Hong Kong: Who Wants to be a Director in Hong Kong?

Last Updated: 1 December 2004

Background

At the same time as corporate governance reforms are requiring more independent non-executive directors to be appointed, there is a growing recognition that the companies who appoint them, their shareholders, the authorities and the general public are expecting higher and higher standards of care and skill. It is inevitable that such higher standards of care widen the scope for exposure to personal liability.

As directors become more concerned at the prospect of being personally sued for decisions they make, the more demand there is for Directors' and Officers' Liability Insurance ("D&O"). Such cover is increasingly being asked for, particularly by independent non-executive directors, as a condition of accepting an appointment to the board of a listed company, given that Hong Kong law does not accept that the legal liability of independent non-executive directors should be any different from that of executive directors who are involved in the day-to-day management of the Company.

D&O in the Hong Kong context

D&O originated in the US where the fear of litigation, vexatious or otherwise, has been part of the daily lives of directors of companies for many years. Although it has been available in Hong Kong for some years, until recently there was a "grey area" as to whether such policies were enforceable against the insurer because of Section 165 of the Companies Ordinance. In the past, the wording of this section made it arguably illegal for companies to pay the premiums for D&O policies for their directors.

However, since the Companies (Amendment) Ordinance 2003 come into force in February 2004, Section 165(3) of the Companies Ordinance has been amended which puts beyond doubt that it is perfectly legal for a company to buy D&O insurance for its directors to cover them against negligence, default, breach of duty or breach of trust. Such insurance does not cover any personal liability the director may be found to have as a consequence of fraud being proven. It is also no longer necessary for a claim against a director to be dismissed or for there to be an acquittal before cover is triggered. As defence costs are often incurred negotiating settlements and before the outcome of a trial is known, this amendment should be welcome for company directors.

D&O for Non-Profit Organizations

A recent variation of D&O cover which our firm has recently come across is a D&O policy specifically designed for non-profit organizations such as clubs, charities and NGOs. Under such policy, it is not only the directors and officers who can benefit from such insurance but also various volunteers and committee members who may be involved in the organization and running of sporting or entertainment events which may be arranged from time to time. Such cover is particularly useful for sporting clubs involved in more hazardous pursuits or for charities or NGOs putting on large events involving the public.

Conclusion

Although D&O policies are widely available in Hong Kong, they can be quite complicated as there are likely to be many legal issues to address. It is important to read the policy and all its schedules and endorsements carefully as there is no such thing as a "standard" form of wording for such policies. It is also important to understand how such policy works and how it fits in with other policies the company may already have to cover the company itself or its managers and employees. Particular legal issues to address are conflicts of interest and shareholder approval, particularly given that such arrangements are likely to give rise to a classic conflict between what is good for the directors and what is reasonable and in the best interests of the company. The ideal D&O policy should strike a reasonable and fair balance between the interests of directors and the interests of the company and be negotiated at arm's length and in a fair and transparent manner.

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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