Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis
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Directors’ Duties and Shareholder Litigation in the Wake of the Financial Crisis

  • Corporations, Globalisation and the Law series

Joan Loughrey

The financial crisis revealed failings at board level at many financial institutions. But despite calls for bank boards to be held to account, there has been a remarkable paucity of litigation against bank directors for breach of their duties to their institutions. This book assesses whether the law relating to directors’ duties and shareholder litigation has contributed to this, taking into account the changes to both that were introduced by the Companies Act 2006.
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Chapter 1: The director’s duty of care and skill and the financial crisis

Joan Loughrey

Extract

In December 2010 the Financial Services Authority (FSA) announced that the crisis at the Royal Bank of Scotland plc (RBS) could not be attributed to a lack of integrity or dishonest activity on the part of any individual at the bank. Rather, senior management had made a series of bad decisions, such as the aggressive acquisition of ABN AMRO and the expansion of the investment banking business. These matters went to competence rather than integrity.1 The FSA’s full report into the matter subsequently confirmed this position.2 Similarly, the Treasury Committee concluded that at Northern Rock plc (Northern Rock) the directors had ‘pursued a reckless business model’3 featuring an aggressive expansion- ary lending policy combined with low holdings of retail deposits,4 reliance on securitization and wholesale funding to maintain liquidity, and a lack of adequate insurance against liquidity problems.5 It had continued to expand this funding model despite signs that this could cause problems if the markets became less liquid.6 However, while this business strategy was described as ‘fatally flawed’, and the directors were criticized as being the principal authors of the bank’s difficulties,7 there was no suggestion of fraud or bad faith on their part. Given these conclusions, any claims against directors arising out of the financial crisis were likely to be based on breach of their duty of care rather than breach of fiduciary duty. Moreover if it is true that ‘directors’ mismanagement and incompetence were the primary causes of the crisis’8

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