Directors and Officers Liability Insurance in State-Owned Companies
The rapid expansion of the Directors and Officers Liability insurance, known as D&O, in the political world is due to various factors including:
- The unlimited liability of the company’s officers
- The influence of the European Union Directives
- The formal and strict environment of corporate governance
- The modern views attributing liability to the companies’ officers and seeking more transparency in the accounts of companies
- The globalization and the wide publicity of failures and company scandals.
Moreover, directors understand the limitations of companies to provide coverage through the Articles of Association. Even if the company has a contractual obligation to provide coverage, the director might have to go through a traumatic experience when he discovers how fast his colleagues can abandon the company.
In Cyprus, this need became imperative in 1999, the year when the mass disclosure of companies at the Stock Exchange Market began. The disclosure put an end to corporate secrets. Public companies have to announce everything regarding their work, their transactions, their financial data, acquisitions, mergers, alliances and others. Every six months they have to announce their audited accounts and their results. The disclosure of a company implies a sharp increase in the number of stakeholders. The need to keep the shareholders satisfied, to control the associates and the company’s managerial staff and to please the customers, increases and makes more complicate the obligations of the administrative council members vis-à-vis all parties involved. The number of mergers and acquisitions is expected to increase steadily and the financial protection of the directors, who are responsible for the purchase or sale is of vital importance.
The exposure to risks of the directors and officers has been escalating for some years. Suddenly, new laws and new standards for corporate governance accumulate more responsibilities on their shoulders. The personal assets of directors and officers are in danger now more than ever. Justifiably, talented people are wondering whether being a director is worth it. Fear of such dangers could bring the economy to a standstill. Personal dangers today are so big that many capable people reject the challenges of being appointed in councils and many directors and officers behave more cowardly than they would have behaved under different circumstances.
For this reason, the insurance shielding directors and officers from responsibilities that could cause irreparable damage to their personal assets is of particular importance. The directors and officers liability insurance:
- Encourages interested parties to accept an appointment in administrative councils
- Allows directors to take commercially justified risks without the fear of personal financial ruin
- Makes available a substantive common fund for the compensation of victims of wrongdoing (which is generally the standard theory for the necessity of insurance)
- Discourages unsubstantiated lawsuits
Public Law Organizations
It is not just the company directors, who are legal persons governed by private law, who have personal responsibilities but the directors of public law organizations as well. The public law organizations are established by law in the public interest and the capitals are either provided by or are guaranteed by the Republic.
The directors of public law organizations have general duties based on common law and more specialized duties based on the organizations’ founding laws. As far as the general duties are concerned, there is too little case law available to draw on and according to the Personal Liability in Public Service Organizations report, the duties applicable to directors of private law companies apply mutatis mutandis and are divided into five categories:
- Duty to act on behalf of the organization: it refers to the extent to which the director is requested to get involved in the affairs of the organization and to take personal responsibility for them.
- Duty of aptitude and diligence: it refers to the level of skill (meaning the specialty, the experience or the ability) and the level of diligence (attention and interest) needed to carry out the specific project.
- Duty of faith: it refers to the limitations in exercising their powers in order to safeguard that the directors act with dedication and good faith toward the organization when carrying out any project assigned to them.
- Responsibilities of governance: they refer to the director’s duty to act with the proper authorization and to make sure that the organization acts within the framework of its founding laws and their regulations.
- Vicarious Liability: it refers to the director’s responsibility regarding the actions of the organization’s personnel and representatives.
Some public law organizations are already founding private law companies for various reasons like for example, commercial activities, research etc. The liability of the public law organization’s directors and officials, as well as of the executives is further compounded when they are asked to serve as directors of the organization’s subsidiary companies.
Irrespective of their legal status –private or public law – it is interesting to see the guidelines on corporate governance of state-owned enterprises issued by the Organization for Economic Cooperation and Development in 2005. According to this code, the administrative council of the state-owned enterprise must act with integrity and be held accountable for its actions. It must be assigned a clear mandate and ultimate responsibility for the enterprise’s performance. The council must be fully accountable to the owners and act in the best interest of the enterprise and treat all shareholders equitably.
Developments in modern times may justify the conversion of all state-owned enterprises into legal persons governed by private law, even if this means that the state will be the sole owner-shareholder. The conversion into legal persons governed by private law includes important benefits like for example avoiding the rigidities of public law regarding purchases of goods and services as well as the hiring and promotion of personnel. The placing of state-owned enterprises under company law will diminish any misconception about the directors having no personal liability and the belief that just the appointment makes them untouchable. It will help directors realize the seriousness of the personal liability that might arise when they act in their capacity as directors.
It is noted that public law organizations, local authorities, and other non-profit organizations are not legally competent to cover their directors regarding their personal liability that might arise when they act in their capacity as members of the administrative council. They do not even have the option that companies have to provide limited coverage in accordance with article 197 of the Companies Law. Moreover, the officers of such organizations are not entitled to request relief by the Court like the officers of enterprises pursuant to article 383 of the Companies Law.
December 17th, 2019