NOVEMBER 2005
Protecting directors from being sued
Recently the Government published its draft bill
on company law reform, following an initial white
paper in July 2002 and a prolonged period of
consultation. The bill proposes wide-ranging
reforms that address all areas of company law. For
the first time, the general duties of company
directors and the procedure allowing shareholders
to hold them accountable may be enshrined in
statute.
WHAT SHOULD I DO?
The proposed codification of directors’ duties is a
fundamental reform and the intended statutory
protection of shareholders' rights to pursue
directors may encourage more shareholders to
bring claims. Only time will tell but in the
meantime company boards should consider:
Whether any further action needs to be taken to
assess risk and to restrict any future liability;
AS A DIRECTOR OF A COMPANY, HOW WILL THE
NEW LAW AFFECT ME?
The concept of directors owing duties to the
company is nothing new - directors already have
established duties which have been built up by
common law. However, under existing law, it may
be difficult to establish that a director has acted in
breach of duty and for a shareholder to take legal
action, primarily because the directors' duties are
owed to the company as a whole.
The government’s proposals set out a statutory
statement of the general duties owed by directors.
These are wider than the existing duties and
include a duty to exercise independent judgment,
reasonable skill, care and diligence and a duty to
promote the success of the company for the
benefit of its members. This requires directors to
take account of a number of factors, including
interests of employees, relationships with
customers and suppliers and the impact of the
company's operations on the community and the
environment.
The scope of indemnities granted to directors
by the company. In April 2005, a new law was
enacted permitting (but not compelling)
companies to give much wider indemnities to
directors for liabilities to third parties and to
fund a director’s defence of civil and criminal
proceedings (see our bulletin of March 2005).
We have advised a number of companies
regarding the introduction of new-style
indemnities which are of greater benefit to its
directors; and
The level and scope of their directors' and
officers' liability insurance cover which may
make specific assumptions regarding the
indemnification provided by the company. We
have specific experience in analysing D&O
insurance policies, alerting companies to
potential gaps in cover and any scope for
insurers to avoid paying claims. We are
currently reviewing D&O policies for clients in
the run-up to renewal.
The draft bill also clarifies the procedure that
allows a shareholder, with permission of the court,
to pursue a director for negligence or breach of
duty, whether or not that shareholder was a
member of the company at the relevant time.
Kirkpatrick & Lockhart Nicholson Graham
LLP
ABOUT US
The Firm: Kirkpatrick & Lockhart Nicholson Graham
("K&LNG") became one of the largest Anglo-American legal
mergers in history on 1 January 2005. The firm has
approximately 1,000 lawyers who practice in offices located in
Boston, Dallas, Harrisburg, London, Los Angeles, Miami,
Newark, New York, Palo Alto, Pittsburgh, San Francisco and
Washington.
K&LNG represents entrepreneurs, growth and middle-market
companies and leading global corporations in every major
industry group. The firm is at once regional, national and
international in scope, cutting edge, complex, and dynamic.
The Insurance Coverage practice group at K&LNG offers an
international policyholder-oriented practice on behalf of
clients of all sizes. It has extensive experience in working with
over 100 companies and their boards in D&O insurance
matters.
Kirkpatrick & Lockhart Nicholson Graham has approximately 1,000 lawyers and represents
entrepreneurs, growth and middle market companies, capital markets participants, and
leading FORTUNE 100 and FTSE 100 global corporations nationally and internationally.
Members of the ERISA Fiduciary Group and their telephone numbers and email addresses are
listed below. For more information you may also visit our website at www.klng.com.
Jane Harte-Lovelace
Stuart Borrie
Robert Hadley
Alex Gibson
jharte-lovelace@klng.com
sborrie@klng.com
rhadley@klng.com
agibson@klng.com
+44 (0)20 7360 8172
+44 (0)20 7360 8153
+44 (0)20 7360 8166
+44 (0)20 7360 8245
www.klng.com
BOSTON DALLAS HARRISBURG LONDON LOS ANGELES MIAMI NEWARK NEW YORK PALO ALTO PITTSBURGH SAN FRANCISCO WASHINGTON
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Kirkpatrick & Lockhart Nicholson Graham (K&LNG) has approximately 1,000 lawyers and represents entrepreneurs, growth and middle market
companies, capital markets participants, and leading FORTUNE 100 and FTSE 100 global corporations nationally and internationally.
K&LNG is a combination of two limited liability partnerships, each named Kirkpatrick & Lockhart Nicholson Graham LLP, one qualified in Delaware,
U.S.A. and practicing from offices in Boston, Dallas, Harrisburg, Los Angeles, Miami, Newark, New York, Palo Alto, Pittsburgh, San Francisco and
Washington and one incorporated in England practicing from the London office.
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upon in regard to any particular facts or circumstances without first consulting a lawyer.
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© 2005 KIRKPATRICK & LOCKHART NICHOLSON GRAHAM LLP. ALL RIGHTS RESERVED.