Yates Memorandum: impact of new rules for manager liability in the US on D&O insurance in Germany


Financier Worldwide Magazine

March 2016 Issue

March 2016 Issue

In the motherland of D&O insurance, the US Department of Justice (DOJ) has proclaimed to make short shrift with managers. This makes an adjustment of current D&O insurance protection necessary. As for German managers’ and supervisory board members’ US mandates, there is an equally urgent need for action.

In September 2015, utterly unnoticed by the broad public, the DOJ enacted new guidelines for managers’ individual accountability arising from corporate misconduct and infringements of the law. A seven-page memorandum named after US deputy attorney general Sally Yates prescribes that companies shall relentlessly investigate cases of misconduct and closely cooperate with investigating authorities.

As of now, companies cannot expect clemency in the determination of civil penalties, unless they disclose all facts and details pertaining to the individuals that are involved in the misconduct. According to the Yates guidelines, it is from the outset that the conduction of both criminal and civil investigations shall focus on individuals.

The Yates agenda is literally as follows: (i) to be eligible for any cooperation credit, corporations must provide to the DOJ all relevant facts about the individuals involved in corporate misconduct; (ii) both criminal and civil corporate investigations should focus on individuals from the inception of the investigation; (iii) criminal and civil attorneys handling corporate investigations should be in routine communication with one another; (iv) absent extraordinary circumstances, no corporate resolution will provide protection from criminal or civil liability for any individuals; (v) corporate cases should not be resolved without a clear plan to resolve individual cases before the statute of limitations expires and declinations as to individuals in such cases must be memorialised; and (vi) civil attorneys should consistently focus on individuals as well as the company and evaluate whether to bring suit against an individual based on considerations beyond that individual’s ability to pay.

Will Volkswagen be a first test? The new guidelines have taken centre stage of press coverage as a result of the DOJ’s billion-dollar action against Volkswagen on account of alleged infringements of the Clean Air Act. In the US, authorities, in cases where the law is broken, lack the competence to impose a fine against the wrongdoer by their own authority Therefore, in order to enforce civil penalties against wrongdoers, they have to bring actions in the District Courts.

As far as present undertakings to elucidate the allegations are concerned, the DOJ in its complaint deems these efforts entirely inadequate. Volkswagen allegedly obstructed ongoing investigations through misleading statements and by withholding essential evidence. Volkswagen is said to have denied disclosure of emails and other communication between executives to US prosecutors. The Californian Environmental Protection Agency’s accusation is this: Volkswagen made the decision to cheat during emissions testing and then attempted to conceal it. They continued their endeavours to conceal everything, thereby exacerbating their lie. Upon getting snapped, they tried to deny everything. By contrast, Volkswagen continuously emphasises that it was fully cooperating with US authorities and that it was merely relying on data protection.

According to the new guidelines, the following policy comes into effect: a settlement between the authorities and the corporate defendant must never allow for the protection of individuals from civil and criminal accountability. Individual misconduct shall be relentlessly uncovered. Ms Yates put it this way: “Corporations can only commit crimes through flesh-and-blood people.”

When managers are brought to justice by their own companies, the D&O policy will serve as their lifeline in setting up a personal defence. Leading American D&O experts sound the alarm: the new Yates-Guidelines necessitate ‘personal catastrophe coverage’ for the involved managers with sufficient and separate coverage limits. Managers can resort to Excess Side A/DIC policies when companies no longer provide the funds for a defence against the claim or the indemnification is not warranted.

The Yates Memorandum increases the perils of parallel proceedings. Companies and individuals should make early decisions about the need for separate counsel for employees at all levels when misconduct is identified. There is a strong possibility that the interests of the business may become adverse to those of a particular individual. It may be proper for individuals to consider obtaining separate counsel at the outset of any investigation.

For their US mandates, German managers ought to take out insurance in the form of an individual D&O policy in Germany. These policies provide the best solution to respond to the aforementioned risks. The concept of personal coverage has been going viral in the German D&O market for quite some time now. Coverage is worldwide and encompasses both German and US mandates. The policy provisions do not include exclusions concerning risks stemming from the new Yates guidelines. Inaccessible ‘strong room policies’ that managers cannot get their hands on are rather undesirable. The same is true for non-executive director mandates in the US. The only drop of bitterness for managers is that they will have to take the money for individual coverage out of their own purse.


Burkhard Fassbach is of counsel at Hendricks Rechtsanwälte. He can be contacted on +49 (0)211 957 4162 31 or by email at: fassbach@fassbach.de.

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