Directors’ Duties, Responsibilities and Companies … codified duties of directors (a) Act in good...

Directors’ Duties, Responsibilities and Companies Act Restrictions on Exemptions and Indemnities

5th October 2016

Dr Thomas B Courtney, FCIS, Partner

Contents of Presentation

1. Directors’ responsibilities and liabilities

2. Directors’ fiduciary duties under section 228

3. Remedies against directors for breach of duties

4. Restrictions on exemptions and liabilities

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Section 1:

Directors’ Responsibilities and liabilities

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Directors’ Responsibilities and Liabilities

• Directors’ responsibilities arise under three broad headings which can give rise to :– Criminal sanctions;

– Administrative sanctions; and

– Civil liabilities

• Although main focus of today is on civil liabilities, it is important to note in passing that no indemnity or insurance can prevent a court from sending a director to jail or from restricting or disqualifying a director.

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• Directors criminal liabilities arise under:– The Companies Act 2014; and– Almost every other enactment that creates an offence.

• Criminal liabilities of directors under the Companies Act 2014 arise under two broad headings:– Where an act or omission by a director is expressed to be a

criminal offence; and– Where an act or omission by a company is expressed to be an

offence by the company or by any officer in default.– Section 270 defines “officer in default” as being an officer who

“authorises or who in breach of his duty as such officer, permits the default mentioned in the provision”

– Section 271 creates a presumption that where it is proved that an officer was aware of the basis facts concerning a default, that the officer permitted the default unless s/he can show that s/he took all reasonable steps to prevent it or that by reason of circumstances outside of the officer’s control, was unable to do so.

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• Criminal liabilities of directors under other enactments arise because virtually every enactment that creates an offence will legislate for where that offence is committed by a “body corporate” of which a company registered under the Companies Act 2014 is an example.– Enactments such as the Health & Safety Acts, the Data

Protection Acts, the Competition Acts, etc all allow company directors to be prosecuted where certain circumstances are proved

– This is despite the fact that the person who commits the primary offence is a company which is a separate legal entity

– An example would be: “Where an offence is committed under this Act by an body corporate and the act or omission that constituted the offence is attributable to the consent, connivance or approval of or to be attributable to any neglect on the part of a person being a director, manager, or other similar officer of the body, or a person who purports to act in any such capacity, that person as well as the body shall be guilty of an offence”

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• The Companies Acts provides for categories 1 to 4 offences as well as three “super offences” which involve fines and terms of imprisonment;

• Directors can also be made subject to restriction orders and disqualification orders.

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Section 2:

Directors’ Fiduciary Duties under s 228

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Directors’ duties and obligations

• Part 5 of the Companies Act concerns directors’ duties

• The stated approach was to codify and consolidatedirectors’ duties and not re-engineer, add to or increase them

• Key provisions in Part 5:

– Codification of fiduciary duties

– Introduction of a directors’ compliance statement

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Directors’ duties and obligations

The codified duties

• The Act sets out 8 principal fiduciary duties of directors, which are owed to the company (and the company alone).

• Breach of duty shall not, of itself, affect the validity or enforceability of a contract or transaction but this is without prejudice to the liability of a third party who is an accessory to a breach of duty

• The duties are based on certain common law rules and equitable principles and are to be interpreted and applied in the same way as the common law rules or equitable principles and regard shall be had to them

• This has given comfort that the duties are not “new” but rather, a restatement of existing law

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The codified duties of directors

(a) Act in good faith in what the director considers to be the company’s interests;A subjective duty; allows two directors to hold diametrically opposing views as to what is in the company’s interests. (b) Act honestly and responsibly in the company’s affairs;Similar to the duty to exercise skill, care and diligence. Can be seen as “new” in the sense that it comes not from common law but the statutory test to avoid being restricted where company is insolvent(c) Act in accordance with the constitution and exercise powers only for lawful purposesImportant that all directors observe the constitution, but there is an additional dimension for directors of DACs and other companies with objects clauses who have a duty to observe any limitations on their powers (e.g. section 973(3) in the case of DACs)

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(d) Not use company property for own or others’ use unless approved by members or in the constitutionReflects the common law position; although a strict literal interpretation could include de minimis usage (e.g. mobile phones, etc), so a clarifying provision might be put in constitution(e) Not to fetter discretion unless permitted by constitution or entered into in the company’s interestsReflects the rule that fiduciaries cannot agree to restrict their power to exercise an independent judgment but that it can be restricted in good faith and in the company’s interests. (f) Avoid conflicts of interest unless released by members (under the constitution or by resolution)Directors are required to avoid situations in which their duty to the company and a director’s other (including personal) interests may conflict

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(g) Exercise care, skill and diligence (subjective test)

Employs a quasi-objective-subjective standard. Regard must be had to the knowledge and experience that may reasonable be expected of a person in the same position as the director and with the director’s actual knowledge and experience.

