Greater focus on strong corporate governance and transparency is placing company directors in the UK and elsewhere under growing scrutiny and increased risk of individual civil and criminal liability. As new case law and legislative changes tighten the enforcement landscape and stakeholders demand more accountability of directors, PE executives should be mindful of new risks associated with being appointed to a portfolio company board.
A number of recent and high-profile legal cases have brought the wide range of directors’ duties and liability for breach of those duties into the spotlight. For example, directors have been subject to litigation in a number of jurisdictions (including the US and the UK) in relation to a director’s contribution to a company’s environmental impact, conduct in the lead-up to the company’s insolvency (including payment of dividends), and alleged cultural issues in the business, including harassment. These cases, aside from having significant time, cost and reputational impact for directors (and a sponsor), also highlight the wide range of matters for which investor directors can be responsible and the potential for adverse findings against them, including personal liability.
While Companies House and the Insolvency Service have always been able to prosecute directors — increasingly, these authorities are seeking to avail themselves of these powers and hold directors accountable for a company’s actions. Unlike many jurisdictions, directors of companies in the UK can also face criminal prosecution for certain offences — including seemingly innocuous offences, such as failure to file accounts in time, for which we have seen a recent uptick in direct enforcement against directors.
We expect this trend to continue in light of new UK legislation which grants Companies House greater powers and additional resources to investigate and enforce breaches relating to director registrations, filing of company accounts, and other statutory filings. Prosecuted directors could face fines, disqualification, reputational damage, and difficulties in accessing D&O and other insurance.
It is vital that PE executives appointed as directors to portfolio companies are cognizant of their statutory duties and obligations (and the possible penalties for failing to comply). Awareness of the company’s obligations for which, as a director, they might be held accountable is also critical.
Individuals should avoid holding directorships in name only, without substantively fulfilling their role by participating in the management of the affairs of the company. In addition, sponsors should ensure that D&O cover is sufficient to cover the cost and scope of enforcement risks facing directors of their portfolio companies. In the event that a company or its board becomes the focus of attention, these precautions will help navigate what can be a stressful and demanding situation.