Litigating in Europe is a complex process. The EU comprises 27 different member states, each with its own national laws and court structures. Moreover, there are fundamental differences in the nature of the legal systems between member states: the common law system is in the minority, with the majority of member states being founded on a civil law system.
In common law jurisdictions, cases and statutes are the primary sources of law. In England, as in the US, there are many areas of law governed almost exclusively by common law, for example, contract and tort. There is a strong adherence to the doctrine of precedent; decisions of superior courts in the home jurisdiction are binding on lower courts and the decisions of foreign common law jurisdictions are often referred to as ‘persuasive authority’.
By contrast, statute is the primary source of law in civil law jurisdictions. Courts decide disputes based on an interpretation of relevant statutes and there is little reference to decided cases, although some reference is still made to decisions of superior courts. Moreover, procedural law in civil law jurisdictions differs markedly from common law jurisdictions. For example, most civil law jurisdictions have no equivalent of the US discovery process, and many operate an inquisitorial, as opposed to adversarial, procedure, with the result that litigators do not necessarily have tools such as crossexamination at their disposal.
EU laws and courts add an additional overarching layer of complexity. National courts are required in certain circumstances to refer to EU courts where questions of interpretation of EU laws arise, and national courts are obliged to interpret domestic laws in a manner consistent with EU laws.
This guide does not seek to give a detailed overview of the litigation framework in Europe. Rather, it aims to provide an overview of particular litigation trends and developments in the areas of collective actions and the liabilities of directors and officers in each of England, France, Germany, Italy, the Netherlands and Spain.
The English civil litigation system does not allow US-style class actions. However, the Civil Procedure Rules, which specify the procedure that should be followed in English civil litigation proceedings, provide for two forms of collective action: group litigation orders (GLOs) and representative claims.
An application can be made to the court for multiple claims involving common or related issues of fact or law to be dealt with by way of a GLO. A GLO is a case management tool designed to manage multiple claims efficiently. It does not ensure finality of claims; potential claimants should opt in to the GLO proceedings, but a failure to do so does not prevent them bringing a claim at a later stage. However, subsequent claims brought might be delayed pending the outcome of the GLO.
Where more than one person has the same interest in a claim, it may be brought as a representative action. It is also open to the court to order that a claim be continued as a representative action. Only the parties represented in the proceedings will be bound by the court’s decision, although decisions can be enforced against parties who were not represented with the court’s permission.
Representative claims have been used infrequently to date. However, in July 2006 the Department of Trade and Industry published proposals, entitled Representative Actions in Consumer Protection Cases, to allow designated bodies to bring actions on behalf of named consumers. These proposals are still at a very early stage.
Director's duties and liabilities
The rules governing the duties that directors owe their companies have been codified in the Companies Act 2006 (the Act). Parts of the Act dealing with these issues are expected to come into force in October 2007. The Act also introduces a new statutory right for shareholders to sue directors in the company’s name (known as the ‘derivative action’), in certain circumstances. Concerns have been expressed about the potential impact of these changes on directors’ liabilities.
At present, the rules governing directors’ duties come from several sources. The general duties they owe to their company are governed by common law and have been developed over many years in case law and supplemented by statute. The Act sets out a new statutory statement of directors’ duties, described as their ‘general duties’, in place of the common law and replaces, and to some extent rewrites, part X of the Companies Act 1985.
Although the government has described the statement of general duties as a codification, it is not exactly the same as the existing law. Some of the language used to describe the general duties in the Act is different from the language used previously and may lead to differences in approach when the new rules are interpreted by the courts.
There are seven general directors’ duties in the new statutory statement.
- To act in accordance with the company’s constitution and to use powers only for the purposes for which they were conferred. This replaces existing, similar duties.
- To promote the success of the company for the benefit of its members as a whole. This replaces the common law duty to act in good faith in the company’s interests.
- To exercise ‘independent judgement’. There is no equivalent duty at common law, however, directors are currently under an obligation not to fetter their discretion to act or to take decisions – this aspect of the general duty replaces this obligation.
- To exercise reasonable care, skill and diligence. This replaces the existing duty of care and skill.
- To avoid conflicts of interest, except where they arise out of a proposed transaction or arrangement with the company. At present, if a director allows his personal interests, or his duties to another person, to conflict with his duty to the company, unless shareholders consent to the conflict:
– the company can avoid any relevant contract; and
– he must account to the company for any ‘secret profit’ he has made out of the arrangement. The new duty replaces this old rule.
