My post earlier this week about the $275 million Activision Blizzard shareholder derivative lawsuit settlement – and in particular my suggestion that the Activision settlement may be the largest derivative suit settlement ever – provoked an interesting flurry of emails and conversations about the lineup of other large derivative lawsuit settlements. To address the various questions I have received on the topic, I have set out below my unofficial list of the derivative suit settlements involving the largest cash components. My purposes in posting this list are two-fold: first, in response to several requests, to share the information I have; and two, to encourage others who may have different or additional information to share the information so that I can update or supplement the list as appropriate.
Here is my list of the ten largest derivative lawsuit settlements of which I am aware:
$275 million Activision Blizzard (2014)
$139 million News Corp. (2013)
$150 million AIG (sham reinsurance transaction)
$137.5 million Freeport-McMoRan (2015)
$122 million Oracle (2005)
$118 million Broadcom Corp. (Options Backdating) (2009)
$115 million AIG (2002 lawsuit) (2008)
$90 million 21st Century Fox (2017)
$75 million Pfizer (2010) UPDATED
$62.5 million Bank of America (Merrill Lynch Acquisition) (2012)
I suspect strongly that there have been settlements with values between the $62.5 Bank of America settlement and the $110 million El Paso-Kinder Morgan settlement. I am hoping readers that are aware of any derivative suit settlements with values in that range, or any other settlements that ought to be on this list, will please let me know. UPDATE: Several readers reminded me of the $89.4 million Del Monte Foods derivative lawsuit settlement and the $75 million Pfizer shareholder derivative lawsuit settlement, which I have added to the list above. The Pfizer settlement is discussed in greater detail here. FURTHER UPDATE: After receipt of comments from readers, I have removed the $110 milllion El Paso settlemetn from the list as it was originally published. Upon review, I was pursuaded that the case had not been filed as a derivative action bur rather as a direct action on behalf of a shareholder class for damages. (For further detail refer here).
These settlements are of course all dwarfed by the $2.876 billion judgment entered in June 2009 against Richard Scrushy in the HealthSouth shareholders’ derivative lawsuit in Jefferson County (Alabama) Circuit Court, but that judgment represents its own peculiar point of reference, It also was of course a judgment following trial rather than a settlement.
Another peculiar point of reference is the $1.262 billion judgment that Chancellor Leo Strine entered in October 2011 the Southern Peru Copper Corporation Shareholder Derivative Litigation (about which refer here). That case also represents its own form of litigation reality, and it too represents a derivative suit judgment following trial, rather than a settlement.
Another derivative lawsuit resolution that is worth considering in the context of the “largest ever” question is the December 2007 settlement of the UnitedHealth Group options backdating-related derivative lawsuit. As discussed here, the lawsuit settled for a total nominal value of approximately $900 million. However, while the press reports at the time described the settlement as the largest derivative settlement ever, the value contributed to the settlement consisted of the surrender by the individual defendants of certain rights, interests and stock option awards, not cash value in that amount.
In the past, going back ten years or so, shareholders’ derivative suits typically did not present the possibility of significant cash payouts, at least in terms of settlements or judgments. The cases did present the possibility of significant defense expense and also of the possibility of having to pay the plaintiffs’ attorneys’ fees, but by and large there was usually not a cash settlement component. As the significant examples above show, that has clearly changed in more recent years.
This trend gained particular momentum with the options backdating scandal. Many of the options backdating cases were filed as derivative suits rather than as securities class action lawsuits (largely because the options backdating disclosures did not always result in the kinds of significant share price declines required to support a securities class action lawsuit). Many of the options backdating cases settlements included a cash component, and as illustrated by the Broadcom case mentioned above, some of the options backdating derivative suit settlements included very substantial cash components
It is interesting to note how many of the derivative settlements listed above were entered in connection with lawsuits objecting to a merger or acquisition transaction – the Activision Blizzard Settlement, the Freeporr-McMoRan settlement, the El Paso-Kinder Morgan settlement, and the BofA/Merrill Lynch settlement all related to lawsuits arising out of merger or acquisition transactions. Indeed, the News Corp. settlement related at least in part to objection to a transaction involving one of Rupert Murdoch’s children. The rise of merger objection litigation has been the target of a great deal of criticism but the number of recent large settlements involving merger or acquisition transactions highlights the fact that among the many cases that are filed there may be at least a few that are more serious.
As I have noted in the past in connection with the increasing numbers of jumbo derivative lawsuit settlements, the upsurge in the number of derivative suit settlements that include a significant cash component undoubtedly is being viewed with alarm by the D&O insurance industry. For many years, D&O insurers have considered that their significant severity exposure consisted of securities class action lawsuits. The undeniable reality now is that in at least some circumstances, derivative suits increasingly represent a severity risk as well. And the settlement amounts themselves represent only part of the D&O insurers’ loss costs. The D&O insurers also incur millions and possibly tens of million of defense cost expense in these derivative suits.
The increasing risk of this type of settlement represents a significant challenge for all D&O insurers, but particularly for those D&O insurers concentrating on providing Excess Side A insurance. Those insurers will have to ask how they are to underwrite the risks associated with these kinds of exposures, and how they are to make certain that their premiums adequately compensate them for the risk.