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Directorsʼ and Officers' risks, liability and insurance Update - as at 2015 (December)

As you have probably noticed, over the last year various risks and liabilities have emerged for company directors and officers; as well as several other legal developments of note. In particular:

  1. Emerging risks
    1. There is heightened community activism and a resulting increase in regulatory action, corruption investigations, and securities class actions;
    2. cyber risks (which are emerging overseas); and
    3. developments in the regulation of white collar crime (and in particular the new policy position of the US DOJ).
  2. Liabilities
    1. We have conducted a review of major Australian D&O claims in the last 12 years (see below). This reveals several key ongoing risks and trends for Australian directors and officers; and
    2. developments in the litigation funding sphere – namely around “common fund” and ”bookbuilding” by funders.
  3. Insurance
    1. From our experience, the leading D&O policies of insurance have responded well to the emerging risks and liabilities presently being faced by companies, as well as the continuing flow of securities and other class action claims; and
    2. at the same time, the confluence of substantial claims and emerging risks under D&O policies of insurance is leading underwriters to review their appetite (capacity and pricing), approach, and the wording of their D&O contracts of insurance.

We provide below a summary of four specific developments in the insurance law area in 2015 which may interest directors and officers.

Detailed analysis

Emerging risks

  1. Activism. There is a global (and local) trend toward heightened community activism. This commercially translates into greater shareholder activism and expectations of proactive regulatory action and corporate accountability. For example:
    1. Regulators (and the governments that support them) are more active – perhaps even invigorated by the global financial crisis. More recent developments include: in Australia, ASIC’s ongoing investigations into Australia’s major banks around BBSW and Fx trading; overseas, the US DOJ’s September policy announcements which reinforce regulators’ attention on the personal liability, including criminal liability, of individuals involved in corporate wrongdoing;
    2. Ongoing focus on corruption, including foreign bribery and, in Australia, expropriation of assets and sovereign risk. By way of spot sample, we have recently been involved in a series of cases, including in the High Court of Australia, around a company's liability for the alleged corruption of its founding directors; as well as the previously unheard of instance of Swiss regulators, in conjunction with Australian police, pursuing an Australian expatriate executive in respect of a federal cartel/corruption inquiry; and
    3. Securities class actions remain a hot topic - although having now been around so long, they can't really be called a recent development. However, two decisions in the last year have proved to be a setback for litigation funding.
  2. Cyber risks. These can manifest as D&O claims (as currently occurs in the US) where it is alleged that directors breached their duty of care by failing to properly protect the company.

    The publicly notorious data breaches experienced by JP Morgan, Sony and many other companies have highlighted how cyber risks have become a major concern for corporations, as well as government and regulators. These risks are increasing, with major Australian public companies reporting constant attempted breaches. It is no longer a matter of if - just when and how a company will be subject to a major cyber breach.

    The risks are high for the corporation, as well as its Board and executive members. There are regular reports of not only “phishing” attempts, but also success, where an email is sent from a source purporting to be someone else – often a senior executive of the organisation – to someone in the organisation requiring a transfer of money or information. We have been involved in such a case where the target company was able to recover its loss from its insurer.

    In the US, there have been a number of cyber-related derivative actions, including cases against Target and Wyndham. These actions face a number of hurdles, including the business judgement rule. They are brought along the lines that the D&Os breached their fiduciary duty of care and wasted corporate assets by failing to take reasonable steps to protect customer information, implement sufficient controls and/or caused the company to conceal breaches from investors and customers.
  3. “White collar crime” – It is well recognised that the US trend of increasing regulatory action and claims around corporate crime and losses, will be repeated in Australia. When, however, is more uncertain.

    On September 9, 2015, the US Department of Justice (“DOJ”) issued a new and tougher policy memorandum for dealing with “white collar criminals”. 1 Amongst its key recommendations were:
    1. “To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.” As the Yates memorandum notes:

      "The rules have just changed. Effective today, if a company wants any consideration for its cooperation, it must give up the individuals, no matter where they sit within the company. And we’re not going to let corporations plead ignorance. If they don’t know who is responsible, they will need to find out. If they want any cooperation credit, they will need to investigate and identify the responsible parties, then provide all non-privileged evidence implicating those individuals. . . .There may be instances where the company’s continued cooperation with respect to individuals will be necessary post-resolution"2

