REPRINT | FINANCIERWORLDWIDE.COM
FINANCIER
.COM
WORLDWIDE corporatefinanceintelligence
REPRINTED FROM EXCLUSIVE ONLINE CONTENT PUBLISHED IN:
NOVEMBER 2011
© 2011 Financier Worldwide Limited.
Permission to use this reprint has been granted by the publisher.
1
www.financierworldwide.com
TalkingPoint:
PERSONAL RISKS FACING
BOARD MEMBERS IN LATIN
AMERICA
REPRINTED FOR
REPRINT
REPRINT | FINANCIERWORLDWIDE.COM
FW moderates a discussion looking at personal risks
facing board members in Latin America between Pascal
Alvarez at Chartis, Alex Guillamont at Kennedys, and
Alejandro Guerrero at Marsh S.A.
Pascal Alvarez
Vice President
Chartis
Pascal Alvarez is a vice president at Chartis, in charge of Financial
Lines for the Latin America & Caribbean Region. Throughout his
near 20 year career with Chartis, Mr Alvarez has held a number of
managerial positions including Financial Institutions manager for
France, Financial Lines Profit Center manager for Spain, and Regional
Financial Institutions manager for the Continental Europe Region.
Mr Alvarez can be contacted on +786 777 74 79 or by email: pascal.
[email protected].
Alex Guillamont
Partner
Kennedys
Alex Guillamont is partner at Kennedys and the founding director
of their Miami Latin America office. His expertise includes policy
drafting, coverage and claims advice for insurers and reinsurers
writing a wide variety of risks in Latin America and the Caribbean,
including Financial Institutions. He was previously based in Kennedys
London and Madrid. Mr Guillamont can be contacted on +1 (305)
371 1111 or by email: [email protected].
Alex was assisted in the development of his answers by:
Jorge Salgado Gonzalez, Associate in the Miami office
T: +1 305 371 1111 Email: [email protected]
Alejandro M. Guerrero
Managing Director
Marsh
2
Alejandro M. Guerrero is managing director of Marsh and chief
operating officer for Marsh Argentina. He is also regional Financial
& Professional (Finpro) leader for Latin America & Caribbean and
a member of Marsh’s Finpro Advisory Board. Mr Guerrero studied
Law at the University of Buenos Aires and has been in the insurance
industry for over 26 years. His experience in the D&O, Professional
Indemnity, and Financial lines of insurance have earned him strong
recognition with insurers and clients throughout the region and world.
He can be contacted at +54 11 4320 5928 or by email: alejandro.
[email protected].
FINANCIERWORLDWIDE.COM | REPRINT
FW: To what extent have you seen an increase in the
personal liability risk facing directors and officers
(D&Os) in Latin America?
Alvarez: Despite the global economic downturn, most
Latin American economies are still growing and have made
the region a very attractive destination for investment and
expansion. As a result, international capital is flowing into
Latin America and with it the habits of foreign investors
which are highly demanding and potentially contentious.
Nowadays, new legislations around the world, the
increased role and activism of regulators in many countries,
coupled with increased international cooperation, means
greater scrutiny than few years ago, all this within an
expanding global environment in Latin America that is
focused increasingly on corporate governance.
Guillamont: In terms of personal liability risks of
directors it may be misleading to think of Latin America
as an entirely homogenous region. Latin America is an
amalgam of countries at different stages of development
and this in turn impacts the potential sources of liability
that directors and officers can face. In contrast with Asia
where securities class actions are not uncommon, only the
‘big six’ countries in the LatAm region – Argentina, Brazil,
Chile, Colombia, Mexico and Peru – have recognised
some sort of class action system, but under none of these
can a US type securities class action be brought outright.
In fact only a few LatAm stock exchanges are a common
point of reference in comparison to the Asian markets.