- Not to accept benefits from third parties. There is no express duty to this effect at common law. It appears to derive from the current duties to act in the company’s interests and the rule dealing with conflicts of interest.
- To declare to the company’s other directors any interest a director has in a proposed transaction or arrangement with the company. At present, a conflict of interest arising out of a transaction or arrangement with the company is dealt with by the general rule on conflicts of interest, described above. In future, such a conflict will be covered by this new duty of disclosure.
One of the most significant differences between the current regime and the new provisions is the requirement that a director must ‘act in the way that he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole’.
In deciding how to promote the success of the company, the directors are required to have regard ‘amongst other matters’ to the:
- likely long-term consequences of their decisions; interests of the company’s employees;
- need to foster the company’s business relationships with suppliers, customers and others;
- impact of the company’s operations on the community and the environment;
- desirability of maintaining a reputation for high standards of business conduct; and
- need to act fairly as between the members of the company.
The introduction of this list of factors has caused some concern. However, although all of the listed factors must be considered by directors for each decision that they take, in many cases it will be enough for them briefly to conclude that a particular factor is not relevant, and move on. Helpfully, the government has made clear that this new provision is not intended to impose additional bureaucratic burdens on companies, and is intended to reflect what is already widely regarded as good practice. The Act also provides that current common law rules should be considered in interpreting the new provisions. It may be that, although this new duty is framed in very different terms from the current law, the courts will nonetheless apply it in a similar way.
Fears have also been expressed that the new requirement for directors to exercise ‘independent judgement’ may prevent individual directors, particularly, non-executives, from relying on the judgement of others in areas in which they are not expert. The government confirmed that directors will continue to be able to do this, and to delegate matters to committees, provided they exercise their own judgement in deciding whether to follow particular advice or to accept someone else’s judgement on a matter.
At present, shareholders only have very limited rights to bring actions against directors. The Act introduces a new statutory right for shareholders to sue directors, in the company’s name, and to recover on the company’s behalf loss suffered as a result of a director’s negligence, default, breach of duty or breach of trust. Shareholders will also be able to claim, in the company’s name, against third parties implicated in any breach in very narrow circumstances, where the damage suffered by the company arose from an act involving a breach of duty on the part of the director (for example, for knowing receipt of money or property transferred in breach of trust or for knowing assistance in a breach of trust).
This new statutory right, known as a ‘derivative action’, will undoubtedly make it easier for shareholders to sue directors. Considerable concern has been expressed that this, together with the statutory statement of directors’ duties, particularly the detailed list of factors which directors are to consider, will lead to potentially increased liabilities for directors.
The government has made some effort to respond to these concerns by introducing a two-stage process for derivative actions. First, a disgruntled shareholder will have to apply to the court for permission to make the claim, if the court considers that the evidence filed by the claimant shareholder does not make out a prima facie case, it will be required to dismiss the application ex parte at this stage. If an application survives this process, it will enter the second stage, when the court will decide, based on the evidence of claimant shareholder and company, whether the claim should be allowed to proceed. At this stage a range of factors will be taken into account, including the views of independent shareholders with no personal interest in the matter. Companies may find it helpful to approach institutional shareholders for support. Only if the claimant shareholder is successful will the claim progress to the final stage – a full trial of the issues.
Directors will want to review company indemnification and insurance arrangements and consider whether these need to be revised in light of the potentially increased risk of shareholder litigation referred to above. The costs of dealing with and defending shareholder litigation could be significant for both the company and its directors.
If the court refuses leave to continue an action brought by a shareholder, the shareholder will bear the cost of the application. However, this is unlikely to include all the costs incurred by the company and the directors in dealing with the claim. If the court gives permission for the action to continue, the company may be ordered to reimburse the costs incurred by the shareholder in bringing the action. In these circumstances, the company may have to bear the burden of funding both the shareholder action and the directors’ defence. Appropriate D&O insurance can help relieve this burden.
Directors will want to ensure that, in addition to any award of damages against them, the costs and expenses of dealing with and defending shareholder litigation fall within the scope of D&O insurance offered. Companies should review the wording of their policies and check the extent of their cover in relation to shareholder litigation, and any exclusions from cover, with their insurers.
Under French law, only claims brought by individuals are actionable before French courts. Class actions cannot be brought, although, as discussed below, their introduction into the French legal system has been seriously considered over the past two years but has recently stalled, mainly for political reasons.
