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• 16% of the motions to approve claims as class actions are accepted.
• 23% of the motions to approve claims as class actions relate to securities.
• 78% of the securities class actions are in cases of liquidation/proven fraud.
• 18% of the security class actions are approved by the District Court as class actions.

Chart of D&O Claims in Israel:

Settlement amounts:

• Before class action approval: between $150,000 - $500,000
• After approval: $500,000-$2,500,000
• Only one claim settled for $10,000,000 back in 1996 (The first security class action)

Financial aspects of litigation:

• Court payment
  • No bond
  • Court fees – 2.5% of the claim amount (not including class action)
• Litigation expenses – plaintiff attorneys
  • Contingency fees – between 10%-15% up to 20% in bodily injury
    
  • Attorneys’ fees in class action are controlled by the court (up to 10% of settlement amount)
    
  • The loser does pay (legal fees and expenses imposed by the court)
    
  • Attorney is not allowed to finance the litigation expenses (i.e. court fees or expert fees).

Some legal fees (defence) figures:

• Subject to caps per stages:
  • Until claim is approved: up to $200,000 or $300,000 (several attorneys when conflict of interest exists)
  • Appeal of District Court decision: up to $100,000
  • Full trial: additional $250,000 up to $400,00 (in case of conflicts)

Class action procedures in Israel

Main Aspects of the Companies Act
Relevant to D&O Insurance

Duty of Care:

• The D&O owes a duty of care to the Company, its shareholders and any other third parties (section 252).
• Breach of duty of care = negligence.
• The standard of behavior will be that of a reasonable D&O - how a reasonable D&O would have acted under the same circumstances (retrospective examination).

Duty of Trust:

• The D&O owes a duty of trust to the Company and shall act in good faith to the benefit of the Company (section 254).
• The D&O should:
• refrain from any act which involves a conflict of interest between the performance of his duty in the company and his other personal interests;
• refrain from any act which involves competition with the Company’s business;
• refrain from taking advantage of any business opportunity of the Company in order to obtain it for himself;
• disclose to the Company any information which relates to its affairs which comes into his possession by virtue of his position in the Company; 
• The Companies Act provides that the duty of trust  towards the Company does not exempt the D&O from his duty of trust toward any third party.

Piercing the Corporate Veil

• To pierce the corporate veil = attributing the obligations of a company to it's shareholders.
• Not allowed against a D&O (new amendment).
• Allowed only against a shareholder.
• The Court may impose personal liability in tort on the D&O.

C.A. 407/89 Zuk Or v. Car Security Ltd P.D.I. 48(5)661: The Court determined the principal of personal liability according to which an individual must be responsible for his wrongdoing.

This principal is also determined by clause 54 to the Companies Act.

Exemption from Liability:

• The Company is allowed to exempt its D&Os from breach of duty of care against it.
• The exemption from liability should be made in advance, prior to the breach of the duty of care.
• An appropriate clause for the exemption must be included in the by-laws of the Company.
• Derivative claim – an exemption from liability may substantially reduce the risk at stake (the by-laws of the Policyholder should be reviewed by Insurers).

Exemption from Liability is not allowed:

• In case of beach of duty of trust, even if perpetrated in good faith.
• In case of breach of duty of care towards third parties.
• In case of breach of duty of care concerning wrongful allocation of shares.

D&O Liability Insurance Under the Companies Act 

A Company is allowed (if permitted by its by-laws) to purchase D&O insurance to insure the liability of its D&O in respect of (section 261):

• breach of duty of care towards the Company or any other third party;
• breach of duty of trust towards the Company, provided that the D&O acted in good faith and that he had reasonable grounds to assume that the act would cause the Company no harm;
• a monetary obligation that will be imposed on him to the benefit of another person

  The list of cases in which insurance is allowed is a closed list.

Criminal Investigation & Criminal Proceedings:

• The Companies Act does not relate to the purchase of a D&O policy in respect of coverage for legal expenses in criminal or investigation proceedings.
• Indemnification by the Company is allowed in respect of such legal expenses.
• Assumption - where indemnification is allowed - insurance is also allowed.

