The One-Tier Board (IVOR nr. 85) 2012/2.7.4:2.7.4 Enforcement by the company

The One-Tier Board (IVOR nr. 85) 2012/2.7.4

2.7.4 Enforcement by the company

Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.Deze functie is alleen te gebruiken als je bent ingelogd.

Duties and liability is one thing; enforcement is another. In the US it is quite easy to start litigation, but indemnities from liability in the articles of association protect directors. UK directors have slightly less protection, but procedural factors ensure that public companies rarely sue their directors. Directors owe their duties only to the company. While derivative suits in the US often provide a viable platform, it is much more difficult in the UK for shareholders to get relief through a derivative suit. If the complete board has been changed, as occurred in the Equitable Lifè litigation, the new board can decide to have the company initiate the litigation. This may happen in exceptional cases. The English courts have made the derivative suit possible, but only in limited and very obvious cases, such as for fraud on the minority, ultra vires conduct and acts requiring a special majority of shareholders, and these will rarely apply to outside directors of public companies. Now section 263(2) of the Companies Act 2006, described in 2.7.3 applies Infringement of duties by outside directors is more likely to involve failure to exercise care or failure to consider all factors necessary for the success of the company, i.e. loyalty.1

In the UK the time, hassle and expense involved will discourage the launching of a suit. The question of costs plays a particular role in the UK. For example:

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the "loser pays" rule, i.e. all costs of litigation on both sides, therefore also the costs of the winner, must be paid by the loser; in the Equitable Life case, which was abandoned mid-trial, the plaintiffs had to pay their own costs and those of the company and directors — a total of £30 million;2

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although lawyers can agree to no win, no fee, the maximum "upside" is 200% of hourly rates; the US practice of contingency fees does not exist in the UK;

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even if plaintiffs win they do not get the proceeds, which go instead to the company; in other words, they have the full downside but not the upside;

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there is one advantage in that if the plaintiff gets leave to go to trial the company can provisionally be ordered to pay the litigation costs;3

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the defendant can demand an indemnity order or can benefit from an indemnity clause in the articles.

British literature describes the wisdom for shareholders not to involve the company in litigation. I mention a few points:4

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publicity of the case brings long-term reputational damage to the company;

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doubts about success; litigation may disrupt the decision making process of the company, because of the time involved for the board;

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deterrence of individuals becoming directors and inducing directors to leave;

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general discouragement of entrepreneurial directors;

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after the fact litigation is difficult.

The first four considerations not to litigate show common sense. They also apply in other countries, including the Netherlands. Shareholders who start litigation should always consider these points. Such UK common sense is a good example.

Deze functie is alleen te gebruiken als je bent ingelogd.