    2. “Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.”3 The rationale is clear:

      "This guideline represents a significant break from the current DOJ practice of focusing on the actions of corporations, rather than individual employees. It serves as a reminder that fear of individual prosecution can be potent motivation to tell the truth in hopes of receiving credit for cooperation."4

    3. “Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.”5
    4. “Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.”6
    5. As the Yates Memorandum explains, meritorious civil suits will now be pursued even if the individual is unlikely to be able to satisfy a substantial money judgment.7 As a result, there will likely be a marked increase in civil enforcement actions. As Yates explained, a civil judgment can indeed be a powerful deterrent.8 The government will not only seek all available assets to satisfy the judgment, it will impact the ability to find future employment.9"

    The contrast with Australia is stark. The DOJ has recovered billions of dollars in settlements, yet the DOJ by the Yates memorandum, is seeking to “change corporate culture.”10. Conversely in Australia, the Chair of ASIC Greg Medcraft described Australia as “soft on crime” – with much ensuing controversy. Still, press reports indicate that almost all submissions to the current Commonwealth of Australia’s Parliamentary Foreign Bribery Inquiry are to the effect that this area "needs major reform.”11

    The focus in Australia arises not only from the prosecution of the former chairman of the Australian Wheat Board, but other alleged cases of foreign bribery involving Leighton, Reserve Bank / Securency and BHP (amongst others). A survey by Deloitte found one-third of companies operating in high risk destinations like Asia, Africa and the Middle-East, had uncovered bribery or corruption incidents over the past 5 years.

    What, if any direction, Australian reform will take, is guesswork. Submissions to the Parliamentary Foreign Bribery Inquiry included: (a) an enforcement approach akin to the UK Bribery Act, in which a company at which corrupt activity has occurred is automatically liable, unless it can show a culture of anti-corruption culture; and (b) a return to where we started, the effective (perhaps past) US system of deferred prosecutions, where a deal is struck between the regulator and the company, often with substantial fines being paid and a “period of good behaviour”.


The following table sets out major litigation over the last 12 years (which is a matter of public record). Each action has either involved company directors or officers as parties to the litigation (denoted by an *) and/or could have concerned the company Board and/or executives, given its nature and circumstances:

Date Name Claim Outcome Claim Details
Claimed Paid
2003 GIO   [$600m] $112m   S Misleading representations – acquisition. Insolvency.
2006 Harris Scarfe   [~$70m] $3m * S Securities class action – misleading or deceptive conduct re financial reporting, continuous disclosure. Insolvency.
2007 Telstra   [$300m] $5m   S Securities class action – continuous disclosure, past expenditure and revenue forecast.
2008 Aristocrat   [~$396m] $144.5m   S Securities class action – continuous disclosure, profit downgrade.
2008 Downer EDI   [~$100m] ~ $20m   S Securities class action – continuous disclosure, profit downgrade.
2009 Sons of Gwalia   [LIQ$800m] $70m * S Continuous disclosure, misleading or deceptive conduct inducing purchase of shares. Insolvency.
2010 AWB   [~$100m] $39.5m * S Securities class action – continuous disclosure, business risk. NB – Flugge
2010 Multiplex   [~$300m] $110m * S Securities class action – continuous disclosure, misleading or deceptive conduct, profit downgrade.
2011 GPT   [~$100m] $70m   S Continuous disclosure, profit downgrade.
2011 Gunns Ltd   [$75m] Stayed (*) O Continuous disclosure re profit downgrade
2011 Oz Minerals   [~$187.5m] $60m   S Securities class action – continuous disclosure re debt position.
2011 Babcock & Brown   [$158m] $40m * S Wrongful dividend payment. Insolvency. Note that a similar claim was later made against the Company and was unsuccessful at trial in 2015
2012 Centro   [~$1bn] $200m   S Continuous disclosure re debt position.
2012 Nufarm     $46.6m   S Securities class action re profit downgrade.
2012 James Hardie     $35m * DC (Jackson) Royal Commission, ASIC prosecution.
2012 NAB   [~$450m] $115m   S Securities class action – continuous disclosure re business risk.
2012 Sigma     $57.5m * S Securities class action - continuous disclosure as part of rights issue, profit downgrade.
2012 Transpacific     $35m   S Securities class action – continuous disclosure, profit downgrade.
2013 GPT     $75m   S Securities class action - continuous disclosure, profit downgrade.
2014 One Tel   [$244m] $40m * S Directors’ duties, rights issue. Insolvency.
2014 Asahi/PEP   [~$500m] $199m   S Misleading conduct re acquisition.
2014 Leighton     $69.45m   S Securities class action – continuous disclosure, misleading or deceptive conduct.
2014 Victorian Bushfires     $494m   S Negligence class action, breach of statutory duty, nuisance.
2014 ABC Learning   [$450m] UD * S Directors' duties, convertible note. Insolvency.
2015 BHP     $31.6m   S Foreign bribery. SEC prosecution.
2015 Securrency         O Foreign bribery and corruption. AFP prosecution.
2015 Flugge (AWB)       * O Director's duties. ASIC prosecution.
2015 Worley Parsons   [$50m]     O Securities class action – misleading or deceptive conduct – profit guidance
2015 Forge Group   [LIQ$800m]     O Misleading and deceptive conduct, continuous disclosure re profit downgrade. Insolvency.
2015 Hastie Group   [LIQ$503m]   (*) O Continuous disclosure re profit downgrade claim being investigated. Insolvency.
  • Index
  • * = Directors and officers joined to action
  • (*) = Merits of joining D&O being investigated
  • S = Settlement
  • J = Court Judgment
  • DC = Defence Costs
  • O = Ongoing
  • UD = Undisclosed
  • Class Action
  • [$ ] = Amount initially claimed
  • [LIQ$ ] = Understood amount owing following collapse (where claim amount unknown)

