A court has ordered a company to allow a shareholder to inspect its D&O policies. Inspection was to help the shareholder decide whether it was worthwhile suing the company's directors. This does not mean that all D&O policies are now available for inspection by all shareholders, but it does represent a significant intrusion into the confidentiality of D&O arrangements.
A shareholder of Style Ltd wanted to inspect the company's records, under section 247A of the Corporations Act. The shareholder wanted to determine whether Style's directors had breached their duties to the company and, if so, whether the shareholder should apply to begin a derivative action against the directors.
The Court concluded that in seeking access for this purpose the shareholder was acting "in good faith" and "for a proper purpose" (as required by section 247A).
As is usual in this type of case, inspection of a wide range of documents was sought. However, there was one unusual group of documents that the shareholder wanted to see: the company's D&O insurance policies.
The Court noted that this appeared to be the first time that such an application had been made.
D&O liability policies
The shareholder pointed out that it is quite common for liquidators of a failed company to be given access to D&O policies and to quiz insurers about those policies. (These orders are made to allow the liquidator to determine whether a law suit against the company's directors would be financially rewarding.)
The contrary view was that was a totally different situation, for two reasons:
- liquidators are not ordinary private litigants - they hold offices and exercise powers created by the Corporations Act;
- the "real" purpose of section 247A is simply to allow shareholders to determine whether directors have a case to answer, not to allow them to work out how much money a successful suit against them could bring in.
The Court agreed that the analogy with liquidators was not perfect. It pointed out that liquidators often seek information about D&O policies because they don't know if the company even has such policies. By contrast, in this case, the company's annual reports had indicated that the company had D&O policies.
Nevertheless, all that the annual reports indicated was that there had been policies during the relevant (and now past) financial year. The shareholder had no idea what the policies covered and whether they were still current.
Accordingly, the Court thought that it was appropriate to allow the shareholder to inspect any D&O policies currently held by the company. The information in those policies would be relevant to any decision on whether to begin derivative proceedings against the directors.
This is the first reported instance in which such an inspection order has been made.
It clearly does not open the floodgates to all shareholders. Nevertheless, at a time when litigation against directors (particularly class-actions) is steadily increasing, we would expect that this type of inspection order will become more common.
An obvious immediate concern for both companies and their insurers will be confidentiality. The Corporations Act itself imposes criminal liability on anyone who discloses (to a third party) information obtained from a court-ordered inspection of company records. This means that competitive confidentiality should not be at risk when this type of order is made.
Nevertheless, there is a second, separate confidentiality issue: many older D&O policies contain confidentiality clauses which bind both the company and its directors. If a court orders that a shareholder should be given access to those policies, those confidentiality provisions would be overridden to the extent necessary to comply with the order.