AIDA FranceClimate Change Working

PartyTHE VW SCANDAL WATCHED WITH D&O SPECTACLES

BY DR ADOLFO PAOLINI

UNIVERSITY OF BUCKINGHAM UK AND DACBEACHCROFT LLP PARIS, DECEMBER 2ND 2015

Volkswagen wrote to me

D&O Main Features

Developed to protect Directors and Officers and not the Company Liability Insurance: Professional Indemnity Insurance/Third Party

Insurance Liability must be established to trigger substantive cover Claims Made Policies D&O does not cover wilful misconduct/fraud D&O does cover regulatory investigations Types: Side A , Side B and Side C Pollution is often excluded

Uncontested Facts

11/09/2015 VW made public a statement highlighting how prosperous and environmentally friendly VW was. ‘world’s most sustainable automotive group’

Investors had purchased American Depository Receipts (ADR’s) in US/ share price lost more than a third of its value

18/09/15 US Environmental Protection Agency served a notice of VW

VW faces billions of Dollars in fines: $37.000 per vehicle/VW set aside $ 7 Billion / Almost 0.5 million cars affected in US and 11 million worldwide.

Uncontested Facts

25/09/15 Germany disclosed that 2.8 million cars have been affected and VW supervisory board has instructed lawyers both in US and Germany to investigate the case

VW admitted liability for the use of ‘defeat devices’ to rig the emissions test/software to circumvent EPA

VW senior officers denied liability and/or knowledge of misconduct

Volkswagen Scenarios

1. Company’s Liability for breaching anti-pollution rules 2. Directors’ Liability to the Company for breach of directors’

duties3. Class Actions against VW by consumers 4. Class Actions against VW by company shareholders/investors5. Attempted actions against directors by third parties6. Attempted actions against directors by Environmental Agencies7. Regulatory Investigations8. Defence Costs Cover

German Scenario and D&O Implications

German Two tier system: Supervisory and Executive Board1. Stock Corporation Act s 111: supervisory board brings the claim,

on behalf of the company, against the executive board and/or management board s 93(4)(3)

2. Shareholders could pass a resolution and force the supervisory board to proceed s 147

3. Shareholders have also the statutory derivative action/1% of the shareholding or Euro 100.000 nominal value. Leave of court is required/ suspicion of dishonesty/must be beneficial for the company/ shares must be acquired before the issue arises

3.1 Shareholders bear the cost/ claim it back if successful 3.2 unfounded actions/shareholders do not recoup costs

German Scenario and D&O Implications

D&O policies ( as any other form of insurance) exclude fraud and /or wilful misconduct/ liability must be ascertained before the exclusion applies

Company’s admission of liability may not affect innocent directors/composite insurance policy/severability

Two tier system and potential conflict of interest/insured v insured (less used these days)/policy wording/policy limits

Insurer choice to defend or settle out of court/ duty to defend and indemnify

Bentham Europe Ltd: shareholder action litigation financing for breach of Securities Trading Act

German Scenario and D&O Implications

Defence Costs? Who bears that defence costs?/Policy Wording/ Hendricks and Fassback (Howden Broking Group) proposal: 1. twin model tower/different limits of indemnity/supervisory and

executive board2. Two towers with different limits of indemnity/like excess policies3. Third party notice to the SB triggers liability.

The UK Strategy

One tier system/executive and non-executive directors Directors duties owed to the company/breach of duty Minority Shareholders derivative action The strategy;1. Rules of Attribution/directors’ misconduct attributed to the

company2. Jetivia v Bilta effect3. Safeway v Twigger/ competition rules/ illegality/ effect

Could Directors be personally Liable to third parties?

Northstar Aerospace v Ministry of Environment Ontario Canada [2012]The company knew about the polluting agent and did its best to clean the site. The Company run out of cash to continue to clean the site and became insolvent. Directors did not act maliciously or negligentlyDirectors and Officers were held personally liable to fund the cleaning up cost of company’s site.D&O’s agree to pay up to 4.5 Can $ and the dispute was settledD&O Insurance policy excluded pollution.

Conclusions

Directors personal liability Side C cover/policy limits Pollution exclusion Defence costs cover German Two tier system UK potential exposures

Thank You

adolfo.Paolini@Buckingham.ac.uk

apaolini@dacbeachcroft.com