(h) Have regard to interests of members and employees

– Regard to employees’ interests is required by section 224; regard to members’ interests is required by section 228(1)(h)

– However, the duty to have regard to their interests is owed to the company and so can only be enforced by the company

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Section 3:

Remedies against Directors for Breach of Duties

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Remedies against Directors for Breach of Duties

• The CA 2014 not only codified duties, but so too did it codify the common law and equitable remedies of indemnity and account for breach of duty.

• Section 232(1) provides where a director acts in breach of s 228(1)(a), (c) to (g) (note exclusion of (b) and (h)) he or she shall be liable to account to the company for any gain and to indemnity the company for any loss or damage.

• Directors and persons connected can also be made to account and indemnity where there is a breach of ss 238 or 239 (substantial property transactions, loans, etc to directors, etc) (s 232(2))

• Same applies to payments in the nature of compensation for loss of office, etc, in ss 251 and 251 (s 232(3)).

• The foregoing are expressly without prejudice to the company’s right at common law to claim damages for breach of duty or to seek equitable relief (s 232(5)).

• A director can be granted relief in respect of a claim for negligence, default or breach of duty where s/he can convince a court s/he acted honestly and reasonably (s 233)

• Relief can also be sought where there is an anticipated claim (s 234)

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Section 4:

Restrictions on Exemptions and

Indemnities

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Restrictions on Exemptions and Indemnities

• Any provision (in a constitution or contract) purporting to exempt or indemnify an officer from or against any liability which would attach in respect of negligence, default, breach or duty or trust is void (s 235(1))

• Provided, a company can indemnity an officer against any liability incurred in defending proceedings (civil or criminal) in which judgment is given in the officer’s favour OR in connection with any proceedings or application for relief under ss 233 or 234 (see previous slide).

• The essence of the prohibition is that a company cannot be bound by such a provision: a company could, voluntarily, agree to pay an officer’s costs where in the company’s interests, or (subject to s 239) make a loan to directors to fund their defence.

• Officers can also get indemnities from other group companies freed from the constraints of s 235.

• And, of course, officers can also benefit from insurance in respect of any liability for negligence, default, breach of duty or trust (s 235(4)).

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ICSA: The Governance Institute

D&O Insurance

Gregory Glynn, Partner and Head of Litigation and Dispute Resolution, Arthur Cox

05/10/2016

Introduction: 3 Cases

| ICSA: The Governance Institute - D&O Insurance34

1. D&O Cover for

– US – DoJ

– US – SEC

2.D&O Cover just SEC

3. No D&O Cover

4.D&O Insurance – things to consider

Case 1: US DOJ Criminal

35 | ICSA: The Governance Institute - D&O Insurance

1. Story

United States of America (Department of Justice) -v- Jerry ShanahanLocation : Concord, New Hampshire, US

Background :�JS initially worked in Irish subsidiary�Then took up a 2 year assignment to parent in the

US and was promoted to COO�JS and family returned to Ireland�JS obtained a new job with a different US company

and was promoted accordingly

36 | Case 1: US DOJ Criminal

Sequence

• Indicted on the normal following charges:I. Securities FraudII. Mail FraudIII. Wire FraudIV. False SEC pricing V. Lying to AuditorsVI. Falsification of Corporate Books and RecordsVII.Conspiracy

�Voluntarily travels from Ireland to the USA to attend his arraignment in the US (very unusual)


Unique Points

• JS non-US national

• JS not living in the US

• During trial it was established for the court that there were no such other US cases of a non-national travelling voluntarily to the US to attend a criminal trial

• Court denied our request that this information be made known to the jury


Sequence Cont.

• US Trial begins in Concord, NH5 week trial

� Jury verdict in December; acquitted on 1 count; hung jury on 5 remaining counts – 11-1 to acquit

� Returned home to Ireland with family for Christmas.

• US DOJ in May decide to retry JS� Motion filed by JS for dismissal on speedy trial grounds in

May� Case dismissed without prejudice on speedy trial grounds in

August� “without prejudice” / “with prejudice” – important words


Sequence Cont.

