The D&O market was already undergoing a period of significant change before the onset of Covid-19. Premiums were up and capacity was down. Covid-19 has certainly not helped that picture. However, we remain at a very early stage and it remains to be seen whether Covid-19 will result in significant volumes of claims against UK directors and officers.
It will surprise no one that the directors and officers most at risk are those working at listed companies, particularly, but by no means exclusively, companies listed on US exchanges.
Those companies (and their directors and officers) are most exposed because of the risk of Covid-19 related class actions or group litigation following a drop in the value of the company’s shares, which plaintiffs counsel seek to link to allegedly inadequate or misleading disclosures or to breaches of duty associated with alleged inadequate director and officer oversight and/or purported failure to incept appropriate risk mitigation protocols.
There are currently only two class actions that we are aware of to date and both have been commenced in the US.
We are not aware of any similar actions in the UK as yet. The first was commenced against Norwegian Cruise Lines and its CEO and CFO, alleging that the company made false and misleading statements in its Form 8-K filing with the SEC in that they discussed positive outlooks for the Company in spite of the COVID-19 outbreak.
The second class action was against Inovio Pharmaceuticals, Inc and its CEO. The complaint alleges that the CEO made false statements to the effect that Inovio had developed a COVID-19 vaccine and was aiming to start phase one human testing in the US early this summer and that following these statements, the company’s share price increased.
It may be thought that these claims should be considered to be confined to their particular facts. However, we can anticipate that aggressive claimant firms will be on the lookout for other listed companies which have suffered share price drops and carefully examining their public statements in the lead up to and following the spread of the pandemic, for example, in relation to supply chain adequacy.
The position in the UK is, of course, slightly better than for companies which are listed on US exchanges. While it is still possible to bring group litigation in the UK, the barriers are higher albeit that the increasing availability of litigation funding is helping to overcome some of the hurdles.
Another area of potential exposure for directors and officers has been the risk that one of the knock-on effects of the measures being taken to combat the spread of COVID-19 could be that companies are trading whilst insolvent. This risk has been recognised by the British, Australian, Singapore and German governments, all of whom have proposed temporary measures to relieve directors from personal liability for trading whilst a company is insolvent (“wrongful trading”).
On Saturday 28 March 2020, the British government announced that it plans to amend insolvency law “to give companies breathing space and keep trading while they explore options for rescue”.
The proposal to relieve directors of personal liability for trading whilst insolvent is only one of the measures announced, with others amounting to implementations of measures following a government consultation in 2018.
Other parts of the proposals include:
- a moratorium for companies giving them breathing space for from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure;
- protection of their supplies to enable them to continue trading during the moratorium; and;
- a new restructuring plan, binding creditors to that plan
The Australian government has published details of its proposals while, elsewhere and in the meantime, the changes in Germany came into effect on 28 March 2020 and there is a draft bill going through the process in Singapore.
It should be noted that there do remain other exposures for directors and the British government has noted that “existing laws for fraudulent trading and the threat of director disqualification will continue to act as an effective deterrent against director misconduct”. The relief from liability for wrongful trading does nothing to remove those other exposures.
Nonetheless, there is a significant difference between wrongful trading and many of the other potential exposures which are focussed on preventing directors from defrauding creditors. For directors who are just trying to keep their companies afloat during this period of crisis, and for their insurers, the measures being taken by these governments will, no doubt, be a welcome relief.
Angus Duncan, Executive Director, FINEX at Willis Towers Watson