The Research on Civil Liabilities of Directors’ Misrepresentation─Focus on Adjusting Independent Directors’ Liabilities
Date Issued
2007
Date
2007
Author(s)
Liao, Ti-Yi
DOI
zh-TW
Abstract
With the revision of Securities Exchange Act in 2006, most of public companies are required to set up independent directors in board. There are more and more discussions centering on the liabilities risk that independent directors should face. When directors make misrepresentation, inside directors and independent directors have the same liabilities in first paragraph of section 23 of Company Act and section 20,section 20-1 and section 32 of Securities Exchange Act. However, the roles and responsibilities of independent directors are different from inside directors. Independent directors play the role of monitoring and their responsibilities focus on monitoring the decision-making process in board, not running the business. Moreover, independent directors are not involved in daily operation and depend deeply on inside directors and management to provide information. Therefore, whether independent directors should have different liabilities is a thought-provoking problem.
Regarding civil liabilities caused by directors’ misrepresentation, the cases and academic discussions highlight on liabilities in Securities Exchange Act. Not many papers lay emphasis on whether directors also breach fiduciary duties. Owing to this situation, this thesis studies the two different liabilities in U.S. law, and then makes comparison with Taiwan legal system. By comparative study, this paper considers some deficiencies in paragraph one of section 23 of Company Act, including that there are no fiduciary relationship between directors and shareholders and that directors owe no fiduciary duties of disclosure to shareholders. As a result, this paper suggests that we should establish the fiduciary relationship and fiduciary duties of disclosure between directors and shareholders.
After the introduction of fiduciary duties in Company Act and disclosure duties in Securities Exchange Act, we will move on to the judicial standard of liability. This paper tries to observe the liabilities of breach of fiduciary duties in U.S. and Japan legal system, especially concentrating on independent directors’ liabilities. These two countries make no difference between independent directors’ liabilities and inside directors’ liabilities, nor do they have formal lesser judicial standard about independent directors. However, when directors breach fiduciary duties with good faith, they can make an agreement with companies in advance to eliminate or limit their liability. Also, if they perform their responsibilities in good faith but still cause the damages to the third person, they can get back their litigation fees or damage compensation from companies. Although independent directors have no different liabilities from inside directors, they can handle their litigation risk in advance through director indemnification and D&O Insurance.
About director liabilities in s10b and rule 10b-5, because of enhanced “scienter” requirement, the plaintiff can hardly prove that independent directors meet ”scienter” requirement. On the other hand, the plaintiff will much more easily to prove “scienter” of inside directors. As a result of the difference of proof burden, there is no need to differentiate independent directors’ liabilities. However, about directors’ liabilities in s11 of Securities Act, some academic papers consider that there are different judicial standard between inside directors and independent directors when courts decide whether “due diligence defense” is established.
In Taiwan law, independent directors can not handle the litigation risk in advance through indemnification and D&O insurance. Besides, independent directors are minorities in board, inside directors and management predominate companies’ business operation policy. In this situation, independent directors should not be liable for management policy decision. Therefore, this paper suggests that it is necessary and important to establish a different judicial standard of in deciding independent directors’ liabilities of in first paragraph of section 23 of Company Act and section 20-1 and section 32 of Securities Exchange Act. In proportionate liabilities of 20-1 in Securities Exchange Act., courts should allocate damages by every participant causation of damages, and independent directors should differ from inside directors.
Subjects
independent director、 inside director、 directors’ liabilities、 misrepresentation、 fiduciary duty、 Securities Act of 1933、 Securities Exchange Act of 1934、 indemnification、 D&O Insurance
Type
thesis