However, where shareholders have potential claims, certain collective actions are available.
- Where a number of shareholders in a listed company suffer a direct or indirect loss, certain associations may initiate proceedings or even institute a civil action on the shareholders’ behalf. But French law imposes strict requirements relating to shareholder voting rights and duration of share ownership so that it is often very difficult in practice to create an association to bring proceedings on shareholders’ behalf.
- Where investors have suffered direct or indirect losses regarding securities, associations may initiate proceedings or launch a civil action for the defence of investors’ rights. To bring proceedings, associations must:
– be created for a minimum period of six months; and
– comprise at least 200 shareholders and fulfill requirements of honourability and competence.
However, the cost of bringing proceedings, their duration and the low levels of damages that are usually awarded to investors mean that these are not frequently used either.
- Some associations may jointly represent two or more investors who are seeking damages against the same defendant, provided that the associations have received powers of attorney from the investors to bring claims on their behalf. Until recently, associations could not canvass investors for powers of attorney to become claimants. However the president of the French civil court of first instance and the president of the French commercial court of first instance, can now authorise an association to canvass investors. The association can then seek powers of attorney from investors who wish to become claimants through various means of communication, such as television, radio, leaflets or even individual letters. As the costs of canvassing are borne by the associations, this can discourage them from launching legal proceedings on behalf of groups of investors.
The Sidel case is a recent example of how the French collective action procedure operates. The Paris criminal court admitted a collective action against Sidel on 12 September 2006 relating to losses suffered by shareholders who were unable to decide whether to buy/sell or keep shares in Sidel because they were not given accurate information. The court granted €10 in damages per share to 700 Sidel shareholders, mainly represented by two associations, who had been joined in the criminal proceedings as civil parties. The court held that Sidel was jointly liable on civil grounds with its former executive directors, for the losses incurred by shareholders as a result of them being provided with misleading information. It considered that the shareholders had suffered a collective loss, and that each shareholder’s direct action (action directe) was admissible. The court also declared that Sidel was entitled to €1 in damages from its executive directors for the loss caused to its brand image. Sidel and the shareholders’ associations representing some minority shareholders lodged an appeal before the Paris court of appeal on 26 September 2006. Where consumers are concerned, collective actions may be brought in two situations.
- Authorised consumer protection groups may represent the interests of consumers who suffer a loss as a result of using the same goods or services. Similar issues will be tried before the same judge. To bring such an action, a consumer protection group must receive powers of attorney from at least two consumers who wish to become claimants. However, unlike class action lawsuits, each consumer who wishes to become a claimant must be named individually in the lawsuit.
- Consumer protection groups may also represent the collective interests of consumers. However when an action is brought on behalf of the collective interest of consumers, any damages paid are awarded to the group itself, not to the consumers individually.
Class actions are currently not available under French law. In 2005, discussions started in the French parliament about the possible introduction of class actions into the French legal system. Two competing draft bills were under review until the government decided to withdraw the project in February 2007. Discussions on a new draft bill on class actions are now not likely to be held in parliament until October 2007 at the earliest. If class actions are to be introduced, there are some concerns as to whether the former draft bills will still constitute a basis for discussions since there was no real consensus on them.
In the first draft bill, introduced on 26 April 2006, class actions in France were due to be introduced under restricted conditions:
- access to class actions was to be limited to authorised consumer protection groups; and
- a judge would have the power to dismiss a claim prima facie, ie without examining the merits of the case. A two-tier system would be put in place: below a specified level of damages, a consumer could be included in an action unless he opted out; and above a specified level of damages an opt-in would be required for the consumer to be considered a claimant in the action. In this second scenario the judge could determine what advertising should take place so that additional consumers could have the opportunity to join the proceedings.
As a result of a governmental initiative, a second draft bill was introduced to parliament on 8 November 2006. It proposed that even more restricted conditions should apply to class actions.
- Only a restricted number of courts (Tribunaux de Grande Instance) would be entitled to hear class actions.
- Damages would be awarded for:
– financial damages (as opposed to damages for personal injury);
– losses suffered personally by several consumers;
– losses caused by a professional in the performance of his contractual obligations (sale of goods or provision of services); and
– losses which do not exceed €2,000
- A two-tier system would be established where the judge would decide on the professional’s liability. If liable, the professional could be required to make an offer of compensation to consumers. If he failed to do so, or if the consumer refused his offer, the judge could decide the amount of damages that should have been paid and impose an additional financial penalty on the professional.
