This newspaper (chinatimesnet.CN) reporter Wu Min reports from Beijing.
After the implementation of the new law, China's punishment for violating the law has gone from "three glasses of wine" to the point of "breaking the muscles and bones". Kangmei Pharmaceutical, Great Wisdom and other judicial cases not only sounded the alarm for listed companies, but also made the directors and senior supervisors see their own practice risks.
The purchase of D&O insurance has become the main means for listed companies to pass on risks. According to incomplete statistics from wind data, since 2023, a total of 309 listed companies have issued announcements of their intention to purchase D&O insurance.
Among the listed companies that purchase D&O insurance, private enterprises account for more than 70%. The reason for this is that most of the directors, supervisors and senior executives of private enterprises are professional managers, and they have begun to pay more and more attention to the risk transfer function of D&O insurance after the legal liability risk they face has increased significantly, which is obviously different from the state-owned enterprises that pay more attention to the corporate governance function of D&O insurance.
309 listed companies plan to purchase D&O insurance
D&O insurance has been developed for more than 20 years since it was introduced to China in 2002. However, due to the lack of awareness of domestic insurance, it has always belonged to a niche marginal type of insurance.
However, in recent years, the risk environment of the A** field has changed dramatically. The new ** law, which was officially implemented in 2020, established a "Chinese-style ** class action system", which greatly increased the litigation risk faced by A-share listed companies and their directors, supervisors and senior executives.
The landmark event that made D&O insurance truly enter the public eye was the financial fraud case of Kangmei Pharmaceutical that occurred at the end of 2021. At that time, Kangmei Pharmaceutical was sentenced to 520,000 investors compensate for investment losses245.9 billion yuan, the then directors, supervisors and senior executives also had to bear joint and several liability, even the independent director with the least joint and several liability, the amount of liability exceeded 100 million yuan.
What is a huge disparity is that the annual salary of these independent directors from Kangmei Pharmaceutical is only more than 10 yuan. Yesterday he was an extremely glamorous executive of a listed company, but today he has become a party with hundreds of millions of yuan in debt.
After that, D&O insurance heated up rapidly, ushering in a wave of insurance upsurge. According to incomplete statistics from the China Times, from 2020 to 2022, the number of listed companies that disclosed the purchase of D&O insurance plans on public platforms such as the Shanghai Stock Exchange and the Shenzhen Stock Exchange was 119, 248, and 337 respectively, with an increase of % respectively.
Since 2023, the number of listed companies that have disclosed the purchase of D&O insurance plans is 309, which is lower than that in 2022On the other hand, D&O insurance is not compulsory, which mainly relies on the active risk management awareness of listed companies. In addition, considering the challenges of the development of the real economy this year, there are also listed companies out of cost saving considerations.
Recently, the "D&O Insurance Market Report of China's Listed Companies (2024)" released by the insurance business team of Shanghai City Development Law Firm shows that among all A-share listed companies that purchase D&O insurance, the number of manufacturing companies is far ahead, accounting for more than 60%. At the same time, among the listed companies that purchase D&O insurance, private enterprises account for nearly 75%, and Sino-foreign joint ventures (including joint ventures between Hong Kong, Macao, Taiwan and China) account for 105%, state-owned enterprises accounted for 46%, and foreign investment (including investment from Hong Kong, Macao and Taiwan) accounted for 10%.
As for the reason for purchasing D&O insurance, the listed company gave an answer in the announcement of the proposed purchase. For example, Jinling Pharmaceutical said that the purchase of liability insurance for the company and its directors, supervisors and senior managers will help strengthen the company's risk management and control system, protect the rights and interests of relevant personnel, promote their full performance of their duties, and reduce the risks or losses that may be caused during the performance of their duties.
From the perspective of the insured amount, the current D&O insurance policy limit of A-share listed companies is mainly 40 million to 60 million yuan, followed by 80 million yuan to 100 million yuan, and the most common policy limits are 50 million yuan and 100 million yuan. Excluding some listed companies that have not disclosed relevant information in the announcement, the minimum policy limit for 2023 is 8 million yuan, and the maximum policy limit is 7500 million yuan, the latter is issued by China's express logistics comprehensive leading enterprise "SF Holdings", which is a listed company on the small and medium-sized board of the Shenzhen Stock Exchange.
On December 26, 2023, the first case of China's ** class action mediation case, Zeda Yisheng case, was successfully mediated, and more than 7,000 investors on the Science and Technology Innovation Board were compensated 2800 million yuan, this case followed the Kangmei Pharmaceutical case and once again released a signal that the class action lawsuit will bring huge civil compensation to listed companies in the future.
