D&O and Financial Institutions

Growing awareness of ESG (environmental, social and governance issues) and rights to access justice is fuelling an increase in group actions against UK and EU-domiciled parent companies for alleged human rights abuse and environmental damage caused by their overseas subsidiaries and affiliates. With the English Supreme Court’s confirmation that parent companies can be liable for such harm, and the EU’s proposal to legislate for mandatory due diligence on human rights, the environment and good governance throughout supply chains, it is inevitable that this trend will continue. Now is an opportune time for parent companies to review their policies, procedures and corporate governance arrangements across corporate groups. Corporations with activities in higher-risk countries where allegations of environmental damage and human rights abuses are more likely to arise, need to get a real handle on risk management and governance of subsidiaries. Ignorance will not assist those at the top of the corporate chain. 

Stringent requirements at both UK and EU level will increase governance on cyber security for connected devices. Directors should pay careful attention now because prevention is always better than cure. The UK government has recently passed the Product Security and Telecommunications Infrastructure Act, which aims to protect consumer connectable devices from cyberattacks. ‘Smart consumer’ products will need to be designed more securely against cyberattacks at the manufacturing stage. Any non-compliance risks fines of £10mn or 4% of global revenues (similar to the GDPR). Similarly, the European Commission has proposed the introduction of the Cyber Resilience Act for products with ‘digital elements’. Any non-compliance risks an administrative fine of up to €15mn or up to 2.5% of its total worldwide annual turnover for the preceding financial year, whichever is higher. Boards will face increasing scrutiny over the coming years. Now is an opportune moment for directors of companies in this sector to review their cyber security obligations for existing and future products to ensure compliance.

While the country struggles to recover from the economic damage of COVID-19, continuing financial uncertainty means companies are now facing a further slew of financial issues beyond their control. Naturally, insolvencies and falling share prices lead to creditors looking to recover funds lost through other means. Predominantly, creditors look to recover these funds through claims made against the directors of the insolvent companies. The Supreme Court has recently considered the duties owed by directors to creditors in circumstances where a company faces financial uncertainty, holding that a ‘real risk’ of insolvency is not sufficient for the creditor duty to arise. Rather, the duty to creditors is only engaged when the directors know, or ought to know, the company is insolvent or bordering on insolvency, such that it is ‘probable’.

A new Modern Slavery Bill was announced in the Queen’s Speech on 10 May 2022 and it awaits further Parliamentary debate. Its purpose is to update the existing Modern Slavery Act 2015 and to “strengthen the protection and support for victims of human trafficking and modern slavery and increase the accountability of companies and other organisations to drive out modern slavery from their supply chains.” The Bill is also expected to introduce criminal offences and financial penalties for non-compliance. Globally, legislators have taken significant steps in recent years to introduce responsibilities on companies to prevent harm arising from their operations; this is part of a broader trend of formal legal obligations beginning to align with voluntary business human rights standards, in particular the UN Guiding Principles on Business and Human Rights.

Those in the energy sector engaged in the mining of fossil fuels have been called on to restore stability to the energy markets around the world. This has meant, in some cases, reversing decisions about exploration and mining, in particular where such activities had previously been curtailed due to the potential negative environmental impacts. While the decisions may yield results in terms of producing a reliable domestic source of energy, there will also be very close scrutiny from activist investors and environmental groups, in particular in circumstances where the sector has posted record profits towards the end of 2022. However, the energy crisis (significantly exacerbated by the Russian-Ukraine conflict) was, arguably, unforeseeable, and therefore statements made in reports and accounts about environmental ambitions and targets will need to be viewed with the benefit of hindsight, and will not easily form the basis of successful claims alleging, for instance, misrepresentations to the markets.