Director's Duties and Liabilities
Directors have a general duty to act diligently. This includes:
- complying with company law;
- complying with any statutory obligations; and
- refraining from mismanaging the company (faute de gestion), ie not acting against the interests of the company.
Shadow directors, who are persons who are not statutory directors, but who are, in practice, managing the company in an autonomous way, may also be held liable for breach of these duties.
Statutory and shadow directors are liable to the company, shareholders and third parties for a breach of this duty.
Although directors can be liable to their company (an action commenced by a company against its directors is called action sociale ut universi), in practice, the ut universi action is rarely used, as directors do not usually commence proceedings against themselves.
Directors can also be liable to the company’s shareholders, who can act on behalf of the company through an action called action sociale ut singuli, equivalent to the common law derivative action. Shareholders may also bring an action against the company for any personal loss if they are able to demonstrate that they have suffered a loss that is distinct from any loss suffered by the company.
If misconduct occurs within the board of directors that cannot be attributed to one director, the board is jointly and severally liable for the misconduct unless individual board members can demonstrate that they explicitly and clearly disapproved of the decision made by the board.
Finally, a director can be held personally liable to third parties if his misconduct is not connected to his duties as a director. Misconduct has been defined by case law as being an ‘intentional misconduct, of particular gravity, incompatible with the normal exercise of the corporate mandate’ (faute detachable), for example a director who counterfeited products. In addition, if a director acts on his own behalf, but third parties believe the director is acting on behalf of the company, both the company and its director may be held jointly liable for any tort committed by the director.
Directors can also be held criminally liable for any deliberate offences they have personally committed. A director of a company, acting as managing director, or his delegate may also be held criminally liable for breaches of non-deliberate offences relating to labour law or environmental law, where specified by statute (for example, an unintentional violation of safety regulations).
Civil Liability of Companies
Under French law, civil claims can be brought against both companies and their directors. A company will be liable for any contractual or civil offence committed by its directors against third parties. The company may then bring an action against the director, where the director has breached his duty to the company (discussed above).
Criminal Liabilities of Companies
Prior to 1 January 2006, companies could only be held criminally liable where this was specifically contemplated by statute. Since 1 January 2006 criminal sanctions can be imposed on companies for all offences under the French criminal code.
Article 121-2 of the French criminal code provides that companies may be held criminally liable for offences committed:
- on their behalf by their representative bodies or representatives such as, among others, the board of directors, statutory and shadow directors or the company’s shareholders in general meeting; and
- in the company’s interest. A company will be held liable for a criminal offence committed by one of its director’s that has furthered the company’s interests. A company will be held criminally liable when its representative bodies or representatives have committed an offence on its behalf. A company will also be held criminally liable as an accomplice when its representative bodies or representatives have acted as accomplices to an offence.
Companies face a range of sanctions that include financial penalties, which can be up to five times larger than those imposed on an individual, dissolution of the company, prohibition regarding certain activities, placement under judicial supervision for up to five years, disqualification from public tenders for up to five years, and prohibition on drawing cheques or using payment cards.
Liability insurance taken out by a company for the benefit of its directors provides cover for damages awarded against directors as well as the costs of defending proceedings. It does not provide cover for risks such as directors’ acts in the course of their private life, directors’ intentional or grossly negligent acts or financial penalties incurred by the company as a result of litigation or damages awarded as a result of criminal proceedings.
Issues have been raised in France as to whether the payment of D&O liability insurance premiums can be regarded as a misuse of corporate assets. No decision has ever been rendered by a court on this specific issue, but it appears that there is little risk that such payments could be considered as a misuse of corporate assets.
Another question has been raised as to whether a director’s misconduct, which is not connected to his duties, should be construed as an intentional or grossly negligent act, and therefore fall outside the scope of insurance. The Cour de Cassation held, on 4 January 2006, that a director’s failure to subscribe to a mandatory insurance policy, which was a criminal offence, was not outside the scope of a director’s functions and would therefore still fall within the scope of D&O insurance.
Germany introduced legislation, known as the capital markets sample proceedings act, or KapMuG, in autumn 2005 that allows for sample proceedings in litigation arising from certain capital markets transactions.
The KapMuG does not apply to any other types of proceedings. It is only available to parties who have already filed a claim and does not allow a claim to be brought in the name of an unidentified group of claimants. The legislation provides for an appellate court to determine questions of fact and/or law common to 10 or more pending lawsuits in one sample proceeding.
