Half of the non-executive directors of UK businesses have deliberately limited their involvement in a major transaction because they fear being sued, a study has shown.

The study, which surveyed non-executive directors from FTSE100, FTSE250 and smaller companies, will add to concerns that recent changes in UK law have exposed directors to far greater risks of litigation.

KPMG, the professional services group, asked respondents to identify factors that “constrain your potential contribution to major corporate transactions”, including takeovers and restructurings. One in two of the non-executive directors said the fear of litigation was holding them back.

Tom Franks, head of KPMG Corporate Finance’s quoted companies team, said: “There’s a clear message that non-executive directors are nervous and while they are discussing major issues concerning their companies they also have one eye on how their actions will be judged in the future and whether they could be personally liable if things go wrong.”

The finding that non-executives have become distracted and that their behaviour could be influenced by fears of litigation is particularly alarming as part of their role is to act as an independent sounding board for executive director decisions.

The survey, which questioned 66 non-executives, also found that concerns about increased regulatory scrutiny and fulfilling stock market reporting obligations was also playing on directors' minds.

Patrick Sherrington, Lovell’s global head of dispute resolution, said: “Senior managers at UK companies face an ever increasing threat of claims against them which can lead to both financial and, in extreme cases, criminal sanctions.”

The KPMG study was conducted in September as UK businesses readied themselves for the introduction of new laws under the Companies Act 2006 that will make it easier for investors to sue directors.

However, some litigation lawyers believe these concerns are misguided.

Andrew Dodd, a partner at DLA Piper, said: “While it is true that the Companies Act provides greater scope for directors to be held personally liable for their decisions, it is striking that many of them appear to be so worried that it is affecting their actions.

“Directors who act diligently and in line with their duties are unlikely to face a wave of litigation.”

The survey also revealed gaps in non-executive directors’ knowledge about how to deal with certain situations under the new Act.

Thirty-one per cent said they were still unclear about their duties and responsibilities in the event that their company received a takeover approach from a private equity firm.

KPMG said that since private equity deals currently account for around thirty per cent of all UK takeover deals and non-executive directors were obliged to advise shareholders in the event of such an approach, a “significant knowledge gap” had emerged on company boards.

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