Every year just after Labor Day, I take a step back and survey the most important current trends and developments in the world of Directors’ and Officers’ liability and D&O insurance. This year’s survey is set out below. Once again, there are a host of things worth watching in the world of D&O.
Will Securities Class Action Lawsuits Filings Continue Their Record Pace?
Year to date, as of September 1, 2017, 299 federal court securities class action lawsuits have been filed, representing a pace of securities suit filings that if continued would set an annual record. The 299 filings so far this year also already exceed the 272 securities suit filings during the full year 2016. The filing total through the year’s first eight months projects to a year-end total of 448, which would be the highest annual number of securities suit filings since 2001, when a flood of IPO laddering cases swelled the filing totals. An annual total of 448 filings would exceed the 1996-2015 annual average of 188 securities suit filings by 138%.
The high number of 2017 federal court securities suit filings is in part a reflection of the shift of merger objection lawsuits from state to federal court. As discussed further below, because of the hostility of the Delaware Court of Chancery to the disclosure-only settlements that frequently resolve these kinds of cases, the plaintiffs’ lawyers are filing these suits in federal court.
However, even if the federal court merger objection lawsuit filings are disregarded, the YTD pace of securities suit filings is still at extraordinary levels. Through the first eight months of the year, there were 168 traditional securities lawsuit filings, which projects to a year-end total of 252 traditional securities suit filings. A total of 252 traditional filings would far exceed the 170 traditional securities lawsuit filings during the full year 2016, and would exceed the 1996-2015 annual filings average of 188 by 34%.
The volume of securities suit filings is all the more striking if the decline in the number of publicly traded companies is taken into account. Due to bankruptcies, mergers, and going private transactions, there are 46% fewer publicly traded companies now than there were in 1996. The increase in the number of securities suit filings together with the decline in the number of publicly traded companies means that the litigation rate has increased substantially compared to historical levels. Measured as of June 30, 2017, and including the merger objection lawsuits, the 2017 filings were on pace for a litigation rate of 9.5% — compared to a comparable litigation rate for the full year 2016 of 5.6% and a 2.8% annual average litigation rate for the period 1996-2015. A 9.5% litigation rate essentially means that one of ten publicly traded companies will get hit with a securities suit this year.
Even if we disregard the merger objection lawsuits, the projected year-end 2017 total of 252 traditional lawsuits implies a litigation rate of 5.4%, which again would far exceed the 2016 litigation rate for traditional lawsuits of 3.9%. The implied 2017 litigation rate for traditional filings is nearly double the 1997-2015 average annual litigation rate of 2.8%.
What is behind this extraordinary increase in the litigation rate? The likeliest explanation is that increased levels of securities suit filings reflect changes in the plaintiffs’ securities class action bar. As Prof. Michael Klausner and Jason Hegland of Stanford Law School detailed in a guest post on this blog (here), since 2009, a significantly larger number of securities class action lawsuits (both in terms of absolute numbers of lawsuit filings and in terms of percentage of all lawsuits filed) are now being filed by a group of small plaintiffs’ firms that were not previously active in filing securities lawsuits. The activities of these “emerging law firms” appear to account for a large proportion of recent increased numbers of securities class action lawsuits filings.
In an August 22, 2017 Wall Street Journal article discussing the extraordinary rise in the rate of securities litigation filings (here), a comment by an attorney at one of the emerging firms seemed to corroborate the conjecture that changes in plaintiffs’ bar’s approach explain the rise in the pace of securities suit filings. The attorney agreed that his firm and others have filed a broader range of cases in recent years, calling it a “necessary adaptation as the more obvious accounting misstatements have become scarcer.”
The changes in securities litigation filing patterns have important implications both for listed companies and for their insurers. Long-term securities litigation frequency risks have changed categorically. This means not only that publicly-traded companies now face an overall greater risk of securities class action litigation than in the past, but it also means that their D&O insurers also may be facing a significantly increased litigation frequency risk as well. To the extent that insurers’ pricing models are not taking these increased risks into account, their pricing calculations may result in premium charges that come up short.
How Will President Trump’s Judicial Nominees Shape the Federal Judiciary?
President Trump’s appointment of Neal Gorsuch to the U.S. Supreme Court represents one of his administration’s early accomplishments. However, as important as the U.S. Supreme Court is, it is in the lower federal courts that the Trump administration may have its most significant impact.
The clamor of day-to-day White House activity dominates the news media’s attention, but in the meantime, the Trump administration has quietly been moving forward to fill the vacancies on the lower federal courts. The Trump administration also has been moving at what has been described as a “breakneck pace” to place its nominees in the federal judiciary. The President’s efforts to put his nominees on the federal bench could have a far greater impact than his more attention-grabbing activities.
There are a significant number of vacancies on the federal bench for President Trump to fill. As of September 1, 2017, there were 144 federal court judicial vacancies, representing over 16% of the authorized federal judgeships.
As of August 31, 2017, the Senate has confirmed including six Trump administration judicial nominees, including one Associate Justice of the Supreme Court, three judges for the United States Courts of Appeals, and one judge for the United States District Courts. However, of even greater significance, and as of the same date, there are 30 Trump administration nominations to federal court judgeships awaiting Senate action, including eight for the Courts of Appeals and 22 for the District Courts.
As Democratic Senator Chris Coons, a member of the Senate Judiciary Committee was recently quoted as saying, President Trump’s influence on the federal judiciary as a result of his nominations “will be the single most important legacy of the Trump administration,” adding with respect to the kinds of candidates that the Trump administration has been nominating, “given their youth and conservatism, they will have a significant impact on the shape and trajectory of American law for decades.”