The most prominent case in which sample proceedings have been instituted is the claim by 14,447 shareholders against Deutsche Telekom for having overstated, in its listing prospectus, the value of its real estate by €2.8bn ($3.4bn). Applications for sample proceedings have also been made regarding several other lawsuits, most of them concerning a failure to report information to the market on a timely basis, or the reporting of incorrect inside information.
The effects of the new law will be monitored over the next five years. It contains a sunset clause and will automatically cease to have effect on 1 November 2010. The government may, however, seek to prolong its operation or broaden its scope to cover other types of proceedings. The KapMuG has already attracted considerable public attention and may act as a catalyst for further litigation.
Directo's Duties and Liabilities
Directors have a general duty to be diligent and conscientious in managing the affairs of the company. This is an objective standard that does not depend on the knowledge and abilities of the particular director, although the knowledge and skills expected may differ depending on the nature, size and other characteristics of the company. According to case law, a director has wide-ranging discretionary powers regarding the management of the company, including the power to take entrepreneurial decisions provided that the director carefully assesses the related risks. Only actions that are beyond the limits of reasonable entrepreneurial conduct or which constitute a violation of the director’s duties for some other reason may result in personal liability.
Directors have an obligation under the stock corporation act (SCA) to protect the company from financial penalties, losses and other financial harm. Further, as trustees of the company’s assets, directors owe comprehensive fiduciary duties and duties of loyalty to the company. The SCA also provides for a number of specific duties, including those relating to the maintenance of registered share capital, bookkeeping, and the organisation of the company. Finally, directors are also subject to numerous reporting requirements (including a duty to keep the securities market informed and updated) as well as strict confidentiality obligations.
In principle only the company, not the individual director, can be liable to third parties. If a director deliberately or negligently breaches a duty resulting in damage to the company, it is generally the company’s responsibility to take internal recourse against the director. A simple majority at the annual general meeting can force the company to seek internal recourse against a director. In recourse proceedings, the director bears the burden of proving that the relevant standard of care has been met. The company is only required to show that it has suffered damage as a result of the actions of the director.
In exceptional circumstances, creditors of the company may bring a direct claim against a director. Statute allows a direct claim against a director where:
- a company is unable to satisfy a claim arising from a violation of a duty by a director;
- a company becomes insolvent and a director delayed the initiation of insolvency proceedings causing damage to the creditor; or
- he is liable under tort law for a serious breach of duty or for a violation of legal provisions that protect certain individuals or groups of people, such as criminal provisions concerning fraudulent or false representation of the company’s affairs.
Recently, successful direct claims have been brought against directors based on tort law where directors have deliberately published incorrect inside information (for example Infomatec, EM.TV). These decisions show a tendency to expand the scope of direct tort claims against directors, in particular by alleviating the burden of proof regarding both the director’s intention to violate a duty and to the causation and assessment of damages.
As directors and officers face increasing liabilities, D&O insurance is now becoming an industry standard in corporate Germany.
The company is generally the policyholder, with the director a named insured. The D&O insurance normally covers the company’s claims against the directors. Since the risk of direct claims against directors and officers based on tort law has increased, particularly for capital market-related information, and given that insurance contracts are being interpreted strictly by the courts, it is important for directors to ensure that the wording of their D&O insurance policies adequately covers their potential internal and external liability.
Until recently, there was some uncertainty regarding the taxation of D&O insurance. However, the German tax authorities have now recognised that D&O insurance does not constitute taxable remuneration for the director if it predominantly serves the company’s interests, rather than those of the director, and if the calculation of the premium is not based on individual characteristics of the insured directors.
There has been an increasing number of disputes regarding scope of coverage. For example, Lufthansa’s claim for €250m against two D&O insurers for damages, allegedly caused by the former management of LSG Sky Chefs entering into contracts that were not in the interests of the company, was resolved by mediation in 2004. In 2005 the Düsseldorf court held that D&O insurers could rescind a D&O insurance policy due to the wilful deceit of the chairman of the insured company’s (Comroad AG) management board. Although the D&O insurance policy contained a severability clause, which effectively protects one director from losing cover because of the dishonesty of another director, the court held that the recission of the D&O insurance policy was effective against other directors of Comroad AG who did not know of the deceit. In autumn 2006, the German bank WestLB settled a claim worth €125m against their D&O insurers. This claim concerned valuation adjustments to loans granted to the British company Boxclever at the end of the 1990s, for which eight directors were allegedly responsible. DaimlerChrysler reportedly settled its claim against eight D&O insurers for an amount of €168m at the end of 2006. The basis of the claim was a $300m settlement of a securities class action brought by US investors claiming that remarks made by former CEO Jürgen Schrempp constituted deceit. The remarks were to the effect that the merger of Mercedes Benz and Chrysler was not a merger of equals but was instead originally planned as a takeover. DaimlerChrysler also recovered €25m from another insurer in separate proceedings regarding the same remarks.