Several aspects jump out from this table of recent litigation/losses:

  1. Securities class actions make up over half of significant Australian claims and losses (i.e. $50m+) over this period;
  2. The number of material class action claims has not increased as much as is often portrayed in the press. Nevertheless, class actions remain the major liability risk for companies and their directors/officers;
  3. A company going into liquidation, almost inevitably invites scrutiny, if not public examination and class actions for recovery. "Insolvency" is therefore the next most common form of claims against directors and officers and their insurance. Sadly this is not surprising, for D&O insurance is often the only asset worth accessing amongst the corporate rubble of a financial collapse; and
  4. Corruption and bribery claims are increasing, much along the lines speculated about in the press and other corporate commentary.

In the class action sphere, there have been two important developments over the last year, both involving litigation funding and both providing some welcome news for defendants (but not plaintiffs and litigation funders):

  1. Common fund application – Class actions can proceed by way of open or closed class. Open class describes a class action which includes all people who fall within the definition of the class members (unless they opt out). A closed class is a description of a limited class of people e.g. people who have elected to join – "opt-in". In this context, it is usually a closed group of people within the class of people affected by the conduct who have signed (opted in) with the litigation funder who is funding the class action.

    Both open and closed classes are recognised in Australia. The practical reason and importance of the distinction is that it is much easier (and broader) to seek recovery for all people affected by the conduct complained about, unless they seek to opt out. However, this does not work for a litigation funder. This is because a litigation funder can only recover from those class members who have signed on to pay the litigation funder a proportion of any recovery. Accordingly, many funded class actions are run as a closed class action, so the funder can be assured of recovering their costs and investment return.

    A solution to this problem is for litigation funders to seek the best of both worlds – an open class action subject to mandatory deduction of an approved proportion for litigation funding expenses (often described as a "common fund"). In the case of Blairgowrie Trading Ltd v Allco Finance Group Ltd (Receivers & Managers Appointed (In Liq) [2015] FCA 811 the Applicants financed by a litigation funder, International Litigation Funding Partners Pty Ltd (ILFP) filed an application on 8 May 2014 which sought:
    1. the Court's approval that the amounts payable to ILFP under the existing funding agreement are reasonable; and
    2. a declaration that the Applicants are entitled to pay these amounts out of any sums recovered, should the Applicants be successful in obtaining a settlement or an award of damages.

