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Directors’ & Officers’ Liability, Risks and Insurance Update – September 2017


  1. 1 There have been several major developments over the last year relevant to D&O liability.
  2. 2 The Commonwealth Government presented its insolvency law reforms to Parliament on 1 June 2017, which introduces (among other things) safe harbour protections for company directors for liability arising from insolvent trading.1 The protection will apply to certain debts incurred if, after suspecting insolvency, the directors pursued a course of action reasonably likely to lead to a better outcome for both the company and its creditors, when compared to a formal insolvency appointment (such as administration or liquidation). If the course of action is no longer viable, the director must adjust the course of action or put the company into administration or liquidation. This means that directors will need to continuously re-assess their position, to ensure that they are satisfying the objective tests required under the safe harbour protections. The Senate Economics Legislation Committee has recommended that the bill be passed, with the legislation intending to take effect in early 2018 (if enacted).

Class Actions and Shareholder Activism

  1. 3 This year marked the 25th anniversary since the introduction of the first class action regime in Australia. Much has changed since then, with Australia now becoming the second most attractive jurisdiction for class action litigation after the United States.
  2. 4 Over the past year, the securities class actions against Allco and Billabong were settled. An in-principle settlement has been reached for the Slater & Gordon class action commenced by Maurice Blackburn. Shareholder claims against Bellamy’s and Spotless were commenced, while other existing class actions – including those against QBE – are ongoing. We have also seen a number of filed and proposed class actions investigating the merits of joining D&Os, including those against Dick Smith, Murray Goulburn and Quintus. While shareholder actions against seven entities were filed over the last year, there has been an increase in the number of multiple, competing class actions being brought by different law firms, with the Bellamy’s, Surfstitch and Slater & Gordon class actions being notable examples.
    Growth in number and breadth
  3. 5 It has regularly been predicted that there will be a sustained and significant increase in the number of class actions filed each year, especially following the GFC. However, the empirical data tends to demonstrate that the growth during this period has fluctuated and, at least in recent years, has been relatively constant. The following graph, drawn from data contained in a recent academic survey undertaken by Professor Vince Morabito, depicts the number of class actions filed each year in Australia since 1992. This graph disputes earlier concerns that there would be an avalanche of class action litigation being commenced after the GFC.

Growth: Fact or Fiction? – Australian class actions filed (by year)2

  1. 6 As the accompanying bar charts also reflect, there has been a growth in the breadth and type of class actions being filed (particularly with consumer claims). Again however, not a significant growth.

    Growth: Fact or Fiction? – Nature of class actions filed in 2014 v 20163

    Expansion in funding
  2. 7 We have also seen funders and law firms seeking to pursue a wider variety of claims, beyond securities class actions. This includes mass consumer actions, environmental claims and product liability matters. For instance, we are currently involved in defending class actions against corporations concerning damage caused by a bushfire, and another relating to consumer leases.
  3. 8 A number of new local and overseas litigation funders have also entered the funding market over the last year, bolstering the ranks of the established players (such as IMF Bentham, ILFP and Harbour Litigation Funding). These new entrants include, for example, JustKapital Litigation and Galactic Litigation Partners. The growth of litigation funding has been extraordinary – between 2012 and 2017, around 55% of class actions filed in the Federal Court were backed by a litigation funder.4 However, as a result of controversies surrounding matters where lawyers and litigation funders have obtained a large percentage of settlement proceeds, the Victorian Law Reform Commission has been asked to review litigation funding practices in Victoria, and is due to report by March 2018. Courts have also indicated that they will apply greater scrutiny in the settlement approval process, and may refuse to approve settlements. Common fund consequences
  4. 9 As many of you are aware, a significant legal development last year was the landmark decision in Money Max v QBE (Money Max).5 Given its significance to the litigation funding market, its impact is worth noting. To recap, the Full Federal Court made a “common fund” order whereby all class members would contribute a percentage of any money received from a settlement or judgment, as a commission, to the litigation funder. This was irrespective of whether a class member had entered into a funding agreement. The Court in March 2017 made its first common fund order in the Allco settlement decision, where the litigation funder received 22% of the settlement sum.6
  5. 10 It had been predicted that Money Max would trigger a significant growth in class action claims, as funders could now seek to obtain a commercial return from all class members, rather than from those who had signed up with the funder. It is also expected to encourage a race among law firms to file proceedings, with the possibility of more competing class actions being commenced. It remains to be seen whether this prediction will come to fruition, especially as the Court is gradually developing the law on this matter. What also needs to be borne in mind is that the Money Max decision introduced an element of uncertainty for funders, as their absolute power to set a commission rate, in effect, has been compromised by this decision. Funders are also handicapped by and are quite open about the fact that they are required to operate a business model in which a prospective matter ordinarily must have a high chance of success, before they will fund a case.7