It should be pointed out that Zeda Yisheng has issued an announcement on the insurance of D&O insurance, and the insurance limit disclosed in the announcement is 50 million yuan, that is to say, if the mediation result of this case is agreed by the insurer in advance, the insurance amount will not be enough to compensate all the losses of investors.
Wang Min, a senior counsel at Shanghai City Development Law Firm, pointed out that in view of the rising risk of investor claims, it is recommended that A-share listed companies should consider purchasing policies with a policy limit of no less than 100 million yuan.
Chen Leibo, a senior partner of Jingshi Law Firm, said in an interview with a reporter from China Times that the purchase of D&O insurance has a positive impact on the market. On the one hand, after a listed company insures individual directors, it can effectively reduce the compensation caused by the fear of decision-making mistakes and encourage directors to make bold decisions. On the other hand, after a listed company has purchased D&O insurance, it will introduce an insurance institution as an external governance mechanism to supervise the decision-making behavior of individual directors.
There will be more actual claims in 2024
In the European and American markets, there have been lawsuits and investor lawsuits due to financial fraud of listed companies, which has aroused the attention of investors and regulators to the diligence and due diligence of senior executives. The landmark case was the Enron bankruptcy in 2001.
Enron was once one of the world's largest energy, goods and services companies, ranking seventh among the top 500 companies in the United States. At that time, Enron's management was the first to be questioned, including the board of directors, the board of supervisors, and the company's senior management. They face allegations of negligence, misrepresentation of accounts, misleading investors and personal gain. At present, D&O insurance has become a must-have for listed companies in Europe and the United States.
In the Hong Kong market, more than 85% of listed companies choose to purchase D&O insurance. The main trigger was the impact of the subprime mortgage crisis and the Lehman Brothers incident on Hong Kong's financial market in 2007, which prompted Hong Kong's listing supervision to become stricter, and SFC increased human, material and institutional investment in the supervision of listed companies, strengthened cross-border law enforcement cooperation, established a "whistleblower" system in the capital market, and the number of investigations on listed companies surged.
However, in the A** field, although Kangmei Pharmaceutical has triggered the enthusiasm of listed companies for D&O insurance, the insurance rate is still low compared with the international market, and the insurance ratio is only 25%.
Zhu Junsheng, research director of the China Insurance and Pension Research Center of Tsinghua University's PBC School of Finance, once told the China Times that in order to popularize D&O insurance, it is necessary to protect the seriousness of directors' fiduciary responsibilities through judicial force, and courts at all levels should directly accept the lawsuits of shareholders of listed companies on the fiduciary responsibilities of directors, rather than on the premise of administrative penalties from regulatory authorities.
Zhu Junsheng pointed out that the strict fiduciary responsibility of directors in the United Kingdom and the United States is established through the rule of law, and directors must bear corresponding responsibilities if they are not careful, and may even be fined and bankrupt. Except for a few extreme cases, the losses caused by the failure of directors' fiduciary responsibilities to shareholders of listed companies are often indirect and long-term, and it is not only difficult for the regulatory authorities to file a case for investigation and punishment, but also the strength of administrative penalties is not enough to produce a broad deterrent effect, so the fiduciary liability of directors of listed companies in China needs to be finally established through a series of deterrent compensation judgments by courts at all levels.
It is worth mentioning that since the introduction of D&O insurance in China, no domestic listed company has announced a compensation case for this type of insurance. The reason for this, Yang Zeyun, a teacher of the Department of Finance of the School of Management of Beijing Union University, believes that the first is that there is less insurance and less compensation. Second, many D&O insurance companies have signed confidentiality agreements involving company secrets, and there are basically no cases disclosed by insurance companies.
Pan Yaobin, manager of the heavy customer department of Mingya Insurance Brokerage Corporation, once analyzed to the "China Times" reporter that this is also related to the product characteristics of D&O insurance, and the "long tail" characteristics of D&O insurance are more obvious. However, many cases are already in the process of being heard by the courts, and it is expected that in the next three years, the corresponding claims will be presented.
According to the Report on the D&O Insurance Market of China's Listed Companies (2024), in 2023, an insurance company paid a D&O insurance compensation of up to RMB 30 million to an A-share listed company, and the case lasted for 4 years from the filing of the claim to the conclusion of the case, which may be the highest insurance payment in the A-share D&O insurance market so far.
Considering the long-tail nature of D&O claims, Wang Min expects that in 2024, there may be more potential claims that will be converted into actual claims, and there will also be more new compensable situations.
Editor-in-charge: Meng Junlian Editor-in-chief: Zhang Zhiwei.