Guerrero: There are clear indicators that D&Os are
facing more personal liability cases. We carry registers
of cases along with several insurers and the number of
cases is growing. We do not consider that exposures
have necessarily increased; instead it is the awareness of
claimants that is causing the increase. More often than
before we find that cases that normally would have been
addressed solely to the companies are now including the
D&Os as well, as a strategy to generate more attention and
obtain higher or faster settlements. There are, however,
some new trends that increase exposures. For example,
as more countries and companies in Latin America adopt
and communicate concepts of compliance, transparency
and corporate responsibility, they are also assuming a
commitment towards such concepts that can broaden
the scope of their exposures and the awareness of the
general public. These are positive trends for the health
of business transactions in general, but company leaders
must also understand that such concepts may create
exposures when they are embraced and publicised.
FW: What types of claims are being brought against
D&Os?
Guillamont: At a corporate level we have seen an increase
in the number of claims notifications under D&O policies
that in legal terms would really fall under a fidelity policy or
a PI policy. While this may be the result of a more litigious
– or rather, more litigation-conscious – environment in
LatAm, it may also be a result of some D&O policies in
the market offering additional first party coverage to the
company. Legal actions against directors brought by the
company are not very common in the region due in part
to the thresholds of voting rights required to issue the
same, but every now and then there are family feuds that
do trigger derivative/minority shareholder claims. These
can also be brought by the company or a new board of
directors following an M&A transaction.
Guerrero: In general the trends have not changed. We
still see employee-related claims topping the list of claims
involving D&Os, with consumers claims close behind.
There have been some claims related to allegations of
lack of compliance with new administrative rules, such as
money laundering procedures and other types of financial
transactions under enhanced scrutiny by government
authorities.
Alvarez: Historically, many of the D&O claims against Latin
American companies used to be in the form of US class
action securities claims – for those companies listed on a
US stock exchange – or in relation to a dispute between
shareholders. As for investor relations, disclosure and
accurate forecasting, along with reporting standards, have
been tightened over the years and regulators are much
more active. As a result D&Os are today more likely to
be involved in an investigation, the outcome of which can
be fines or penalties. Nowadays, the matters giving rise
to litigation against D&Os are much more diverse and,
while a large number of them are against D&Os of the
top parent companies, we have observed more litigation
against D&Os of subsidiaries, within or outside their home
country, and even if wholly owned.
FW: Have there been any recent legal and regulatory
changes in Latin America which affects the personal
risks of D&Os?
Guerrero: The main changes in recent years have to do
with the administrative rules related to financial transaction
procedures that specifically address the responsibility of
D&Os for corporate conduct. Other regulations have
not changed in particular, however consumer laws and
regulations are putting more emphasis on actions that
resemble class-action suits related to consumer rights.
Alvarez: In general, several countries need to enhance
their legislation to bring them up to the new standards
of corporate governance and D&O liability. At the same
time, many others are on level footing with advanced
countries around the globe. Mexico recently approved a
law that will enter into force on March 2012 and enable
class action claims to be brought in relation to consumer
3
REPRINT | FINANCIERWORLDWIDE.COM
products, financial services, environmental matters,
pollution or breach of antitrust regulations. Also, Brazil
has recently started insider trading investigations related
to earnings releases, and CVM, the Brazilian securities
regulator, is developing a new system to monitor markets
and detect trading patterns on the days prior to earnings
releases. The use of non-public information to trade
securities is a crime in Brazil and exposes its authors to
severe penalties.
Guillamont: One striking aspect of the risks assumed
by D&Os in Latin America is that, generally speaking,
the board is jointly liable together with the director at
fault. This feature of company law in the region has not
changed since the relevant statutes were first enacted at
the beginning of the 20th century although the judicial
tendency in civil law countries has been to find liability
for breaches of the duty of care even in cases of ordinary
negligence, where the line between the business decisions
or risks assumed by the company and the decisions or
negligence of the directors is easily blurred. While in
common law jurisdictions courts have been very reluctant
to establish a duty of care between D&Os and individual
shareholders or the company’s customers, in principle
there is no legal impediment to establish such duty in
LatAm countries, there being only a general duty of care
in tort. As such it remains to be seen if NGOs or other
stakeholders will use the still evolving LatAm class action
regimes as a platform for bringing civil claims against
D&Os for alleged financial or moral damages.
