Legal Updates

D&O exemption from liability replacing a prior exemption creates continuity and does not stand by itself

July 12, 2018

A shareholder in a public company moved to approve a derivative claim against directors contending transactions in conflict of interests and negligence, after the company's board of directors refused to file the claim. The shareholder also contended that the letters of exemption from liability and indemnification given to the directors were not valid as they were amended after the events that are the subject of the motion.

The Court dismissed the motion and held that the derivative claim process provides a "standing right" for a shareholder to sue on behalf of the company, where the authorized organs refrain from filing a claim on behalf of the company against an officer or other relevant party. The applicant for approval must convince the Court that there is cause for action to the company; that the claim and its management are for the benefit of the company and that the applicant is not acting in bad faith. The business judgment rules prevents the Court from intervening with the discretion of the company's board of directors, and provides a kind of "immunity" to decision-makers from imposing liability for breach of duty of care. The rule will apply where a decision was taken following a discussion based on an orderly process. The rule will also be applied to a decision not to file a claim and here the decision was made after receiving the opinion of an external law firm on the matter. One of the reasonings for not filing a claim on behalf of the company was the exemption letters that were amended after the events and the new exemption letters determined that they canceled the previous exemption letters.  However, this does not break the sequence in the exemption itself, especially when the amendment was in the indemnification clauses, which is a separate undertaking.