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Settlements reached in 2005 in securities litigation involving Enron and WorldCom highlighted the financial risks faced by outside directors of public companies. We argue elsewhere that Enron and WorldCom, as instances where directors made damages payments out of their own pockets, are and likely will remain exceptional in the United States (see Bernard Black, Brian Cheffins and Michael Klausner, Outside Director Liability, In this paper, we show that the risk of out-of-pocket payment is likewise very low on a cross-border basis, in both common law and civil law countries. The largest source of risk is efforts by government agencies to make an example of particular directors, even when the cost of doing so likely exceeds the financial recovery. We study Britain and Germany in depth and offer summaries of the position in Australia, Canada, France, and Japan. We find that while specific laws quite often differ, there is substantial functional convergence. In each country we analyze, due to a combination of substantive law, procedural rules, and market forces, the out-of-pocket liability risk faced by outside directors of public companies is similar - present but very small. We draw upon our cross-border analysis to assess the legal risks outside directors can expect to face going forward, both in the United States and elsewhere. We also briefly consider whether the current approach reflects sensible public policy.

Other pieces of this overall project are: (a pre-Enron and WorldCom version of "Outside Director Liability", 2004) (policy analysis, 2005) (study of Korea, 2011) (summary article for a finance audience, 2005) (Germany-centered, 2005) (German language version of Germany-paper, 2005) (summary article for a practitioner audience, 2004)

Published in

Texas Law Review
Vol. 84, pp. 1385-1480, 2006

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