Outside Director Liability Across Countries

97 Pages Posted: 20 Jan 2005 Last revised: 29 Jun 2011

See all articles by Brian R. Cheffins

Brian R. Cheffins

University of Cambridge - Faculty of Law; European Corporate Governance Institute (ECGI)

Bernard S. Black

Northwestern University - Pritzker School of Law

Date Written: July 1, 2006


Settlements reached in 2005 in securities litigation involving Enron and WorldCom highlighted the financial risks faced by outside directors of public companies. We argue elsewhere that Enron and WorldCom, as instances where directors made damages payments out of their own pockets, are and likely will remain exceptional in the United States (see Bernard Black, Brian Cheffins and Michael Klausner, Outside Director Liability, http://ssrn.com/abstract=894921). In this paper, we show that the risk of out-of-pocket payment is likewise very low on a cross-border basis, in both common law and civil law countries. The largest source of risk is efforts by government agencies to make an example of particular directors, even when the cost of doing so likely exceeds the financial recovery. We study Britain and Germany in depth and offer summaries of the position in Australia, Canada, France, and Japan. We find that while specific laws quite often differ, there is substantial functional convergence. In each country we analyze, due to a combination of substantive law, procedural rules, and market forces, the out-of-pocket liability risk faced by outside directors of public companies is similar - present but very small. We draw upon our cross-border analysis to assess the legal risks outside directors can expect to face going forward, both in the United States and elsewhere. We also briefly consider whether the current approach reflects sensible public policy.

Other pieces of this overall project are:

http://ssrn.com/abstract=382422 (a pre-Enron and WorldCom version of "Outside Director Liability", 2004)

http://ssrn.com/abstract=878135 (policy analysis, 2005)

http://ssrn.com/abstract=628223 (study of Korea, 2011)

http://ssrn.com/abstract=682507 (summary article for a finance audience, 2005)

http://ssrn.com/abstract=800584 (Germany-centered, 2005)

http://ssrn.com/abstract=800604 (German language version of Germany-paper, 2005)

http://ssrn.com/abstract=590913 (summary article for a practitioner audience, 2004)

Keywords: outside directors, director liability, corporate law, securities law, indemnification, D&O insurance, derivative suits, securities class actions

JEL Classification: G30, G34, G38, K22

Suggested Citation

Cheffins, Brian R. and Black, Bernard S., Outside Director Liability Across Countries (July 1, 2006). as published in Texas Law Review, Vol. 84, pp. 1385-1480, 2006, ECGI - Law Working Paper No. 71/2006, Stanford Law and Economics Olin Working Paper No. 266, Univ of Texas Law and Economics Research Paper No. 31, Available at SSRN: https://ssrn.com/abstract=438321 or http://dx.doi.org/10.2139/ssrn.438321

Brian R. Cheffins

University of Cambridge - Faculty of Law ( email )

10 West Road
Cambridge, CB3 9DZ
United Kingdom
+44 1223 330084 (Phone)
+44 1223 330055 (Fax)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels

Bernard S. Black (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States
312-503-2784 (Phone)

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