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Rising
Exposure of Directors and Officers and
Protection Against Civil Liability
Presented
at the Conference on Good Corporate Governance,
Bangkok,
Thailand
November 30-December
1, 1998
by
David
Lyman, Senior Partner
Tilleke & Gibbins
Good
morning.
I have been asked to brief you in the next
1¼ hours on the following topics:
A. Rising accountability and exposure of
directors and officers of companies.
B. Understanding directors’ and officers’ ("D&O")
insurance.
C. Why directors’ and officers’ insurance is vital.
D. Coverage provided under directors’ and officers’
insurance.
Before digging into the subject, I wish
to acknowledge several people who assisted in my presentation
by providing background information and responding to my many
questions on D&O insurance in Thailand:
1. Mr. Leighton Fowles, Managing Director
of Thailand Reinsurance Brokers Co., Ltd.,
2. Miss Atchaporn Nunjuntee of Royal and Sun Alliance Insurance
(Thailand) Ltd., and
3. Mr. David Sims of Lamancha Co., Ltd., insurance consultants
and brokers.
For purposes of this briefing, I have directed
my remarks exclusively to Thailand situations, companies and laws.
A.
Rising Accountability and Exposure of Directors and Officers
of Companies
As the
subject of "Responsibilities & Liabilities of Company
Directors" is being probed this afternoon by my colleague
from another law firm, thankfully I won’t have to start with
an in-depth study of that topic. But any comments about D&O
insurance don’t make much sense without establishing the
context in which this type of insurance applies. So, at the expense
of some overlap, let me set the stage of directors’ and officers’
legal liabilities in Thailand.
First, Thai law recognizes only directors,
representatives, managers, staff, employees, and agents of companies.
The offices of "President", "Vice President",
"Secretary", "Treasurer", "CEO",
"COO", "CFO", and even "Managing Director",
as well as their deputies, assistants, associates, etc., have
no grounding or recognition in Thai law. The titles are all honorific,
only describing by common usage where someone is or stands within
the hierarchy of an organization.
If directors are elected by the shareholders
of a company, where do "officers" come from? Remembering
that "officers" are not found or defined in Thai law
with a specified set of duties and responsibilities, they usually
are positions within a company created by the Board of Directors
with only those powers and duties expressly delegated to them
by the Board. So, which positions are deemed "officers"
is a matter of Board of Directors action, and as defined by the
issuer of D&O insurance policies.
Next, what is the source of defining the
responsibilities and duties of directors? The answer is open-ended,
but essentially one could say "from the law". The fundamental
general law governing private limited liability companies is the
"Civil and Commercial Code". Other laws for newer types
of juristic persons, i.e. all being creations of law, also detail
the responsibilities and liabilities of their directors. The Public
Limited Companies Act B.E. 2535 (A.D. 1992) is such an example.
Similarly, State Enterprises created by special laws cover such
issues in their "enabling" legislation. (Sorry for the
use of so many legal terms but they do have precise meanings.)
What are some of those responsibilities
and liabilities of directors? The details are lengthy and are
discussed in some detail in Attachment
I, being my 1993 paper entitled, "Legal
Liability of Directors under Thai Law". In general, directors
are charged by law and the Memorandum and Articles of Association
of a company with managing, administering and directing that company
and its affairs to meet the objectives of the company, having
a general duty of care to the shareholders. To achieve this purpose,
directors are given by law and the company’s charter an extensive
list of responsibilities, duties and powers. Each director must
exercise his or her powers honestly, and in the best interests
of the shareholders and the company. Directors must exercise the
judgment of careful businesspersons, and they should not put themselves
into positions whereby their duties and personal interests are
likely to conflict with those of the company or its shareholders.
The failure to properly execute those responsibilities
and duties could subject the individual offending directors to
a plethora of both civil and criminal liabilities and penalties.
That means the duty of care of directors is being extended to
cover third parties and the government as well as the shareholders
of the company.
The negligent performance or failure to
perform by a director of enumerated duties is also actionable,
usually at the civil court level, rather than criminal.
