Given the heavily regulated nature of the life sciences industry, directors face heightened risks. UK life science companies are increasingly seeking to safeguard executives from personal liability arising from their corporate roles. We provide a brief overview of the protections available and their limitations.
The board of directors of a UK company is responsible for day to day strategic and operational management of the company’s business, including for ensuring that the company meets its legal and regulatory obligations. Directors who have performed their statutory duties responsibly will generally not be liable unless they participate in unlawful action. In practice “participation” is construed widely and a director cannot escape liability by claiming ignorance as to the transaction in question if he or she has otherwise neglected his or her duties as a director.
Good corporate governance is key to ensuring the directors perform their duties responsibly. Practical steps that companies can take to minimise the risk of personal liability of directors for breach of duty include the following:
- Ensure directors know what their duties are – many companies arrange training for their boards and provide directors with guidance notes.
- Ensure the board reviews the business periodically to identify material risks.
- Communicate the business of the board to all directors.
- Convene regular board meetings, ensure directors attend where possible and are encouraged to participate.
- Ensure all board meetings are properly minuted and all transactions properly documented.
- Encourage directors to make enquiries into the nature of any documents they are asked to sign and any business to be transacted at board meetings to ensure that they can make informed decisions.
- Ensure that the extent of any delegated authority is appropriate having regard to the expertise of delegates (whether committees, a specific director or any other employee) and that the directors are kept informed as to the activities which delegates are carrying out.
- Ensure that limits on delegated authorities are clearly communicated to delegates and relevant personnel and that corporate governance control procedures including signing authorities are rigorously adhered to.
Whilst prevention is better than cure, directors may nevertheless face claims. The two principal means of protection for a director are to seek recourse from the company under an indemnity and/or to rely on the company’s directors’ and officers’ (D&O) liability insurance cover.
In general, a director can be indemnified against any liability owed to a third party and can ask the company to fund defence costs so long as certain conditions are satisfied and subject to any limits in the company’s articles of association. However, the Companies Act 2006 expressly prohibits a company from indemnifying a director against liability for negligence, default, breach of duty or breach of trust in relation to the company. Careful drafting is required because an indemnity that does not wholly satisfy the statutory requirements will be wholly void. Once in place, the indemnity is only as good as the financial covenant of the company – if the company gets into financial difficulty, the indemnity could be worthless.
A company can purchase D&O insurance to cover the directors’ liability for negligence, default or breach of duty. Side A policies provide cover to directors and officers when the company is unable to indemnify them. Side B policies reimburse the company when it indemnifies its directors. Side C policies cover securities claims made against the company. D&O policies can vary widely in terms of their coverage, exclusions and limits. Premiums increased markedly during the pandemic with the life sciences sector amongst the hardest hit, though pricing has since softened. Companies should consult their insurance broker and/or legal advisers to ensure policies are tailored to their needs, to understand how they interact with director indemnities and to avoid gaps in coverage.
For more details, please get in contact with James Floyd.