1. Introduction

As modern day business practices evolve, the scope of director and officer liability expands. Directors and officers have a common law and statutory duty to exercise reasonable care and diligence.1 In the era of the digital age and emerging technologies, along with the growing trend for seeking action for failure to follow regulations and standards, directors and officers must ensure they have adequate coverage for unanticipated claims.

This article will discuss emerging risks for directors and officers in attracting liability, along with statistics and recent developments in some keys area both north and south of the border.

2. The risks in numbers

a. United States

Large insurance companies operating in the United States keep up-to date, comprehensive information on director and officer losses and claims.

In 2018, it was reported than more than one in four private companies in the United States experienced a loss in relation to director and officer claims in the last three years2, with the average monetary loss reported as $399,394 USD.3

From 2011-2019 directors and officers liability claims originated from the following:

  • Derivative shareholder and investors suits – 35%
  • Director shareholder/investor suits – 32%
  • Employer related – 32%
  • Regulatory – 15%
  • Other – 13%4

Other reported director and officer liability claims have included: customer suits against the company and/or directors or officers, vendor or supplier suits against the company and/or directors or officers, competitors suits against the company and/or its directors and officers, government agency and regulatory fines, partners or other shareholder actions against the company, and directors or officers sued in connection with decisions relating to the purchase or sale of any equity or debt securities.5

b. Canada

Statistics regarding director and officer liability insurance claims are not as readily available in Canada as they are in the United States. It is apparent, however, that there is a growing increase in both regulatory noncompliance claims, as well as environmental liability due to enhanced exposure for directors and officers through the development of case law and statutory liability. Regulators like the Ontario Securities Commission and the Alberta Securities Commission appear to be launching more wide-reaching and onerous investigations. Additionally shareholder class action litigation relating to potential director and officer liability is increasing according to the number of claims filed.6

3. Areas of emerging risk

a. Traditional financial causes of action

Litigation related to securities and shareholder actions is on the rise. Secondary market liability included in Canadian securities legislation creates significant exposure for personal liability to directors and officers in such actions. Additionally, the CBCA was recently amended to clarify the "best interests of the corporation" may require directors and officers of the corporation to consider the interests of shareholders, creditors and consumers.7

Personal liability that may attach to directors and officers has also been expanded through case law. The Supreme Court of Canada ("SCC") recently held that directors and officers may be personally liable, rather than the corporation, for oppression remedy claims.8

In the United States, there were a reported 441 new securities class actions filed in 2018.9 The average settlement for each being roughly $69 million.10 Moreover, this increased pace of new claims for securities class actions filings appears to be continuing in 2019.11 Currently, 83% of finalized company mergers result in litigation and it is expected that one in 12 publicly traded companies will be sued in a securities class action within the year.12

b. Environmental claims and exposure to liability

In recent times, Canadian courts have expanded the liability of directors and officers of a corporations and held them personally responsible for acts and environmental offences committed by the corporation during the time they serve on the board. Further, recent amendments to the CBCA have clarified that statutory liability may arise in situations of environmental negligence as directors and officers should consider the interests of the environment in discharging their duty of ensuring the best interests of the corporation. The regulatory regime and legislation such as the Canadian Environmental Protection Act ("CEPA") and provincial statutes also increase the likelihood that a director may attract personal liability for decisions undertaken that impact the environment. Under CEPA, a director may be held liable for offences committed by the corporation that the director may have "directed, authorized, assented to, acquiesced in or participated in."13

Director and officer liability for corporate environmental negligence has been further developed in common law. An Ontario court recently found that the directors of a company were both not covered by their environmental liability policy and their director and officer policy excluded remediation. The directors of the company were ultimately found personally liable and forced to pay applicable fines.14

This potential area of director and officer liability has not seen as much activity in the United States. The last action in which there was an attempt to attach personal director and officer liability to an environmental claim was in 2007 and was ultimately unsuccessful.

c. Cyber security and data breaches

Directors and officers may be held liable for cyber attacks or data breaches if they are found to have failed to meet their requisite duty of care. Additionally, directors and officers may also be held personally liable in the event that a corporation fails to comply with Canada's Anti-Spam Legislation.15 In April, 2019, the CRTC found nCrowd, a coupon marketing company, had violated CASL and additionally assigned personal liability to their former CEO for the violation. The former CEO was ordered to pay a $10,000 fine.