As to directors being criminally responsible
for their acts or omissions, some years ago, in 1993, my law firm
put together for the presidents of the Foreign Chambers of Commerce
for submission to the then Prime Minister and at his request,
a list of 51 special laws, generally regulatory in nature, which
contain criminal penalties imposed on directors, and others defined
in each law, for acts and omissions of themselves and of their
subordinate staff--the legal term for the latter is "vicarious
criminal liability". That list, in the form of an extract
from our law firm’s book entitled "Thailand Business
Basics", is enclosed with this paper as Attachment
II. I must stress that the list appearing in the Attachment
II list is not complete. There are bound to be some laws we overlooked.
In the time since we assembled this list, new laws and amendments
to existing laws have been added to the statute books expanding
the scope of both civil and criminal liabilities of corporate
directors and managers.
The more new regulatory and special laws
Thailand adopts to bring Thai corporate practices in line with
those of its neighbors and trading partners, the more openness
and accountability is being expected of company directors and
senior members of their staffs. The Public Companies Act of 1992
is an example. This law added a host of responsibilities and liabilities
on directors and representatives of public companies, considerably
exceeding those imposed on directors of private limited companies
under the Civil and Commercial Code and the Act on Offenses Concerning
Registered Partnerships, Limited Partnerships, Limited Companies,
Associations and Foundations B.E. 2449 (A.D. 1952), amended last
in B.E. 2535 (A.D. 1992).
The laws creating the Securities Exchange
Commission, the Stock Exchange of Thailand and the Rules issued
by these units add even more requirements and civil and criminal
liabilities on public companies listed on the Stock Exchange and
their directors and representatives.
The Stock Exchange of Thailand in December
1997 published a 120-page summary of "The Roles, Duties and
Responsibilities of Directors of Listed Companies". It is
comprehensive, clear and excellently written. I highly recommend
it to all company directors, officers, and shareholders, whether
or not the company under focus is listed or not, public or private.
"Transparency" and "accountability"
are the new buzz words of the 1997 Constitution and the Chuan
government. Those concepts are now being applied to corporate
governance as well as the public sector.
There is today, without question, rapidly
rising accountability and civil and criminal liability exposure
of directors and officers of companies.
B. Understanding
Directors' and Officers' Insurance
Insurance
is a form of protection to keep an insured financially whole in
the event of a loss from a risk covered by an insurer and stated
in the insurance policy issued by the insurer in exchange for
a fee called a "premium". Out of that simple non-legal
definition has grown a vast service industry covering commercial
and many other risks and providing consulting and financial services.
In Thailand, all insurance business is governed
by two principal laws: (1) The Life Insurance Act, and (2) The
Casualty Insurance Act. Directors’ and officers' liability
insurance falls into the latter class.
The purpose of D&O insurance is to protect
the individual directors and other insureds against legal liability
claims, judgments and costs arising from breach of contract, trust
or duty; any act; neglect; error or omission; any misstatement
or misleading statement, and breach of warranty of authority.
The policy may or may not protect the company as well as the individuals.
Because some companies have the power in their charter, they may
agree to indemnify and hold harmless directors and officers from
claims. To protect itself, the company might acquire a separate
type of insurance policy called a Company Reimbursement Policy.
Sometimes, the risks insured under this type of policy are incorporated
into a broader D&O policy. Practices obviously vary.
Perhaps more important to understand than
what risks are protected by D&O insurance is to thoroughly
understand what risks are not covered, i.e. the exclusions, and
conditions. For instance, few policies will cover fraud, dishonesty,
fines, penalties, deliberate criminal acts, etc.
C. Why
Directors' and Officers' Insurance is Vital
D&O
insurance took root in the U.S. earlier than anywhere else. This
was essentially because Americans are the most litigious of any
nationality on the planet. They love to sue to protect their rights
and recover damages for their breach. Those awards can sometimes
be very high. Many other common law countries, i.e. those with
a British heritage, such as the U.K., Canada, Australia and New
Zealand, soon followed the U.S. practices. Thailand, hasn’t
yet.
The U.S. also has "class actions" whereby a few people
damaged by the acts or omissions of a company can sue the company,
its directors and representatives on behalf of themselves and
other members of the class who were similarly injured. Thailand
does not yet embrace the "class action" concept.
The U.S. also adopted the legal concept of "piercing the
corporate veil" to break through the protective walls of
limited liability of shareholders for operating companies which
are just fronts or shells hiding the real activities of the company
which are usually undercapitalized and for the pecuniary benefit
of the company’s owners, directors or officers at the expense
of staff, third parties or the government. Thailand has not yet
adopted this legal weapon either.