Regulatory Activism

  1. 11 We have seen continuing regulatory activism (both locally and globally), with a particular focus on corporate culture and bribery and corruption. There has been increased activity by ASIC, after additional funding was announced by the Government in 2016, and it is expected that this would continue with the introduction of the industry funding model, which came into effect on 1 July 2017.
  2. 12 ASIC has indicated that a key surveillance and enforcement focus for 2017 will be corporate culture and conduct, in light of recent scandals in the financial services industry. Corporate culture can now give rise to corporate liability for the newly introduced false accounting offences under the Criminal Code. 8 We expect to see further investigations by regulators into corporate culture over the next year, including in industries outside the financial services sector.
  3. 13 Bribery and corruption also continues to be a major focus for Australian regulators. ICAC remains active domestically in the white collar crime and corruption spheres, while ASIC, the DPP and AFP appear to have become emboldened by recently enacted (and proposed) antibribery reforms.9 The AFP are presently investigating 37 cases of foreign bribery and white-
    collar crime is reportedly taking up a growing amount of the AFP’s time.10 Further changes have also been mooted, in order to align Australia’s anti-bribery system with the US and UK models. These include the introduction of a “failure to prevent bribery” offence11 and deferred prosecution agreements.12 If these reforms are enacted, we expect to see a rise in the number of investigations being undertaken by the AFP, along with an increase in the number of prosecutions.
  4. 14 There also continues to be increased worldwide regulatory focus and cooperation in respect of taxation planning and the use of tax havens, particularly after the Panama Papers scandal. A recent landmark transfer-pricing decision against Chevron,13 resulting in a $300 million liability, plus other developments, will no doubt encourage the ATO to pursue additional transfer pricing cases against corporate groups in the future.
  1. 15 A development continuing to gather steam in 2017 is potential legal action arising from the management of climate-related risks, including physical risks and transition risks arising from a change to a lower carbon economy. This will have particular relevance for companies in the insurance and energy industries.
  2. 16 Following the ratification of the Paris Agreement in November 2016, Australian regulators have been increasingly vocal on climate related risks. In February, APRA warned that it was unsafe for companies (and regulators) to ignore risks, include climate related risks, just because there was uncertainty or controversy over it.14 In a Senate Committee hearing into climate risk disclosure held in March, ASIC stated that directors had a duty to consider and disclose climate risks. This follows on the back of a legal opinion issued by the leading silk, Noel Hutley SC, in October 2016 who concluded that climate change risks could be considered by a court as being foreseeable, and accordingly relevant to a director’s duty of care and diligence.15
  3. 17 It may be some time before we see a shareholder class action commenced in Australia on the basis of an alleged failure by a company to manage climate change risks, or misleading disclosures. However, recent examples in the US (including, for example, a class action commenced against Exxon Mobil) and UK suggest that the timing of this may occur closer than what most commentators are expecting.

