COVERING THE LIABILITY OF INDEPENDENT DIRECTORS IN RUSSIA

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COVERING THE LIABILITY OF INDEPENDENT DIRECTORS
IN RUSSIA
Andrei Denissov September 22, 2005
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Contents

• Basis of DO Liability 3
• Legal background of DO liability in Russia 6
• Two functions of the DO insurance 8
• What is a DO insurance policy 9
• Policy basics 10
• Claims 14
• Works procedure 17

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Basis of Directors Liability

• Securities Act of 1933
• initial offering sale of securities
• full disclosure
• act violations can be punished as criminal
  offences
• Securities Exchange Act 1934
• secondary trading
• this act set up SEC
• investigative / regulatory power to prevent
  fraud
• act violations
• Sarbanes - Oxley Act
• transparency of financial reporting
• independent audit
• corporate responsibility financial
  disclosure
• improvement of SEC oversight control

4
World-wide trends of the risk increase

• Increased effort to protect the rights of
  minority shareholders through the emerging
  shareholder associations (DEMINOR, ADAM, IPA)
• Growing effort to hold DOs responsible for their
  indirect involvement in Corporate Accidents and
  Pollution
• A shift in the responsibility for corporate
  reporting away from Accountants towards
  Management
• A disparity in the duties of DOs to their
  employees from one country to another
• Globalisation of securities trading.

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Relevance of DO Insurance

• Corporate management culture growth
• Initial Public Offering (IPO)
• Securities placement on international markets
  ADRs, GDRs, etc.
• Active participation of foreign investors in
  Russian companies as shareholders.

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Legal background of DO liability in Russia

• Article 53 of the Civil Code of the Russian
  Federation
• A party acting on behalf of a legal entity by
  force of law or pursuant to the articles thereof
  must act reasonably and in good faith in the best
  interest of the legal entity in represents.
• Article 71.1 of the Joint-Stock Company Law
• Members of the board of directors (supervisory
  board) of a company, chief executive officer of
  the company (director, general director) and/or
  members of the collegial executive body of the
  company (management committee, directorate) as
  well as management company or outside manager in
  exercising their rights and performing their
  duties shall act in the best interests of the
  company, and exercise their rights and perform
  their duties to the company reasonably and in
  good faith.
• Article 71.2 of the Joint-Stock Company Law
• DO shall be liable to the company for damages
  caused to the company through their wilful
  misconduct or negligent action (omission).

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Legal background of DO liability in Russia

• Article 71.5 of the Joint-Stock Company Law
• Entity or shareholder who owns more than 1 of
  common offered stock of a company shall have a
  right to file a suit in court against DO
  pursuant point 2 of this article.
• Article 44 of the Law on Limited Liability
  Companies
• Article 22.3 of the Securities Market Law
• Officers of the issuer of the securities who are
  responsible pursuant to the issuers charter
  and/or internal documents for completeness and
  accuracy of information included in the documents
  in connection with registration of securities
  issue, are liable for performance of such
  obligations pursuant to the laws of the Russian
  Federation.

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Two Functions of the DO Insurance
CLAIMANTS
CLAIMS
SECURITY CLAIMS
DIRECTORS
COMPANY
DIRECTED TO
DIRECTED TO
Personal Assets
Corporate Assets
Corporate Assets
II. CORPORATE RISK TRANSFER
I. PERSONAL ASSETS PROTECTION
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What is a DO insurance policy?

• The policy will pay judgments, settlements and
  defense costs incurred by an Insured as a result
  of a claim made against him or her during the
  policy Period and reported to the insurer in a
  timely manner pursuant to the policy alleging a
  Wrongful Act (i.e. mismanagement).

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Definition of Wrongful Act
Policy basics

• Any breach of fiduciary duty, neglect, error,
  misleading statement, misstatement, omission or
  act.
• Any other claim made against an Insured arising
  out of their capacity as a director or officer.
• Extension for claim arising out of a director or
  officer sitting as a Director or Officer of an
  Outside Entity.

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Definition of Claim
Policy basics

• Written demand for monetary and non-monetary
  relief
• Civil proceedings for monetary and non-monetary
  relief
• Criminal proceedings (post indictment)
• Administrative proceedings (post notice of
  charges).
• Not applicable to entity coverage

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Policy basics

• Traditional Exclusions
• Dishonesty Personal profiting, illegal
  remuneration, short swing profits, deliberate
  fraud, criminal acts
• Other policies BI/PD, PI, Pending/prior
  litigation
• Nuclear
• Foreign and domestic political/governmental
  bribes
• Pollution
• Insured v. Insured (other than for wrongful
  termination)

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Policy basics

• New exclusions / coverage restrictions
• War terrorism
• Failure to obtain insurance
• False accounting exclusion
• Outside board cover restricted
• Discovery period restricted
• 20 co-insurance on securities claims
• Deductible increases
• Laddering exclusion

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Claims structureIn what spheres directors are
claimed on?
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Who claims on?In USA
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Who claims on?In Europe
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How do we workInsurance programme placement
scheme
RUSSIAN INSURANCE MARKET
INTERNATIONAL INSURANCE MARKET
REINSURER
1. TERMS AND CONDITIONS NEGOTIATIONS
REINSURER
CLIENT (GROUP OF COMPANIES)
REINSURER
REINSURER
REINSURER
RUSSIAN INSURANCE COMPANY
REINSURER
REINSURER
2. FURTHER PAPER WORK
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Any Questions?Contact InformationZAO
Marsh - Insurance BrokersVolkov lane 19,
Moscowtel. 7 095 787 70 70