Criminal Investigation & Proceedings
Comparison between the Companies Act and the Policy

The Companies Act

• Indemnification is allowed in case:
  • the investigation was concluded with a decision not to file a criminal indictment, or
  • a criminal indictment was filed and the D&O was acquitted or convicted with an offense which does not require proof of criminal intent.
  • Criminal intent - an offense which requires proof of mens rea (not a negligence offense or an absolute offense).

  Examples: - Offense regarding environmental issues                                  

  • Most of the D&O policies cover criminal investigations and criminal proceedings even in case of conviction (except in cases of fraudulent or dishonest acts).
  • Advancement of costs is allowed.
  • Some policies give the insurer discretion to decide whether to advance legal expenses.

                                  - Misleading details in a prospectus

 

The D&O Policy

Other Cases in which Indemnification is allowed:

• The Company is also allowed (if permitted by its by- laws) to indemnify its D&O in respect of a monetary liability imposed on him by a judgment in favour of another person (section 260).

The list of cases in which indemnification is allowed is a closed list.

• Indemnification may be in advance if restricted to certain occurrences which the Board expects in view of the Company's activity.
• Indemnification should also be restricted to reasonable amounts.
• Indemnification is also allowed retrospectively.
• Insurance implication: where indemnification is permitted, Insurance cover B will apply.

Matters Uninsurable under the Companies Act:  

• breach of fiduciary duty - unless committed in good faith under the impression that it will not harm the company;
• acts committed with the intention of making improper gain;
• fines imposed in legal proceedings;
• intentional or reckless breach of duty of care, unless the recklessness was perpetrated with negligence (new amendment);
• recklessness – a state of mind which requires more than pure negligence, but less than intention;

Section 263 forbids a company to indemnify or insure in case of:

Implications of the new amendment – Securities claim in the U.S.A. (Scienter):

• Authority investigation initiated against the oil company and its CEO, alleging that the company sold low sulfur diesel at a price which exceeds the permitted price as set by the Law of Products and Services price control.
• Following an investigation by the Israeli Securities Authority, it was decided to file a criminal indictment against the directors of a holding company.
• Allegedly, they used inside information, for sale of their shares.
• An investigation due to the alleged unlawful disposal of waste material from the company, which included hazardous pollutants, etc, according to the law (disposal of hazardous materials) the D&O are personally liable for any breach.
• The Securities Exchange commission instigated an investigation against I.D.B.H. a public company and it's D&Os alleging that in its official publication the company did not consolidate the financial reports of its affiliated company, even though in the report issued to the stock exchange the affiliated company’s report was in fact consolidated.

EPL – Hardly existing problem:

• Israel – Labor Laws:
  • Socialist country, right to holiday, severance pay, ability to fire – included in Labor Law.
• No class actions in labor related matter.
• Past Experience:
  • Most EPL (sexual harassment) claims end in settlement – less than $150,000.
• Almost no claims for discrimination.
• Some claims for wrongful termination of work.

  Shareholders Claim v. Derivative claim:

Allocation of Damages:

Section 11 of the Tort Ordinance:

Proposal Form:  

• There is no obligation for the assureds initiated disclosure.
• The insured must answer the questions asked fully and completely.
• The proposal form becomes an integral part of the policy (clause 3 of the insurance Contract Law 1981).
• If the answer is partial, in order to void the policy an insurer must prove that a prudent insurer would not have agreed to cover, or would have charged increased premium.
• The remedy: (clause 7) – Payment of Reduced Insurance Benefits.
• Void can only occur in case of proven fraud, or in case an objective, reasonable insurer would not agree to insure at all.

Prior Knowledge:

• The knowledge should be concrete and not merely a suspicion. The burden of proof will be on the insurer.
• C.A. 1530/02
• Even when the policy provides retroactive coverage, it does not intend to cover existing and known circumstances.
• Clause 16 of the Insurance Contract Law 1981 provides:
• An insurance contract to cover a risk which at the time that the conclusion of the contract already occurred, is void.

Late Notification:

Statue of Limitation:

• Liability Insurance – until the claim against the insured proscribed, i.e.:
  • Regular tort claim 7 years
  • Minor – the number of years until he became 18 + 7 years
  • Special cases – if the information was not known - up to 10 years.
  • Insurance claim – 3 years from the occurrence of the insured event.
  • Security claim in accordance with the Security Act – misleading particular in prospectus – 2 years from the issue date, for absolute liability.
  • 7 years on claims based on torts.