global financial crisis, regulators in Europe started to make various reforms to corporate law.

“The UK has the Companies Act, for instance, and now we’re seeing that the Czech Republic, Germany, Spain and other countries are introducing similar reforms. With their duties becoming more codified by these reforms, directors will become much more accountable.”

The multinational nature of many companies further complicates exposures. The time when one master D&O insurance policy had a worldwide coverage and paid claims around the world are over, and certain countries, such as many emerging markets, require a policy in that territory to pay a claim.

Companies should pay particular attention to their D&O exposure in India, China, Australia, South Africa and the Netherlands, which Chubb calls the top five D&O liability hotspots. China and India are hotspots because there is a global appreciation for anti-corruption and bribery, and each has a history of being exposed to business transactions involving bribes, Holloway said.

“China wants to absolutely rule out any bribery or corruption dealings that go on, which some large pharmaceutical companies have discovered first-hand. It is making examples of not just the companies, but of the individuals that run these entities in China,” he added. “China and India are big hotspots, because they are both territories where your master policy in the UK wouldn’t pay your claim, so you need to have a policy on the ground to pay it.”

Australia, South Africa and the Netherlands are in the top five because of the rise of investor activism in these countries. Class actions used to be limited to the US and to some extent Canada, but the phenomenon is now moving elsewhere.

“In Australia, laws are being changed that now allow for classes of investors to make a claim. More importantly, litigation funding is quite rife in Australia. So we’re seeing third-party companies that will pay for investors to bring a claim in return for a percentage of the awarded damages.”

In South Africa and the Netherlands, classes of shareholders can also be brought together. Due to regulatory changes in the US, countries like the Netherlands can take a claim out of the US and have it heard in a Dutch court. There have been some high-profile cases recently where the settlements have taken place in the Netherlands.

The UK too could potentially see its first class action soon, as Tesco faces damages claims over its accounting black hole and Volkswagen over its emissions scandal. Additionally, shareholders of Lloyds Bank have filed compensation claims over the bank’s takeover of HBOS in 2008, arguing that Lloyds failed to fully disclose the perilous state of HBOS’ finances to its shareholders.

“The UK Companies Act allows for classes of investors to come together, but there were so many hurdles that we’ve not actually seen that take place,” said Holloway. “But now we’ve got these major cases bubbling away in the background. And if those classes come together and get paid out, does that mean we’ll see a raft of that coming through?”

Now that class actions are expanding outside of North America, corporates are no longer able to ignore these exposures, even if they are not present in the US. “There are probably more hurdles in place in these other territories and it is not as easy to bring a claim as it is in the US, but class actions in these countries are still effective and we’re already seeing losses and settlements taking place.”