FW: What kinds of prosecutions, settlements and
penalties have you seen imposed upon D&Os in
Latin America? Are there any particular cases worth
highlighting?
Alvarez: Despite the fact that the litigation environment is
not as active in Latin America as it is in more developed
regions, we are starting to see an increase in litigation
activity. Although not all claims brought against D&Os
result in paid losses, the associated defence costs are
steep as the process tends to extend over a long period
of time and legal fees can represent a substantial portion
of the final cost. In terms of exposures faced by D&Os,
among the most common we currently see are bankruptcy
and mismanagement, tax liability investigations, criminal
investigations and prosecutions, securities class actions,
and antitrust investigations.
Guillamont: In Brazil the securities regulator has settled
investigations for approximately $100m and has imposed
fines on companies of around $300m. In Mexico the
securities regulator is currently probing several insider
trading activities involving separate listed companies, has
been bolstering its staff and investigating unusual share
transactions that occur before an important company
announcement. In August 2011 the Mexican securities
4
regulator fined a trader of UBS approximately $120,000 for
using inside information to make stock recommendations
to his clients. Most claims made under D&O policies in
Peru relate to criminal prosecutions against contractors
of public procurement projects and criminal prosecutions
by the securities regulator. Wide attention has been
paid in Chile to a claim against the D&Os of retailer
La Polar concerning an alleged manipulation of the
account receivables to artificially increase the value of the
company’s stock.
Guerrero: There have been very few cases that have
actually required settlements and in most cases the
principal factor of claims expenditures are defence costs.
There have, however, been an increasing number of
prosecutions against D&Os related to tax liability cases
and money-laundering dispositions. A particular case
in Argentina related to the prosecution of the money
laundering officer of a bank for not notifying a specific case
when an officer from another bank that co-participated in
the same operation did notify the same operation. The
defence counsel indicated that the principal that ruled
such notifications was not the size of a specific transaction
but, instead, the abnormality of a certain transaction
according to normal and typical client behaviour. In this
case Bank A was the principal bank with which the client
in question regularly conducted sizeable operations and
this was just another typical operation, but for Bank B,
with whom the client operated much less, this was an
atypical operation and therefore each bank, applying
the same principal, viewed the same operation in two
different ways and acted accordingly. The case is still
being discussed pending final decision as to pretension
of penalising the officer.
FW: What affect is the general increase in corporate
regulation, and associated penalties, having on D&O
liability insurance?
Guillamont: D&O insurance is a relatively recent
introduction to the LatAm market and not as widely
purchased as in more litigious jurisdictions elsewhere. The
evolving regulatory changes in the region may not have an
immediate impact on the general terms under which D&O
cover is offered, nor on premium levels. Any modifications
in this respect will most likely be considered on a case
by case basis and the company’s and/or director’s claims
history. Perhaps those companies with trade or investment
links to the UK and the US will most likely be affected by
D&O pricing in those jurisdictions, particularly companies
whose shares are traded in those markets.
Guerrero: There has not been a direct effect on pricing
and claims are still quite low for Latin America in general,
however we are observing that insurers intend to be more
conservative in the extension of policy wording, in particular
when financial operations wordings are involved.
FINANCIERWORLDWIDE.COM | REPRINT
Alvarez: Demand for D&O policies has seen a considerable
increase in the last couple of years, but penetration is
still very low. We still see locally listed companies and
even ADRs without the proper D&O risk management
programs in place. Nonetheless, awareness is evolving,
brought by the influence from more developed markets,
the interest of more sophisticated investors, the use of
outside directors and the increasing risk from a more
active regulatory and legal environment. On the other
hand, D&O policies continue to evolve to address contract
certainty and expand the scope of coverage, making
them more valuable and providing tangible benefits to
policyholders. Still, many D&Os are unwilling to use a risk
transfer approach to protect their own personal assets
and the company’s based on the perceived low probability
that a claim will impact their operation – a decision many
D&Os have come to regret.
