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Public Companies Update September 2005
5 DIRECTORS INDEMNITIES
Another important development in the last few months relates
to the changes, implemented earlier this year, to the provisions
of the Companies Act 1985 (CA) concerning the indemnification
of directors and other officers.
To re-cap, the pre-amendment provisions of CA (Section 310)
effectively prohibited a company from indemnifying its officers
(which includes directors, company secretary and senior employees)
or auditors for breach of duty, although a company could indemnify
them in defending civil or criminal proceedings in which judgment
is given in their favour.
Largely because of these restrictions, it is commonplace for
companies to purchase D&O insurance for their officers.
Although, under ABI guidelines it is not best practice for
AIM or fully listed companies to provide D&O insurance
for the auditors.
It was felt by many that the legislation relating to indemnification
was excessively restrictive and was having an adverse impact
on the ability of companies to recruit directors.
The new law, contained in new sections 309A-C CA (which have
been inserted by the Companies (Audit, Investigations and
Community Enterprise) Act 2004), creates a new regime for
the indemnification of directors which relaxes the old law
in many respects, yet tightens it up in others.
The way in which the old law has been relaxed is as follows:
| • |
a company can now indemnify its directors
(and those of its associated companies, i.e. companies
in the same group) for any liability to third parties; |
| • |
it can now fund the director's defence costs,
whether incurred or to be incurred, during the course
of civil proceedings (whether brought by the company itself
or a third party) arising out of those proceedings and
judgment is ultimately given in the director's favour.
If judgment is given against a director, that director
must repay (except where proceedings were brought by a
third party, in which case the company can elect to forgive
repayment); |
| • |
it can also fund the director's defence
costs, whether incurred or to be incurred, during the
course of criminal proceedings for costs arising out of
those proceedings (unless director ultimately convicted,
in which case director must repay); |
| • |
the company can fund the director's defence
costs through the provision of a loan, so that section
330 CA (which, subject to certain exceptions, prohibits
a company from making a loan to a director) is disapplied
for these purposes. |
However, it is important to note that a company cannot indemnify
a director in respect of criminal penalties or regulatory
fines (such as those imposed by the FSA or the SEC), but
the indemnity could cover the cost of regulatory proceedings
(say brought by the FSA for a breach by a director of the
Listing Rules) but could not cover any civil fine imposed
by the relevant regulatory body in these circumstances.
The new legislation imposes disclosure obligations where
indemnities are given to directors - the directors' report
must state that the relevant indemnity was in force and the
relevant indemnity agreement between the company and its directors
must be available for inspection by shareholders. This must
be done each year the indemnity is in force, i.e. not just
in the year the indemnity is created. This disclosure obligation
will apply to any indemnity in a company's Articles that meets
the requirements for a "qualifying third party indemnity
provision". This means that, most companies will need
to make a disclosure in the annual report and accounts.
It is very important to note that the new provisions relate
only to directors, not other officers or auditors.
The old law (i.e. Section 310) still applies to auditors,
but not to officers. This means that there are no statutory
restrictions on a company indemnifying its officers who are
not directors, such as company secretaries, but obviously
the board will want to have regard to its fiduciary duties
generally.
If you require further information on any matter covered in
this note, please contact your principal contact at Charles
Russell or Simon
Gilbert, Clive
Hopewell or Alexander
Keepin (London), Francis
Rundall , Richard
Norton, or Adrian
Mayer (Cheltenham), Catherine
Drew or Geoff
Sparks (Guildford) or Peter
Elliott (Oxford) on 0207 203 5000.
To download these articles in pdf format, please click
here
Please note that the summaries above are
a general indicative guide only. They are not exhaustive.
This information has been prepared by the firm as a service
to our clients. As it is a general guide, we recommend that
you seek professional advice before taking action. No liability
can be accepted by the firm for any action taken or not taken
as a result of this information. The firm is not authorised
under the Financial Services and Markets Act 2000 but we are
able in certain circumstances to offer a limited range of
investment services to clients because we are members of the
Law Society. We can provide these investment services if they
are an incidental part of the professional services we have
been engaged to provide.
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