At present, Italy has no class action legislation governing the filing of claims for damages or sums of money. However, consumer associations can file claims on behalf of groups of consumers enabling them to obtain judicial orders against corporations that cause injury or damage to consumers.
These orders can compel certain types of behaviour, such as a change in general terms of trade in contracts with consumers, or prohibit certain types of behaviour, such as illegal activities, but it is not possible for associations to claim compensation or damages on behalf of consumers. This means that individuals must bring their own actions for damages.
The introduction of class actions is on the new government’s agenda and formed part of the political programme of the parties supporting the present coalition in the 2006 elections. Several draft bills are under scrutiny, however these are facing strong opposition from bodies such as the associations of Italian banks (ABI) and of Italian insurance companies (ANIA).
One draft bill, submitted by the government, would give consumer associations, professional associations and chambers of commerce the right to sue in any business area on the basis of both contract and tort. The object of such an action would be a judgment declaring that certain behaviour caused damage to individual members of a class. Such a judgment would specify the criteria for assessment of any damages and individual members could use that judgment as the basis for an application for summary judgment with damages to be assessed according to the criteria established, provided that the mandatory alternative dispute resolution procedures set out in the bill did not result in a settlement. The bill does not provide for the introduction of punitive damages nor for contingency fee based agreements with lawyers.
There have also been six draft bills submitted by parliament members which are being considered by parliament. These bills would give standing to individuals as well as to the associations listed above and would mean that, once any collective action had been brought, there would not be any need for additional action on the individuals’ part. Some of these bills submitted by parliament members contemplate that lawyers’ fees for bringing the class action would be a percentage of the compensation received (capped at 10 per cent), but also provide that, in case of a favourable judgment being obtained by claimants, they are paid by the defendant. None of these six bills has a realistic chance of being passed although the government bill is likely to be passed by parliament in some form during the next 18 months.
Director's Duties and Liabilities
Under Italian law a director owes fiduciary duties to both the company and its creditors. Directors are liable for any breach of these duties, to the company, its creditors, individual shareholders and third parties. However, individual shareholders and third parties can only sue directors for damage suffered directly as a consequence of wrongdoings by the individual, not for damage suffered indirectly as a consequence of wrongdoing by the company.
Directors are not directly liable to shareholders, or third persons, for damage caused to the company; they are only liable to the company itself or to its creditors where the company becomes insolvent. Claims are not usually filed against directors by individual shareholders, except as a result of regulatory breaches, such as misleading information, insider dealing and market manipulation. Claims against directors filed by the company are usually brought in the context of criminal or insolvency scenarios.
New legislation has enabled the board of internal auditors and the shareholders to sue directors for damages on behalf of the company provided that certain minimum thresholds are met. In the case of claims filed by the board of internal auditors, a two-thirds majority of the board is required. In the case of shareholders, an individual shareholder holding at least 20 per cent of the share capital of an unlisted company, or at least 2.5 per cent of the share capital of a listed company, may file a claim. These thresholds can be modified in a company’s articles of association, subject to certain restrictions.
The proceeds of the derivative claim, either from a judgment or from a settlement, are awarded to the company and not to the shareholders who filed the derivative claim.
The increasing availability of D&O insurance in Italy is likely to increase the appetite for actions against directors. Until a few years ago there were doubts as to whether insurance protection was legal and this led to underwriters being unwilling to write this type of risk. However, this issue has now been favourably resolved. D&O insurance, if taken out, covers damages up to the limit of indemnity in the policy plus legal costs for an amount not exceeding 25 per cent of the indemnity limit.
D&O liability insurance policies available in Italy cannot provide cover for intentional misconduct and do not tend to cover regulatory sanctions, even if this would be possible where the regulatory breach is not the result of intentional misconduct. However, civil claims generated by criminal offences are normally covered unless they have been triggered by a director’s intentional misconduct. Given that a director’s intentional misconduct will not be covered by the D&O insurance, a director facing a claim arising out of this type of criminal offence might find that the D&O insurance does not cover any resulting liability that he may have. The situation is not clear-cut, the concept of intentional misconduct is open to interpretation and partly unresolved, in particular regarding certain categories of intentional misconduct such as dolus eventualis, a concept partly similar to that of reckless negligence.