There are few laws in Thailand which are
designed to aid and clear the way for injured persons to recover
damages from directors and representatives of a company.
The absence of these legal arsenals is part of the reason there
are few directors and officers liability cases in Thailand. Traditionally,
Thais prefer to avoid going to court, rather settling their disputes
in other ways.
With the risk of claims and directors being sued in Thailand being
so low, in the past only a very few companies and directors bought
D&O insurance coverage. For that matter no D&O policy
is yet written in Thailand, though Thai insurance companies will
ask their counterparts abroad to prepare such a policy in the
local insurance company’s name. The local insurance company
will service the policy and the insured, probably keep a piece
of the risk, and sell the rest on the reinsurance market, locally
and abroad.
As companies only act by and through their representatives, a
director’s personal liability is usually unlimited. All his
or her assets are at risk. While the company can hide behind the
protection of limited liability, the director cannot hide. The
director’s exposure increases while serving in publicly listed
companies, in companies or their subsidiaries having outside shareholders,
in joint ventures, when funding is raised from the public and
even from private offerings with placement to outside investors,
in mergers and acquisitions, major restructuring and sales of
assets and subsidiaries.
The importance of D&O insurance to the directors and representatives
depends on the value to themselves which they place on the defined
and covered risks. Since civil suits and substantial recoveries
in Thailand against directors and managers are still rare, the
risk could be considered low. Most multinational companies, because
of their exposure to suits brought in other countries for events
occurring in Thailand, will often carry blanket policies issued
overseas to cover all their subsidiaries and the directors and
officers thereof.
Today’s trend is towards insistence on more responsible corporate
governance. Media disclosures of poor corporate decisions and
management, aside from the corporate frauds and scandals, are
surfacing on almost a daily basis. Therefore, I believe we can
look forward to much closer scrutiny of the actions of company
directors and managers by the government, shareholders, current
and ex-staff, customers, suppliers, auditors, receivers, and other
third parties injured by the acts and omissions of directors and
managers. Hence, the demand for D&O insurance protection in
civil actions will probably increase.
Suits against directors and officers of companies in, say, the
U.S. or U.K., the costs, legal fees and claims paid are averaging
US$ 8,000,000 for cases settled out of court, and US$20,000,000
for cases litigated in court. At such levels, the average unprotected
director or officer could face personal bankruptcy.
D.
Coverage Provided Under Directors' and Officers' Insurance
This topic
has been covered in the discussions above. Essentially, D&O
insurance protects the insured people from legal liability arising
from a variety of civil wrongful acts, errors and omissions in
the course of carrying out their duties performed in the name
of or on behalf of the companies they serve. If the company indemnifies
the individual, that portion paid by the Company is not insured
under a D&O policy, i.e. no "double dip" or double
recovery.
The exclusions from coverage are numerous.
For example, the following are not acts which D&O insurance
will cover:
· dishonest or fraudulent act or omission,
· wrongful remuneration or profiting from abusing duties,
· maybe, the death or bodily injury to any person,
· loss or damage to both immovable or movable property,
· nuclear, toxic, explosive or hazardous waste caused damages,
· violations of environmental laws,
· unauthorized guarantees,
· risks which are unquantifiable, such as Y2K liabilities.
In any event, coverage will be limited to a maximum insured amount.
Coverage will be provided only if the act or omission occurred
during the validity period of the policy. The insured must abide
by all of the conditions of the policy or protection could be
denied.
Not only limited companies and their directors and officers could
benefit from D&O insurance. Without D&O coverage, the
leaders and office holders of non-profit and charitable organizations,
NGOs, unincorporated clubs or societies, foundations and associations
are equally unprotected against claims.
Historically, the risks of civil suits in Thailand against directors
and representatives are low. And when suits are successful, the
court-awarded damages are usually low. Thus, the costs of coverage
could exceed the value of the risks being covered. But things
could change in the future. Today, there is a choice to be made
considering all the factors touched on in this presentation, as
well as others I’ve missed.
Your attention has been appreciated. I’ll now respond to
your questions.
For
further information, please contact Mr.
David Lyman, Chariman & Chief Values
Officer, Tilleke & Gibbins (e-mail david.l@tillekeandgibbins.com).
©1998
Tilleke & Gibbins, Bangkok, Thailand
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