    Under s 33ZF of the Federal Court of Australia Act 1976 (Cth) (FCA Act), the Court has general power to make any order it deems appropriate or necessary to ensure that justice is done. The trial judge (Wigney J) held at pp.55 – 56 (dot points inserted for ease of reference):

    • "The main consideration in this context is the lack of available information, or the insufficiency of the Applicants' evidence on this application, to enable the Court to determine the implications of making the proposed order.
    • There is no clear indication of the number of group members who would be affected by the making of the proposed order. There is no indication of the value or the potential claims of the group members and therefore no way of even estimating the total value of the damages claims in question.
    • There is therefore no way of even estimating the amount of the commission that the Court is asked to approve as reasonable consideration payable to ILFP. It may fairly be inferred, however, that the potential commission payable to ILFP, if the proposed order is made, could run into the tens if not hundreds of millions of dollars, even if the matter settles at an early stage. There is no evidence as to the likely length and complexity of the trial, though it can fairly be inferred that the trial, if contested to its conclusion, will be lengthy, complex and costly. That said, there is no way of accurately estimating the legal costs that the Court is asked to approve as reasonable.
    • In all the circumstances, even if the Court's discretion to make an order under s 33ZF (or s 23) was enlivened, it would not be appropriate to exercise that discretion in favour of making the order at this stage of the proceeding.

    Although a setback for litigation funders and the concept of a “common fund arrangement", the Allco decision kept this possibility open, either later in the proceedings and/or through potential legislative reform. The judgment expressly noted that this decision did not mean that "the common fund" order sought "cannot, or will not, ever be made in any representative proceedings under Pt IVCA of the FCA Act." – per Wigney J at p. 56.

  2. Plaintiffs (litigation funders) efforts to “book-build” – Most litigation funders will not commit to funding until they have reached a specified point or number of class action members. (This is prudent, so as to be sure that the risk return warrants investment in the class action litigation. What is often referred to as the “book-build” stage). Whilst this book-build can take some time, the plaintiff lawyers and/or class action applicants and/or litigation funders are still anxious to commence legal proceedings, with all the attendant publicity such a step usually attracts. A timing tension therefore often arises.

    In March 2014, the plaintiff lawyers, ACA Lawyers, issued a media release, "Shareholder Class Action Against Iluka Resources", stating that it had obtained funding to commence a class action proceeding against Iluka on behalf of shareholders who have sustained losses. The press release stated that the class action would allege that Iluka failed to comply with its continuous disclosure obligations and engaged in misleading and deceptive conduct for investors who purchased shares between 8 May 2012 and 8 July 2012.

    Subsequently the lead plaintiff – Mr Bonham – made an application for preliminary discovery. Under the Federal Court Rules 20111 (Cth), the Court considers the following relevant factors in a preliminary discovery application:
    1. the existence of a reasonable belief in a right to obtain relief in court;
    2. the making of reasonable inquiries directed to obtaining sufficient information to decide whether to start a proceeding in the court to obtain that relief;
    3. an insufficiency of information to enable that decision to be made;
    4. the existence of a reasonable belief that the prospective respondent has or had, or is likely to have or have had, documents:
      • that are directly relevant to the question whether the putative right to relief exists; and
      • whose inspection would assist in making a decision whether to start a proceeding in the court to obtain that relief.12

    In the decision of Bonham v Iluka Resources Limited [2015] FCA 713, this application was dismissed because:

    "there was no evidence that the prospective applicant had a personal belief that Iluka knew or ought to have known of the circumstances which led to the downgrade.”

    Kerr J held that the beliefs of the applicant's solicitors were not enough. When an application for preliminary discovery is made, the prospective application must personally believe that they have a right to obtain relief – in Mr Bonham's case this was necessary to give credence to the proposition that other shareholders or investors may have held the same belief.13"

    Notably Kerr J went on to criticise the applicant's solicitors for seeking preliminary discovery (to assist in deciding whether to commence proceedings) while at the same time making statements in the course of the "book-build" process to the effect that they had already decided to commence a proceeding.

    • 12 Federal Court Rules 2011 (Cth), r. 7.23. A similar provision appears in r. 32.05 of the Supreme Court (General Civil Procedure) Rules 2005 (Vic)
    • 13 Bonham v Iluka Resources Limited [2015] FCA 713 at [151-152] oer Kerr J, following the reasoning of Perry J in ObjectiVision V Visionsearch [2014] FCA 1087 at [35]/


There were a number of developments in the insurance law area in 2015, some of which include:

  1. Insurer prevented from forcing (some) class action members to opt outin Johnston v Endeavour Energy [2015] NSWSC 1117, an “open” class action was commenced on behalf of individuals who had suffered injury or damage to property in the 2013 Blue Mountains bushfire. Some of the properties destroyed were covered by insurance. The insured properties were not covered for their entire value. One insurer determined, without consulting the (over 500) insureds, to file “opt out” notices on their behalves, removing the insureds from the class action. The insurer sought to do so in order to join the insureds to the insurer’s own class action. The insureds learnt of the opt out notices after they had been filed. The lead plaintiff in the original class action sought a declaration that the opt out notices were invalid.