Under Dutch law, companies that are potentially liable for causing damage to a number of injured parties face two types of legal actions:
- individual actions from injured parties seeking compensation for the damage that they have suffered; and
- collective actions from associations representing the interests of injured parties seeking a judicial declaration that the defendant is liable for the damage it has caused. Damages cannot be claimed in a collective action.
Once a declaration has been obtained that the defendant has acted unlawfully, damages may be claimed in subsequent proceedings by the injured parties represented in the collective action. Issues such as causality (is there a causal link between the unlawful act of the defendant and the damages alleged by the injured party), own risk or fault of the injured party, limitation periods etc, are often raised in these proceedings.
Collective actions can only be initiated by associations that state in their articles of association that they represent the interests of the injured parties. In addition, an association will not be able to bring its claim if the court considers that the association has not tried sufficiently to reach a settlement with the defendant.
Collective Settlement of mass damages claim Act (CSMDA)
The CSMDA came into force in the Netherlands on 1 August 2005. It states that associations representing injured parties may negotiate a settlement with a defendant for the payment of damages that may be approved and declared binding by the Amsterdam court of appeal.
Although injured parties are not allowed to sue collectively under the act, the benefit of the court-approved settlement mechanism is that all injured parties will be bound by it as long as certain prerequisites are met. Injured parties who do not wish to be bound by the settlement remain entitled to have their individual claims determined by the courts through ordinary proceedings. However, it is expected that most injured parties will be discouraged from commencing individual actions if they can easily and without cost accept the settlement.
Director's Duties and Liabilities
Dutch law does not positively define the duties of managing directors, who are engaged in the day to day operations of the company, and supervisory directors, who perform a similar role to non-executive directors, but provides guidelines on what constitutes the proper and improper fulfilment by a managing director and a supervisory director of his duties.
The duties and obligations of directors essentially arise from statutory provisions, the articles of association (in particular the objects clause board rules (if applicable) and the principle of corporate good faith that governs the actions of directors. In all of their actions and decisions directors need to act in the best interests of the company and its business.
Dutch law expressly states what this means in relation to supervisory directors, but this also applies to managing directors. ‘Best interests’ include the interests of all interested parties, including shareholders, employees and, in some circumstances, creditors of the company.
The duty of good faith that applies to managing directors and supervisory directors forms part of the principle of corporate good faith, which governs all aspects of the internal organisation of a company. For example, the good faith principle will govern situations where a managing director is in a position to obtain a personal benefit that is to the company’s detriment, or situations in which the management board would deny other corporate bodies any powers or rights to which they are in principle entitled. The good faith principle also provides that the management board and the supervisory board cannot, without justification, prioritise particular interests over other interests and should always carefully weigh the interest of all parties.
Each director has a duty to the company to properly perform his tasks. A managing director will properly perform his management tasks as long as he is ‘acting in accordance with what could reasonably be expected from him under the prevailing circumstances’.
Although the nature of the tasks and responsibilities of the supervisory board is clearly different from that of the management board, the duties of supervisory directors are also tested against the principle of acting in the best interests of the company and its business.
Specific Duties of the Management Board
Dutch law and the company’s articles of association impose a variety of specific tasks and responsibilities on the management board. The management board, for example, has an important role in capital maintenance and capital reduction processes, in mergers and de-mergers, and in liquidation scenarios. Other specific responsibilities include:
- preparing and filing of the company’s annual accounts; and
- the proper administration of the company’s financial state.
In addition, specific statutory provisions create a personal liability to creditors of the company in certain situations where a managing director blatantly fails to perform his tasks.
Specific Duties of Supervisory Board
The following general principles apply specifically to the role of a supervisory board member. They:
- usually play a key role in evaluating and questioning strategic decisions;
- usually take responsibility for monitoring the performance of management. In addition, they also ensure the accuracy of financial statements and the adequacy of internal control systems in conjunction with managing directors; and
- are sometimes appointed as a result of specialist expertise. When issues arise where their expertise is relevant, their input will be required and they will need to exercise appropriate skill and care.
