Corporate Governance Expert Witness Examines Allegedly Lax FCPA Oversight

    Corporate GovernanceIn this case, a corporate governance expert witness was asked to opine on a shareholder derivative action on behalf of a nominal party, an oil and gas company, filed against its board of directors. The action alleges the board failed to install and maintain internal controls and accounting systems required to ensure the company’s compliance with the requirements of the Foreign Corrupt Practices Act (FCPA). The company is the target of U.S. Department of Justice and U.S. Securities and Exchange Commission investigations. News of the investigations caused a drop in the price of the company’s shares, resulting in over $1.2 billion in losses of shareholders’ equity, according to the complaint. The board has incurred more than $100 million in expenses connected with the FCPA investigations, and the company faces unpredictable but likely heft penalties and fines. The complaint seeks to recover damages on behalf of the company for the board’s alleged breach of its duties.

    Question(s) For Expert Witness

    • 1.) Do laws of the European country permit company shareholders to bring claims on behalf of the company against the individual defendants based on alleged acts or omissions that occurred prior to the 2009 re-domestication?
    • 2.) Do the resolutions by the annual general shareholder meetings bar such claims? Are the allegations sufficient to state a claim for breach of duty under the European country’s law for the period after the re-domestication?

    Expert Witness Response

    In 2009, the company underwent a re-domestication process in which the place of incorporation of the parent company changed from a Caribbean country to a European country. The newly formed company acquired all shares in the Caribbean company. Through a share exchange agreement, the shareholders acquired shares equal to their Caribbean company shares.

    The European country’s law does not permit asserted shareholders of the company to bring claims for directors and officers liability against its officers or directors based on alleged conduct pre-dating the re-domestication, nor do they have standing to bring derivative claims on behalf of the Caribbean company. From the perspective of the European country’s law, the new company is not the legal successor of the Caribbean company; it is a newly established parent company. Therefore, the companies are two separate legal entities in a parent-subsidiary relationship. Board members of the European company may not be made liable for alleged acts or omissions that occurred prior to them having been put in office.

    The European company strictly follows a separate legal entity approach, under which each entity in a corporate group is considered as a separate legal entity. To the extent that the asserted breach of duty was committed before the re-domestication, it was committed by officers and directors of the Caribbean company, and thus by a different group company. Under the European country’s law, in conformity with the separate legal entity approach, the individual defendants are not subject to D&O liability for the asserted breach of duty.

    Therefore, only acts or omissions of the individual defendants after the re-domestication could be relevant in this case. However, under the European country’s law, the general meeting of shareholders may discharge officers and directors from liability for their acts or omissions following approval by a majority of the shareholders. Shareholders who did not vote for the discharge must bring any claims within six months after approval by the majority, or their right to bring such claims is forfeited and expires.

    At each of three consecutive annual general meetings, the shareholders approved the discharge of its board members and executive officers from liability under the European country’s law. In my view the shareholders were provided with sufficient facts concerning the then-pending government and internal investigations to render the releases effective as to the acts and omissions alleged in this petition. Therefore, even if plaintiffs did not vote in favor of the releases, their rights to bring claims against the individual defendants expired six months after each of those respective resolutions were approved.

    The expert is a partner in a commercial law firm in the European country and has expertise and numerous publications in the field of law regarding corporate liability and directors’ liability.

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