1 Directors and Officers' Risks, Liability and Insurance Update

quinn emanuel trial lawyers | sydney Level 15, 111 Elizabeth Street, Sydney NSW 2000, Australia | TEL +61 2 9146 3500 FAX +61 2 9146 3600 Directors and Officers' risks, liability and insurance Update - as at 2015 (December) This note provides an update on the risks and liabilities which have recently emerged for company directors and officers; as well as several other recent developments. In summary: 1. Emerging risks i. There is heightened community activism and a resulting increase in regulatory action, corruption investigations, and securities class actions; ii. cyber risks (which are emerging overseas); and iii. developments in the regulation of white collar crime (and in particular the new policy position of the US DOJ). 2. Liabilities i. We have conducted a review of major Australian D&O claims in the last 12 years (see below). This reveals the key ongoing risks and trends for Australian directors and officers; and ii. we provide below an update on two recent developments in the litigation funding sphere (the “common fund” and a case concerning ”bookbuilding” by funders). 3. Insurance i. From our experience, the leading D&O policies of insurance have responded well to the emerging risks and liabilities presently being faced by companies, as well as the continuing flow of securities and other class action claims; ii. at the same time, the confluence of substantial claims and emerging risks under D&O policies of insurance is leading to underwriters reviewing their appetite (capacity and pricing), approach, and the wording of their D&O contracts of insurance; and iii. we provide below a summary of four specific developments in the insurance law area in 2015 which may interest directors and officers. Detailed analysis Emerging risks 1. Activism . There is a global (and local) trend toward heightened community activism. This commercially translates into greater shareholder activism and expectations of proactive regulatory action and corporate accountability. For example: i. Regulators (and the governments that support them) are more active – perhaps even invigorated by the global financial crisis. More recent developments include: in Australia, ASIC’s ongoing investigations into Australia’s major banks around BBSW and Fx trading; overseas, the US DOJ’s September policy announcements which reinforce regulators’ attention on the personal liability, including criminal liability, of individuals involved in corporate wrongdoing; ii. Ongoing focus on corruption, including foreign bribery and, in Australia, expropriation of assets and sovereign risk. By way of spot sample, we have recently been involved in a series of cases, including in the High Court of Australia, around a company's liability for the alleged corruption of its founding directors; as well as the previously unheard of instance of Swiss regulators, in conjunction with Australian police, pursuing an Australian expatriate executive in respect of a federal cartel/corruption inquiry; and iii. Securities class actions remain a hot topic - although having now been around so long, 1 quinn emanuel trial lawyers | sydney Level 15, 111 Elizabeth Street, Sydney NSW 2000, Australia | TEL +61 2 9146 3500 FAX +61 2 9146 3600 they can't really be called a recent development. However, two decisions in the last year have proved to be a setback for litigation funding. 2. Cyber risks . These can manifest as D&O claims (as currently occurs in the US) where it is alleged that directors breached their duty of care by failing to properly protect the company. The publicly notorious data breaches experienced by JP Morgan, Sony and many other companies have highlighted how cyber risks have become a major concern for corporations, as well as government and regulators. These risks are increasing, with major Australian public companies reporting constant attempted breaches. It is no longer a matter of if - just when and how a company will be subject to a major cyber breach. The risks are high for the corporation, as well as its Board and executive members. There are regular reports of not only “phishing” attempts, but also success, where an email is sent from a source purporting to be someone else – often a senior executive of the organisation – to someone in the organisation requiring a transfer of money or information. We have been involved in such a case where the target company was able to recover its loss from its insurer. In the US, there have been a number of cyber-related derivative actions, including cases against Target and Wyndham. These actions face a number of hurdles, including the business judgement rule. They are brought along the lines that the D&Os breached their fiduciary duty of care and wasted corporate assets by failing to take reasonable steps to protect customer information, implement sufficient controls and/or caused the company to conceal breaches from investors and customers. 3. “White collar crime” – It is well recognised that the US trend of increasing regulatory action and claims around corporate crime and losses, will be repeated in Australia. When, however, is more uncertain. On September 9, 2015, the US Department of Justice (“DOJ”) issued a new and tougher policy memorandum for dealing with “white collar criminals”. 1 Amongst its key recommendations were: i. “To be eligible for any cooperation credit, corporations must provide to the Department all relevant facts about the individuals involved in corporate misconduct.” As the Yates memorandum notes: "The rules have just changed. Effective today, if a company wants any consideration for its cooperation, it must give up the individuals, no matter where they sit within the company. And we’re not going to let corporations plead ignorance. If they don’t know who is responsible, they will need to find out. If they want any cooperation credit, they will need to investigate and identify the responsible parties, then provide all non-privileged evidence implicating those individuals. .There may be instances where the company’s continued cooperation with respect to individuals will be necessary post-resolution" 2 ii. “Both criminal and civil corporate investigations should focus on individuals from the inception of the investigation.” 3 The rationale is clear: "This guideline represents a significant break from the current DOJ practice of focusing on the actions of corporations, rather than individual employees. It 1 Sally Quillian Yates, “Individual Accountability for Corporate Wrongdoing,” Sept. 9, 2015 (“Yates Memorandum”), available at http://www.justice.gov/dag/file/769036/download 2 Yates Memorandum at 3-4. 3 Yates Memorandum at 4. 2 quinn emanuel trial lawyers | sydney Level 15, 111 Elizabeth Street, Sydney NSW 2000, Australia | TEL +61 2 9146 3500 FAX +61 2 9146 3600 serves as a reminder that fear of individual prosecution can be potent motivation to tell the truth in hopes of receiving credit for cooperation."4 iii. “Absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals.” 5 iv. “Civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.” 6 v. As the Yates Memorandum explains, meritorious civil suits will now be pursued even if the individual is unlikely to be able to satisfy a substantial money judgment. 7 As a result, there will likely be a marked increase in civil enforcement actions. As Yates explained, a civil judgment can indeed be a powerful deterrent. 8 The government will not only seek all available assets to satisfy the judgment, it will impact the ability to find future employment. 9" The contrast with Australia is stark. The DOJ has recovered billions of dollars in settlements, yet the DOJ by the Yates memorandum, is seeking to “change corporate culture.” 10 . Conversely in Australia, the Chair of ASIC Greg Medcraft described Australia as “soft on crime” – with much ensuing controversy. Still, press reports indicate that almost all submissions to the current Commonwealth of Australia’s Parliamentary Foreign Bribery Inquiry are to the effect that this area "needs major reform.” 11 The focus in Australia arises not only from the prosecution of the former chairman of the Australian Wheat Board, but other alleged cases of foreign bribery involving Leighton, Reserve Bank / Securency and BHP (amongst others). A survey by Deloitte found one-third of companies operating in high risk destinations like Asia, Africa and the Middle-East, had uncovered bribery or corruption incidents over the past 5 years. What, if any direction, Australian reform will take, is guesswork. Submissions to the Parliamentary Foreign Bribery Inquiry included: (a) an enforcement approach akin to the UK Bribery Act, in which a company at which corrupt activity has occurred is automatically liable, unless it can show a culture of anti-corruption culture; and (b) a return to where we started, the effective (perhaps past) US system of deferred prosecutions, where a deal is struck between the regulator and the company, often with substantial fines being paid and a “period of good behaviour”. Liabilities The following table sets out major litigation over the last 12 years (which is a matter of public record). Each action has either involved company directors or officers as parties to the litigation (denoted by an *) and/or could have concerned the company Board and/or executives, given its nature and circumstances:

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