Protecting company directors and officers against litigation risks

Litigation against company directors and officers is rare in Singapore, but it remains important to understand the risks that might lead to it, and the possible protections available.

Singapore presents a relatively benign legal environment for individuals who act as directors of local companies. For example, under Singapore law, a director owes duties to the company itself, not to shareholders and creditors.

Only the company can bring an action for breach of duty against a director, even though shareholders may be able to bring a derivative action for breach of duty on behalf of the company. As a result, the incidence of claims in local courts is limited.

Yet even though the risk of actions from a wider range of stakeholders is mitigated, there have been large and highly publicised collapses of local companies – Hyflux being an example – which led to claims against former directors and officers, potentially involving significant legal costs and damages.

Every company has its own risk profile that determines its board’s and management’s exposure to litigation and regulatory investigations. There are several factors that may affect this risk exposure, including geographic spread, a company’s stage of development and listed status. As companies grow and expand internationally, directors of their foreign subsidiaries face different legal environments to the parent company in Singapore.

Under local law abroad, directors may have extended duties to a wider range of stakeholders, and face courts which are more sympathetic to claimants. Employees may have stronger rights, and be more willing to seek redress from their employer and its directors for perceived breaches of rights. And environmental and consumer law may be more favourable to third parties.

The upshot of these circumstances is that the incidence and costs of litigation may be greater. This is certainly the case for North America and Australasia, for example, but significant fines and penalties can be imposed in South-east Asian countries too.

Another factor that could increase the board and management’s exposure to regulatory investigations is the company’s stage of development.

For instance, Singapore’s vibrant tech scene has seen significant capital raised from investors in recent years. Companies in the digital economy face challenges in expanding at speed while managing cash and trying to become profitable, amid a more difficult fundraising environment. They can encounter operational and financial difficulties that may result in their collapse and the threat of legal action against the directors and officers.

For companies that are listed or planning to list on a US stock exchange, the risk profile is dramatically different to that of a private or public company in Singapore. As US-listed companies, they become subject to securities law, greater regulatory scrutiny, and the risk of class actions against the company and its directors.

A report by Cornerstone Research in 2022 indicated that there were 208 class actions in the US against public companies and their boards, with the average cost of a settlement estimated at US$31.7 million.

The importance of corporate governance and environmental, social and governance (ESG) factors is much more pronounced and a key part of managing risk for these companies.

Given these factors, Singapore directors may want to understand if and how they will be protected in the event of an investigation or lawsuit: Will they be indemnified by the company?

In Singapore, a company can indemnify its directors for some liabilities, but it is prohibited from providing an indemnity against any liability occurring in connection to negligence, default, breach of duty or breach of trust in relation to the company. Elsewhere in the world, a subsidiary company or a US-listed entity may be allowed to provide indemnity in a wider or narrower range of circumstances.

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In the first instance, directors may wish to understand what protection – if any – is provided to them under a company’s articles of association, and what redress they may have under their employment contracts.

This may give some comfort, but there may be situations where enforcing such indemnities become problematic, for example where the company disputes the request. An added layer of protection can be provided by directors and officers (D&O) insurance. Regardless of legal barriers to the provision of direct indemnities, a company is not prevented from buying D&O insurance.

In doing so, the company protects its own balance sheet, where it can indemnify. It also protects the personal assets of the directors in cases where the company is prevented by law from providing an indemnity, or where indemnity is impossible – such as insolvency of the firm.

Civil lawsuits, regulatory actions and legal proceedings due to directors’ errors are a risk to both directors and organisation. The costs of such lawsuits and potential subsequent fines can run in the millions. Organisations and directors must therefore take steps to ensure that they themselves, as well as their balance sheet, are protected before lawsuits arise.