Cyber Risk

  1. 18 Cyber risk will continue to be a key risk in 2017, as evidenced by the global ransomware cyberattacks which have occurred over the last few months
  2. 19 The Federal Government recently introduced mandatory data breach reporting reforms, which are expected to commence in February 2018.16 These reforms are likely to increase the spotlight on D&O accountability for cyber security issues, particularly in light of notable shareholder claims in the US which have alleged that directors breached their fiduciary duty and duty of care by not taking adequate steps to protect their company from a cyber attack.17 Entities regulated by the Privacy Act (including private sector organisations with an annual turnover of more than $3 million) will be obliged to provide notification to the Australian Information Commissioner and affected individuals, as soon as practicable, where it has reasonable grounds to believe that an “eligible data breach” has occurred. An “eligible data breach” happens where:
    • there is unauthorised access to, unauthorised disclosure of, or loss of, personal information held by an entity; and
    • the access, disclosure or loss is likely to result in serious harm to any of the individuals to whom the information relates.
  3. 20 Other than regulatory investigations, we may witness a growth in data breach class action claims brought by consumers and/or shareholders against companies and their directors, as a result of these reforms. These may include claims for negligence, breach of confidence or breach of continuous disclosure obligations, in respect of privacy or data breach incidents. Examples of high profile data breach class action claims commenced in the US include those made against Ashley Madison, Home Depot and Target. The mandatory reporting required under these reforms may also provide assistance to plaintiff law firms and litigation funders with their bookbuilding processes, in readily identifying affected individuals.

The D&O Insurance Market

  1. 21 While the D&O insurance market continues to evolve rapidly, Aon Risk Solutions (Aon) anticipates the market will harden, continuing from the sharp increase in premiums which have been noted this year.
  2. 22 Aon observes that aggressive pricing strategies over a number of years, brought about by an abundance of capital and competition from new entrants, has put the Australian premium pool under enormous pressure. Portfolio profitability has also suffered as a result of material claims activity, driven predominantly by shareholder class action claims, and insurers are now taking substantive corrective action.
  3. 23 Looking forward, Aon warns clients should expect to incur double digit rate increases on renewal of primary (or low) attachment A, B and C layers. In light of the deterioration of the market over the last month, Aon expects that Side C deductibles will also increase.
  4. 24 Policyholders are therefore likely to face tougher conditions at the time of policy renewal next year, with local D&O insurers potentially taking steps to:
    • increase premiums;
    • decrease policy limits provided under D&O policies, or demand sub-limits or the widening of exclusions for certain risks; and/or
    • not offer any coverage at all.
  5. 12 September 2017

    • 1 Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 (Cth).
    • 2 Morabito, An Empirical Study, July 2017, pp22-23.
    • 3 Based on various sources including Morabito, An Empirical Survey; KWM, The Review Class Actions in Australia 2014-2015; and KWM, The Review Class Actions in Australia 2015-2016.
    • 4 Morabito, An Empirical Study, July 2017, p33.
    • 5 (2016) 245 FCR 191.
    • 6 Blairgowrie Trading Ltd v Allco Finance Group Ltd (Recs & Mgrs Apptd) (In Liq) (No 3) [2017] FCA 330.
    • 7 Australian Financial Review, “Whatever the amount, SurfStitch class action will settle: they all do” (8 June 2017).
    • 8 See s 12.3 and Part 10.9 of Criminal Code.
    • 9 See, eg, Crimes Legislation Amendment (Proceeds of Crime and Other Measures) Act 2016 (Cth).
    • 10 Commissioner Andrew Colvin speech at National Press Club on 31 May 2017, taken from the “Foreign bribery cases tax AFP” Australian Financial Review, 1 June 2017 at page 6.
    • 11 Commonwealth Attorney General Public Consultation Paper, Proposed amendments to the foreign bribery offence in the Criminal Code Act 1995 (April 2017).
    • 12 Commonwealth Attorney General Public Consultation Paper, A proposed model for a Deferred Prosecution Agreement scheme in Australia (March 2017).
    • 13 Chevron Australia Holdings Pty Ltd v Commissioner of Taxation [2017] FCAFC 62.
    • 14 APRA, Australia’s New Horizon: Climate Change Challenges and Prudential Risk (17 February 2017).
    • 15 Centre for Policy Development and Future Business Council, “Climate Change and Director Duties” (7 October 2016).
    • 16 See Privacy Amendment (Notifiable Data Breaches) Bill 2016 (Cth).
    • 17 See, eg, the shareholder derivative lawsuits commenced against Target ( Mary Davis et al. v. Gregg W. Steinhafel et al. ) and Wyndham (Palkon ex rel. Wyndham Worldwide Corp. v. Holmes).