4-4-18�January JS files a motion for dismissal on double

jeopardy grounds based on 1 of his 6 charges of acquittal in the November trial

�Motion heard in February and US Judge takes it on advisement

�In December Judge grants a stay on the retrial pending the outcome of related case in law in the US Supreme Court

�US Prosecutors agree that Supreme Court ruling had direct consequence to the motion for dismissal and filed a motion to dismiss the JS indictment with prejudice.


Case 2: US SEC - Civil


5-1-5

• US SEC v 1-10 Defendants

• Filed 9 February 2007

• Finished 4 January 2013

42 | Case 2: US SEC - Civil

2. Story

Lessons contd.

• Legal Costs in excess of $2 million

• Sentencing – 10 years +

• US Government 90% success rate in these cases

• Not for the faint-hearted

• Even if you win in a DOJ case you still have to deal with the SEC from a civil perspective

• SEC concluded in January 2013


US – Civil Case

Securities and Exchange Commission -v- AB

Location : Minnesota

Background �AB never worked in the US

�AB worked for a US subsidiary in Ireland as General Manager for 1 year

�US parent commissioned one of the Big Five accountancy firms to conduct a management / financial review of the Irish subsidiary

�AB challenged this and a HR exit strategy was agreed.

�AB left the Irish company


Sequence

• SEC in Chicago informal approach - I refer to it as the “reach out and touch programme”

�SEC suggest an interview of AB in Dublin

�Supply information voluntarily

�Dangers of a “Road Map”

• We try to get access to the accountant’s report but the US Parent would not allow us review it


Sequence Cont.

• However, US Parent had already provided the SEC with a copy of the accountant’s report –we did not know that

• US Parent would not cover AB’s legal costs• AB declined SEC request• Major issue arose with the Irish Parent on the

D & O Cover and the accountant’s report• SEC arrived in Dublin for interviews – stayed

one week• AB did not participate.


Sequence Cont.

SEC in the second stage request a Wells submission.

�A Wells submission is a document in which the proposed Defendant or Respondent explains why an Enforcement Action is not warranted.

AB declined the Wells submission.


Sequence Cont.

• June the SEC commence their proceedings in Minnesota against AB.

• The principle reliefs: I. bar AB from being an accountant before the

SEC; and

II. permanent bar on AB being an officer / director of a US publicly traded undertaking

�Not major in the scheme of things


Sequence Cont.

• Letters Rogatory acted on in Ireland. SEC again travelled over to conduct depositions and were here for several days

• Accountancy Report was ridiculed in the US proceedings and was not being relied on by the SEC

• US Federal Court granted AB his motion for summary Judgment and dismissed with prejudice


Sequence Cont.

• Again these words “with prejudice”.

Quote

“In light of the relatively small amounts of the three misstatements at issue, and the apparent low risk that AB poses to shareholders of the US publicly-traded companies, the court questions whether the SEC could not have expended its resources on more important matters.”

2-7-13


Lessons

1. D & O Cover essential

� AB’s US legal costs were in excess of €2 million

� D & O Cover well worth it

� D & O Cover and the refusal to furnish the accountancy report was still a problem in Ireland

� Summary Judgment – if AB did not have D&O Cover and he was informed of the cost he would have cut a deal with the SEC.


Lessons Cont.

2. In this SEC case there is no financial sanction sought against AB which can financially ruin you


Lessons Cont.

1. Watch your back.

2. Be very careful in cooperating on the civil side (SEC).

3. Matter could end up with the DOJ.

4. Always ask yourself can this “information” be used for regulatory enforcement or criminal prosecution.


Case 3: No D&O Cover


3. Story

• Terrible situation to be in

• Non Irish manager (Canadian)

• Married with 2 children, moves to Ireland

• Promoted in an Irish company

• US DoJ indicted 9 defendants

• 2 of them live here

• Company was able to personally fund the US legal costs for the non-Irish manager, ≤ $700,000

55 | Case 3: No D&O Cover (ongoing)

3. Story Cont.

• Company ran out of money

• Major dilemma for individual

• Financial ruin

• Cannot “buy justice”

• Cut a deal

• Utter failure by the company to have appropriate policy(ies) in place

• Reflects very badly on the company.

56 | Case 3: No D&O Cover (ongoing)

D&O Insurance – Things to Know

• When in doubt, give notice

| Case 3: No D&O Cover (ongoing)57

• Defence costs count against limits

• Most things the insurer will want from you can be negotiated

• Balance your obligation to communicate with the insurer with your client’s interest in confidentiality

• If your client is facing criminal charges, watch out for the defence advancement cut-off

[email protected]

Thank you for your time today.

05/10/2016

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