How company bosses need to protect themselves from increasingly ‘creative’ legal action

Company bosses and directors are being targeted increasingly with ‘creative’ legal action over investment deals that have gone wrong.

It is clear that management teams and non-executive directors are now operating in a rapidly developing and fraught environment. Claims from investors and lenders are being pursued more aggressively outside standard routes of recovery such as breaches of warranty and covenant claims as well as Insolvency Act breaches.

These have been joined by several not so standard routes by which investors and lenders are increasingly willing to claw back money from the directors personally. These include breach of duty and misfeasance claims (brought in the context of a shareholder petition, and bypassing the derivative claims procedure), greater examination of the role of directors in mergers and acquisitions, focusing on the decisions made by directors that can be characterised as a breach to act in best interests of the company rather than identifying how a director has benefited.

The change is not in the nature of directors’ duties but rather the willingness of investors and lenders to look at the directors as a means of clawing back value where an investment has underperformed or failed – and the means by which this can be done. Investors and lenders have become much more knowledgeable of the ways and means by which they can claw back money from failed investments.

A result of this has been a far greater examination of the role of directors in mergers and acquisitions – especially where directors sit on both sides of the transaction. This has been common where some management figures have transferred with an acquisition and raises a potential conflict of interests between the directors’ duty to promote a transaction and their duty to exercise care and to fully disclose relevant information to the new company that they also owe duties to once appointed.

Similarly, we have seen an increase in relevance of fraud and conspiracy claims against directors from wounded investor/lender who feel that they were misled. Their legal efforts will be focused more and more on who personally they felt mislead by, which will undoubtably lead to further claims against directors.

There are a whole host of potential legal headaches for company directors and management. Most prominent are the risks surrounding cyber security, notably having a sufficient cyber incident response plan in place, as a key area where management must play a key role or else risk shareholder claims and lawsuits.

At a recent seminar held in conjunction with global insurer Marsh, it became clear that Marsh and other insurers have noted a major upsurge in directors coming to them to discuss cyber risks over the past couple of years. This is undoubtably linked to the significant media attention that recent cyber incidents have attached – 2017 was a particularly bad year for cyber security with the WannaCry Cyber Attack affecting numerous companies alongside the NHS, alongside data breaches from cooperate giants Uber, Equifax and InterContinental Hotels Group.

Another prominent area of concern for directors are the risks relating to employment and personnel. We have seen an upsurge in sexual harassment cases off the back of the #MeToo movement, many of which include high profile C-suite executives and directors. Philip Green of Arcadia Group and Ray Kelvin of Ted Baker are just two of the more prominent directors to have fallen foul of sexual harassment claims. Directors should therefore be fully aware of the potential damage of such claims and must ensure they are adequately protected in their insurance.

There are increasingly sophisticated insurance products out there, which cover exposures across an investment’s lifespan, and are designed to protect both investment value, and the people responsible for running them. Directors would be well advised to consider this when they arrange their insurance policies.

We are in the midst of a fast-developing environment for directors and officers. With lenders and investors more knowledgeable and aggressive than ever before it is essential that directors and management fully consider the potential for legal action over future investment deals, and to ensure they are sufficiently insured in the event a deal goes sour. 

Euan Palmer is a Partner in Rosling King’s Dispute Resolution Team