There have yet to be any claims filed against directors and officers for cybersecurity breaches in Canada, however there have been quite a few derivative actions in the United States. In January of this year, a multi-million dollar amount was awarded to customers for a data-related derivative action.

d. New financial risks

The increased prominence of cryptocurrency and blockchain used in everyday transactions will likely lead to future claims. There has yet to be any litigation surrounding cryptocurrency or blockchain in Canada as regulators have found it difficult to assert actual oversight over forms of digital payments. This confusion rests with whether securities commissions across the country are able to properly qualify cryptocurrencies as "securities", a requirement for attracting market liability.

In the United States, there has been only one case where a defendant sole director was found guilty due to his "undeniable influence" over the cryptocurrency enterprise he was operating and its subsequent failure to launch.16

Key takeaways

Due to the uncertainty surrounding emerging fields in business generally, there are considerable risks surrounding the potential for personal liability for directors and officers. As a result, additional risk management is recommended in order to ensure personal liability is limited. Some ways to reduce risk include:

  • Ensuring operational structures and processes are both comprehensive and formalized (including establishing a formal information reporting system) and that directors and officers are familiar with the processes;
  • Ensuring corporate documents contain proper indemnification and limitation of liability provisions;
  • Providing statutory liability and negligence training to ensure director and officer awareness. Training of directors and officers on areas of risk and management should be updated every six months;
  • Minimizing risk of conflict of interest;
  • Ensuring directors and officers experience and background is diverse;
  • Implementing a comprehensive indemnification policy; and
  • Last but definitely not the least, a comprehensive insurance policy should be maintained. Some questions to ask your insurer or broker:

    • What is Side A, Side B and Side C insurance?
    • Who is covered and how can committee members be covered under the policy?
    • What run off periods are applicable?
    • What would be the impacts on insolvency?
    • What are the reporting timelines and obligations?
    • Is it is a claims made v. an occurrence policy?
    • Should additional insurance be obtained for key members of management such as the CEP and the CFO?
    • What are the Exclusions in the Policy?
    • Who controls the defence of a claim in the event one is made against the directors and officers?

Footnotes

1 Peoples Department Stores Inc v Wise, 2004 SCC, Canada Business Corporation Act, RSC 195, c C-44 s 122(1) [CBCA]; Ontario Business Corporations Act, RSO 1990 c B 16 s 134(1).

2 https://www.chubb.com/us-en/_assets/doc/2018-04.20-14-01-1270-private-company-infobook.pdf

3 https://www.chubb.com/us-en/_assets/doc/2018-04.20-14-01-1270-private-company-infobook.pdf

4 file:///C:/Users/mclellanl/Downloads/2018-management-liability-d-o-us-survey-executive-summary.pdf. We also reviewed the case law filed in some of the key jurisdictions and federal courts to estimate the filings and number of cases in 2019.

5 https://www.chubb.com/us-en/_assets/doc/2018-04.20-14-01-1270-private-company-infobook.pdf. We also reviewed the case law filed in some of the key jurisdictions and federal courts to estimate the filings and number of cases in 2019.

6 https://energynow.ca/2019/04/trends-impacting-directors-and-officers-liability-in-2019-iridium-risk-services/.

7 CBCA 122, s 1.1.

8 Wilson v Alharayeri, 2017 SCC 39, paras 60 – 65.

9 https://www.nera.com/publications/archive/2019/recent-trends-in-securities-class-action-litigation–2018-full-y.html.

10 https://www.nera.com/publications/archive/2019/recent-trends-in-securities-class-action-litigation–2018-full-y.html. This figure can be attributed to a $3 billion settlement in the year 2018.

11 https://www.brinknews.com/do-liability-three-emerging-areas-to-watch/.

12 https://www.brinknews.com/do-liability-three-emerging-areas-to-watch/

13 CEPA, s 280 (1).

14 Baker et al. v. Director, Ministry of the Environment, 2013 ONSC 4142.

15 SC 2010, c 23.

16 Hodges v Monkey Capital, US District Court, Southern District of Florida, 2018.

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