FW: What advice would you give to D&Os on selecting
a policy that is appropriate for both the individual and
the company? How important is it to properly assess
the terms, coverage and pricing of available policies?
Guerrero: Our main concern when advising our clients
is that they ensure that policy wordings address local
issues and specific matters related to the geographies
and potential jurisdictions in which they operate. If clients
use standard US wordings and are only exposed in Latin
American geographies and jurisdictions, they are exposed
to having a policy wording that does not contemplate
local legal or judicial aspects. The proper assessment
of terms and coverage is key to proper counselling for
a client. Pricing will vary substantially if policies are not
as broad, and unfortunately what may appear as a small
difference in cover may have a great impact when claims
arise.
Alvarez: First, it is important that D&Os, guided by their
insurance broker, select an insurance company that is
committed to the Latin America region, has the expertise
and specialisation in this type of insurance, and has local
and global experience in the underwriting of D&O risks
as well as the expertise to handle claims. An insurance
company with a large geographic footprint also benefits
D&Os doing business in multiple international jurisdictions
by being able to provide local policies issued in multiple
countries. Policies have evolved a lot in recent years,
as has competition between insurers, and now global
insurers offer the same broad coverage to D&Os in Latin
America than their peers can find in the most developed
insurance markets.
Guillamont: Directors should have a clear understanding
of the meaning of defined terms so that the purpose of
conditions and exclusions can be put into context in their
circumstances. As previously mentioned, we have seen
situations where claims are made under D&O policies
where the underlying issue is better suited for reporting
under a fidelity or a PI wording. Directors must be aware
that D&O policies are not necessarily a blanket bond.
There will be situations where the company will be able
to indemnify the director and situations in which the
directors may find themselves facing an action alone,
whether as a result of regulatory impediment or conflict
of interest situations. Thus it is advisable for directors
to be aware of the underlying company legislation that
concerns them – this entirely depends on their specific
needs and company characteristics.
FW: Looking ahead, do you expect to see more Latin
American companies taking a proactive approach to
risk management tailored specifically to protecting
board members?
Guillamont: This is already happening because of the
corporate governance initiatives in the region coordinated
by the OECD and World Bank in Latin America. Corporate
governance institutes are also being established in each
country. These initiatives apply to both listed and non
listed companies and increasingly more LatAm companies
advertise that they comply with some sort of voluntary
code in terms of corporate governance. Latin America
will continue to be a magnet of foreign investment in
terms of infrastructure, energy, retail and commodities,
so institutional investors will have a very important say in
terms of corporate governance and risk management as
they become active shareholders in these projects.
Alvarez: While the number of companies with D&O
insurance in place is still relatively modest, there is
definitely an increased awareness in the region about the
risks that D&Os face and knowledge on the part of D&Os
of the existence of an insurance solution to protect their
assets. Sometimes, a market ‘shock’ is necessary for them
to have their company buy such insurance protection:
for instance, in Chile, the highly publicised financial
scandal involving one of the country’s leading retailers is
contributing to a significant increase in demand for D&O
insurance as local businessmen become more aware of
their personal liability and the importance of an insurance
policy to protect their personal assets. As D&O claims
become more publicised as regulators conduct more
investigations, there is no doubt that the question of ‘how
to mitigate their personal risks’ is on top of the agenda
of many D&Os.
Guerrero: We already see a greater concern from board
members and risk managers to ensure that their individual
policies are reviewed and adjusted to their specific needs,
and not just ‘accepting’ standard wordings. As a matter
of fact we are asked to conduct permanent reviews of
policies in conjunction with the client’s legal counsel to
assure that policy wordings are adapted to the needs and
jurisdictions where the client operates.
5