AIDA France Climate Change Working Party The VW Scandal watched with D&o Spectacles By Dr Adolfo Paolini University of Buckingham UK and DACBeachcroft LLP Paris, December 2nd 2015

Volkswagen wrote to me

D&O Main Features Developed to protect Directors and Officers and not the Company Liability Insurance: Professional Indemnity Insurance/Third Party Insurance Liability must be established to trigger substantive cover Claims Made Policies D&O does not cover wilful misconduct/fraud D&O does cover regulatory investigations Types: Side A , Side B and Side C Pollution is often excluded

Uncontested Facts 11/09/2015 VW made public a statement highlighting how prosperous and environmentally friendly VW was. ‘world’s most sustainable automotive group’ Investors had purchased American Depository Receipts (ADR’s) in US/ share price lost more than a third of its value 18/09/15 US Environmental Protection Agency served a notice of VW VW faces billions of Dollars in fines: $37.000 per vehicle/VW set aside $ 7 Billion / Almost 0.5 million cars affected in US and 11 million worldwide.

Uncontested Facts 25/09/15 Germany disclosed that 2.8 million cars have been affected and VW supervisory board has instructed lawyers both in US and Germany to investigate the case VW admitted liability for the use of ‘defeat devices’ to rig the emissions test/software to circumvent EPA VW senior officers denied liability and/or knowledge of misconduct

Volkswagen Scenarios Company’s Liability for breaching anti-pollution rules Directors’ Liability to the Company for breach of directors’ duties Class Actions against VW by consumers Class Actions against VW by company shareholders/investors Attempted actions against directors by third parties Attempted actions against directors by Environmental Agencies Regulatory Investigations Defence Costs Cover

German Scenario and D&O Implications German Two tier system: Supervisory and Executive Board 1. Stock Corporation Act s 111: supervisory board brings the claim, on behalf of the company, against the executive board and/or management board s 93(4)(3) 2. Shareholders could pass a resolution and force the supervisory board to proceed s 147 3. Shareholders have also the statutory derivative action/1% of the shareholding or Euro 100.000 nominal value. Leave of court is required/ suspicion of dishonesty/must be beneficial for the company/ shares must be acquired before the issue arises 3.1 Shareholders bear the cost/ claim it back if successful 3.2 unfounded actions/shareholders do not recoup costs

German Scenario and D&O Implications D&O policies ( as any other form of insurance) exclude fraud and /or wilful misconduct/ liability must be ascertained before the exclusion applies Company’s admission of liability may not affect innocent directors/composite insurance policy/severability Two tier system and potential conflict of interest/insured v insured (less used these days)/policy wording/policy limits Insurer choice to defend or settle out of court/ duty to defend and indemnify Bentham Europe Ltd: shareholder action litigation financing for breach of Securities Trading Act

German Scenario and D&O Implications Defence Costs? Who bears that defence costs?/Policy Wording/ Hendricks and Fassback (Howden Broking Group) proposal: twin model tower/different limits of indemnity/supervisory and executive board Two towers with different limits of indemnity/like excess policies Third party notice to the SB triggers liability.

The UK Strategy One tier system/executive and non-executive directors Directors duties owed to the company/breach of duty Minority Shareholders derivative action The strategy; Rules of Attribution/directors’ misconduct attributed to the company Jetivia v Bilta effect Safeway v Twigger/ competition rules/ illegality/ effect

Could Directors be personally Liable to third parties? Northstar Aerospace v Ministry of Environment Ontario Canada [2012] The company knew about the polluting agent and did its best to clean the site. The Company run out of cash to continue to clean the site and became insolvent. Directors did not act maliciously or negligently Directors and Officers were held personally liable to fund the cleaning up cost of company’s site. D&O’s agree to pay up to 4.5 Can $ and the dispute was settled D&O Insurance policy excluded pollution.

Conclusions Directors personal liability Side C cover/policy limits Pollution exclusion Defence costs cover German Two tier system UK potential exposures

Thank You adolfo.Paolini@Buckingham.ac.uk apaolini@dacbeachcroft.com