A court has ordered a company to allow a shareholder to inspect
its D&O policies. Inspection was to help the shareholder decide
whether it was worthwhile suing the company's directors. This
does not mean that all D&O policies are now available for
inspection by all shareholders, but it does represent a significant
intrusion into the confidentiality of D&O arrangements.
A shareholder of Style Ltd wanted to inspect the company's
records, under section 247A of the Corporations Act. The
shareholder wanted to determine whether Style's directors had
breached their duties to the company and, if so, whether the
shareholder should apply to begin a derivative action against the
The Court concluded that in seeking access for this purpose the
shareholder was acting "in good faith" and "for a
proper purpose" (as required by section 247A).
As is usual in this type of case, inspection of a wide range of
documents was sought. However, there was one unusual group of
documents that the shareholder wanted to see: the company's
D&O insurance policies.
The Court noted that this appeared to be the first time that
such an application had been made.
D&O liability policies
The shareholder pointed out that it is quite common for
liquidators of a failed company to be given access to D&O
policies and to quiz insurers about those policies. (These orders
are made to allow the liquidator to determine whether a law suit
against the company's directors would be financially
The contrary view was that was a totally different situation,
for two reasons:
liquidators are not ordinary private litigants - they hold
offices and exercise powers created by the Corporations Act;
the "real" purpose of section 247A is simply to allow
shareholders to determine whether directors have a case to answer,
not to allow them to work out how much money a successful suit
against them could bring in.
The Court agreed that the analogy with liquidators was not
perfect. It pointed out that liquidators often seek information
about D&O policies because they don't know if the company
even has such policies. By contrast, in this case, the
company's annual reports had indicated that the company had
Nevertheless, all that the annual reports indicated was that
there had been policies during the relevant (and now past)
financial year. The shareholder had no idea what the policies
covered and whether they were still current.
Accordingly, the Court thought that it was appropriate to allow
the shareholder to inspect any D&O policies currently held by
the company. The information in those policies would be relevant to
any decision on whether to begin derivative proceedings against the
This is the first reported instance in which such an inspection
order has been made.
It clearly does not open the floodgates to all shareholders.
Nevertheless, at a time when litigation against directors
(particularly class-actions) is steadily increasing, we would
expect that this type of inspection order will become more
An obvious immediate concern for both companies and their
insurers will be confidentiality. The Corporations Act itself
imposes criminal liability on anyone who discloses (to a third
party) information obtained from a court-ordered inspection of
company records. This means that competitive confidentiality should
not be at risk when this type of order is made.
Nevertheless, there is a second, separate confidentiality issue:
many older D&O policies contain confidentiality clauses which
bind both the company and its directors. If a court orders that a
shareholder should be given access to those policies, those
confidentiality provisions would be overridden to the extent
necessary to comply with the order.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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