Where a Dutch company suffers damages as a result of the actions of a third party, including those of a director of the company, only the company can claim damages from that third party. The Dutch Supreme Court (DSC) has ruled that even where shareholders may have suffered loss (for example because their shares in the company have reduced in value) they cannot bring a derivative action.
However, under certain circumstances DSC law does provide for a shareholder to claim damages from a third party (for example a director of the company) where that third party has breached a specific standard of care that he owed to the shareholder.
A typical Dutch D&O insurance provides protection for both managing directors and supervisory directors against any personal liability towards third parties resulting from errors made in the course of the performance of their duties as director. It also provides for the costs of defending legal proceedings for such personal liability. The insurance policy may also cover a director’s liabilities towards the company itself. Typically the company will be the policyholder and will pay the premium.
Spanish law recognises an individual’s right to take action where he has suffered harm, as well as the right of certain nominated consumer associations to take action to protect the interests of identified consumers. A number of groups already have the power to bring collective or class actions.
Various consumer associations and bodies (asociaciones para la defensa de consumidores y usuarios) are legally constituted to defend the collective interest and groups of injured parties. Claims are published and notified to these various groups and they are entitled to intervene in proceedings. Recent changes to Spanish civil procedure rules include the introduction of a quasi-class action right for certain consumer associations to claim damages on behalf of unidentified classes of consumers, or even indeterminate group members.
Actions taken on behalf of unidentified consumer associations give rise to certain procedural issues regarding publicity and the intervention of affected parties. For example, the consumer association must represent an adequate number of affected parties who have suffered the same loss/harm. Further, any judgment made by the Spanish court will list the individual beneficiaries or, if that is not possible, the conditions that need to be fulfilled for a party to benefit from a judgment. This also applies to individuals or entities who are not party to the proceedings. An opt in mechanism is provided for injured parties, but there is no opt out mechanism. If affected parties who meet the conditions laid down in the judgment do not wish to benefit from it, they are not entitled to take separate action on their own.
Director's Duties and Liabilities
The main duties of directors under Spanish law can be classified as those the director owes to the company and those the director owes to the shareholders.
Directors owe a duty of ‘diligence of a prudent businessman and of a loyal representative’ to the company. The legal duty of loyalty means that directors must do everything possible to develop the company’s objects and business. Directors are also responsible for ensuring that the rights of shareholders are observed (ie the right to participate in profits, the right to information, rights of pre-emption and the right to attend shareholders’ meetings). Directors also have a specific duty of confidentiality, which continues even after they cease to be a director.
The Conthe Code (the Code), which was approved in May 2006 following a long consultation process, has recommended a more stringent regime to regulate the director’s duty of loyalty and has defined this duty more strictly. It is expected that in the near future this will lead to a growth in the demands on directors. One of the recommendations of the Code is to extend the duty of loyalty to cover both de facto and shadow directors as well as controlling shareholders.
Directors are jointly and severally liable for unlawful acts or omissions that cause damage to the company. In such a situation, it should be the company that brings a claim, following approval by the shareholders at a general meeting. However, in certain circumstances, if an action is not commenced by the company, shareholders with at least 5 per cent of the share capital may bring a joint action. In addition, any shareholder or third party may bring a personal indemnity action where they have suffered direct damage. The Code proposes extending the rights of shareholders to bring proceedings for breach of the duty of loyalty and to give courts the power to throw spurious claims out at an early stage.
Fines and penalties for such breaches would be increased under the Code. Directors have also been made to reimburse sums that were deemed to have led to unjust enrichment.
The D&O insurance market in Spain is flooded with providers and is considered a soft market. This may change as a result of the increased liabilities that directors are facing, due to the recommendations of the Code and changes in insolvency law. There has also been an increase in the regulatory requirements that directors and officers are now required to observe. One idea being considered is compulsory D&O insurance.
The number of claims against directors has also increased as consumer associations become more active and shareholders are likely to follow suit as a result of the recommendations proposed by the Code. Financial scandals, such as the investigation into BBVA over misuse of funds and falsification of accounts in 2002 and the collapse of the Gescartera brokerage house in 2001 following the disappearance of $1m of client money, have made both consumer associations and shareholders more aware of the need to protect their rights and pursue directors who do not fulfil their duties. As the scope of directors’ liability increases, insurance policies will have to be re-examined to ensure that coverage is adequate for both the company and directors. One particular concern for directors is that Spanish law (Ley del Contrato de Seguro 50/1980) does not recognise severability clauses in D&O insurance policies. As a result, directors may wish to consider taking out individual D&O policies.