    Justice Garling held, first, that because the insurer had not fully indemnified the insureds, it did not prima facie have the right to control recovery proceedings for the insureds. However, this conclusion could be varied by policy wording assigning the insurer the right to take actions against third parties. The Judge sorted the policies according to which conferred this right on the insurer. The Judge held that in the remaining cases the opt out notices were invalid. The Judge also sounded a warning to the insurer whose opt out notices were affirmed. The Judge observed that, because the insurer had not indemnified the whole of the insureds’ loss, it had (perhaps, heightened) obligations to the insureds, including but not limited to obtaining the insureds’ consent before settling their claims.
  2. The High Court deals a double blow to insurers You would recall the liability insurance crisis of the 1990s. Identified as a cause of the crisis was the ability, under Australian law at the time, for a claimant to choose the defendant with the “deepest pockets” and seek all of the claimant’s loss from that defendant, despite the involvement of others. In response, Australian Parliaments passed “proportionate liability” regimes, allowing defendants to reduce their liability by referring to the involvement of others. These schemes apply primarily to claims of negligence, contractual breach, and misleading or deceptive conduct. In Selig v Wealthsure Pty Ltd [2015] HCA 18, the High Court took a restrictive view of the schemes, such that a claimant who had suffered loss as a result of misleading or deceptive conduct was permitted to claim the whole loss under a different legal avenue referable to the same loss. As such, the claimant sidestepped the operation of the proportionate liability scheme. This opens the door for other claimants adopting this tactic to target “deep pocketed” (ie, insured) defendants from whom to recover the whole of their loss.

    The main losing party in the High Court was a financial adviser who, at the time of the appeal, was bankrupt. The appeal to the High Court, and the appeal preceding it, were controlled by the adviser’s professional indemnity insurer. The High Court ordered that the insurer was to pay the successful parties’ costs of both appeals. This was despite the insurer not being a party to the proceedings.
  3. Terrorism and insurance2015 was sadly another year of terrorist attacks. In January, Joe Hockey declared that the Lindt Café siege was a “terrorist incident”. This sparked a debate in some circles as to whether this was a crime or a terrorist attack, and what if anything the difference was. In insurance circles it was observed that this was in fact the first occasion where such a declaration had been made, triggering the operation of the Terrorism Insurance Act 2003 (Cth). What the declaration meant was that insurers were prevented from relying on terrorism exclusions in property insurance policies. This scheme is supported by a reinsurance scheme operated by the Commonwealth which can provide up to $13.6b to insurers who have been required to pay claims as a result of a declaration.
  4. Major shareholder exclusion applies to deny indemnity for class actionWe are often asked to review D&O policies on behalf of companies and their directors. These reviews, and the negotiations with insurers that typically follow, can seem overly technical and obstructive. OZ Minerals v AIG Australia [2015] VSC 185 illustrates the importance of sweating the detail in D&O insurance.

    In OZ Minerals, Company X and its directors engaged in certain conduct. Company X was then acquired by Oz Minerals through a Scheme of Arrangement. A class action was commenced against OZ Minerals, based on asserted continuous disclosure breaches in respect of the acquisition of Company X. Most of the alleged breaches went to the operations of Company X, and OZ Minerals sought to attribute liability for the class action to Company X and its directors. Company X’s D&O Policy included a clause excluding claims by shareholders holding 15%+ votes and with a nominee director on the Board of Company X. This exclusion was not satisfied at the time of the alleged conduct, but due to the acquisition, was satisfied at the time of the claim. The Court held that the wording of the exclusion was such that it would exclude claims by substantial shareholders at the time of the conduct, and would also exclude claims by substantial shareholders at the time of the claim. The exclusion applies if its terms are satisfied at either of those times. As such, the claim was excluded. This decision was affirmed on appeal: OZ Minerals v AIG Australia [2015] VSCA 346, This shows the importance of negotiating clauses such as major shareholder exclusions (which are regularly the subject of scrutiny in our reviews).