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Encouraging litigation
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Evan Pickworth
Financial Mail
Friday, June 04, 2010
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When the new Companies Act comes into effect this year, company directors and officers face a heightened risk of litigation. They will also need to be more wary of what they say. The competition commission has broadened its focus to monitor practices that might lead to collusive agreements — such as sharing sensitive information between competitors.
Increased shareholder activism and the extension of liability to a wider class of persons means SA is likely to follow the trend in the UK and Australia where there has been an increase in litigation against companies, their officers and directors.
According to insurer Chartis, in Australia claims against directors and officers doubled in the past four years. In the UK, the market for company insurance is forecast to grow by 27% to £596m by 2013.
Key provisions of the Companies Act increase the likelihood of legal action .
“The scope of persons able to bring an action, as well as the basis for liability, is now much wider,” says Philip Hobson, financial lines manager at Chartis SA.
Currently, shareholders cannot bring legal action against officers directly — they have to ask the company to bring a lawsuit against an officer who committed a wrongful act. But directors and company officers are unlikely to take legal action against their colleagues .
“Under the new Companies Act, shareholders will have direct recourse against directors and officers in a personal capacity as long as they can prove they have suffered damages,” explains Hobson.
Directors will be personally liable for breaches of their fiduciary duties and may be sued for loss and damages caused to creditors, employees, customers, competitors and shareholders .
For example, if a director makes a bad decision or acts negligently, causing a company to suffer financially, an employee retrenched as a result will be able to bring action against the officer , says Hobson.
The act now specifically provides for class action lawsuits by extending liability to a class of persons. This can greatly increase the amount claimed and executive assets may be vulnerable .
Company directors and officers need to prepare for new competition law as well. The competition commission’s focus on information sharing to tackle cartels may have unintended consequences .
Robert Wilson, competition law partner at Webber Wentzel, says the commission is trying to ensure the sharing of information does not lead to a change in the competitive behaviour of companies.
If competitors meet, say, at an industry body, and exchange company-specific information that is not publicly available, it increases the transparency to both parties.
Desmond Rudman, also a competition law partner at Webber Wentzel, says companies have to understand what type of information is considered competitively sensitive and the circumstances in which its exchange raises competition concerns.
But the strict approach may have unintended consequences. Wilson says business people could become so wary of sharing industry information that they may stay away from events where they might rub shoulders with competitors.
“This could lead to consumers being worse off in instances where standards need to be set or an industry-wide approach adopted,” he says.
Rudman adds that the competition commission is most concerned about information sharing about pricing, sales quantities, production levels and capacity utilisation, particularly if it reflects current or future intentions.
The result of the changes is a tougher climate for senior company executives. Many would argue it is about time.
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