Some of Trump administration’s nominees to the federal judiciary have proven to be controversial, most of Trump’s judicial nominees have, as Jeffrey Toobin noted in a recent New Yorker article, “excellent formal qualifications.” More to the point in terms of possible consequences of Trump’s judicial nominations, Toobin noted that “Trump is poised to reshape the judiciary in a notably conservative direction.”
With the benefit of a Republican-controlled Senate, the Trump administration appears well-positioned to continue to place its nominees on the federal bench. The decidedly conservative cast of the administration’s nominees will have a significant impact on the proceedings in the lower federal courts for years to come. This impact may take a number of forms, but among other things, one likely impact would seem to be a more defendant-friendly approach to business disputes and other commercial matters, at least to the extent the adminitration’s nominees share the President’s anti-regulation, business-friendly outlook. To the extent this defendant-friendly approach actually materializes, it could prove to provide a significant boost to corporate litigants and their D&O insurers.
What Impact Will President Trump’s Political Appointments Have on D&O Claims?
Beyond his judicial appointment authority, President Trump’s authority to make executive branch and other political appointments affords him, through his administration, enormous power to set policy, promulgate or revise regulation, and determine the direction of the government and its course of conduct. As Michael Lewis’s potent July 26, 2017 Vanity Fair article about U.S. Department of Energy under the Trump administration demonstrates, the President’s executive branch nominations and other political appointments potentially can have a dramatic impact on the policies and activities of the U.S. government and on its fulfillment of its responsibilities.
Two of President Trump’s appointments have the greatest potential to have a significant impact on companies and their directors and officers. First, the President appointed Senator Jeff Sessions as the Attorney General and head of the U.S. Department of Justice. Sessions is a former prosecutor and U.S. Attorney with a well-established reputation as defender of “law and order.” While he is well known for his focus on drug enforcement issues, he has also made it clear that he is prepared to be active on white collar crime issues. In his confirmation hearings as well as in numerous prior public statements, Sessions has made it clear that he places a high priority on fighting corporate misbehavior.
Though Sessions has moved quickly to reverse Obama administration policies in a number of areas, expectations are that he will continue the Obama’s aggressive approach to white collar crime enforcement. In a May speech, Sessions affirmed that would continue to vigorously enforce the nation’s anti-fraud laws, including the Foreign Corrupt Practices Act (FCPA), stating with respect to law enforcement that “one area where this is critical is enforcement of the Foreign Corrupt Practices Act.”
One particularly important question about the Department of Justice under Sessions is the extent to which the agency will continue to enforce the so-called Yates Memo, which embodied the prior administration’s policy of seeking to hold individual executives accountable for corporate misconduct. Though the Department administration will no longer refer to this policy as the Yates Memo, expectations are that the new administration will continue the policy of seeking to hold individuals accountable. Indeed, in his May speech, Sessions specifically said that “The Department of Justice will continue to emphasize the importance of holding individuals accountable for corporate misconduct.”
President Trump’s appointee as Chairman of the SEC, Jay Clayton, is a Wall Street lawyer who has made a career representing large financial firms and other corporate clients in financial transactions and regulatory matters. His client list included most of the largest banks on Wall Street; his wife works for Goldman Sachs. His law practice generally did not include representing clients in connection with enforcement matters. His background contrasts from that of his predecessor, Mary Jo White, who was a career prosecutor who brought to her job a lifetime reputation as a “tough cop.” All else equal, it seems likelier that priority of the agency under Clayton would be more toward regulatory and finance issues, rather than toward enforcement issues.
Just the same, in a July 12, 2017 speech, Clayton made a point of emphasizing that “I fully intend to continue deploying significant resources to root out fraud and shady practices in the markets, particularly in areas where Main Street investors are most exposed.” He also said that “the Commission will continue to use its enforcement and examination authority to support market integrity.” One particular area he chose to emphasize in his speech is corporate responsibility for disclosure relating to cybersecurity. He said that “public companies have a clear obligation to disclose material information about cyber risks and cyber events. I expect them to take this requirement seriously.”
In the past, Clayton contributed to a white paper suggesting that rigorous FCPA enforcement was pushing foreign companies to avoid registering as U.S. issuers and stating that the U.S. government should “dial back the scope of FCPA enforcement with respect to companies.” Nevertheless, expectations are that as head of the SEC, Clayton will continue prior administration’s policies of active FCPA enforcement.
How Will the Supreme Court Decide the Pending Securities Cases on its Docket?
In the past, years would pass between occasions on which the U.S. Supreme Court would take up cases raising questions under the securities laws. In more recent years, the Court inexplicably has seemed more inclined to take up securities cases. The upcoming Supreme Court term, which commences in October 2017, is no exception to this recent trend. The Court already has at least three important securities cases on its docket for the upcoming term.
Leidos, Inc. v. Indiana Public Retirement System: This case will afford the Court an opportunity to resolve a circuit split by addressing the question of whether or not the alleged failure to make a disclosure required by Item 303 of Reg. S-K is an actionable omission under Section 10(b) and Rule 10b-5. The Second Circuit has held that Item 303 does create an actionable duty of disclosure, while the Ninth and Third Circuits have held that it does not.
Item 303 of Reg. S-K states in pertinent part that in its periodic reports to the SEC, a company is to “[d]escribe any known trends or uncertainties that have had or that the registrant reasonably expects will have a materially favorable or unfavorable impact” on the company. Guidance provided by the SEC on Item 303 clarifies that disclosure is necessary where a “trend, demand commitment event or uncertainty is both presently known to management and reasonably likely to have material effects on the registrant’s financial conditions or results of operations.” Issuers’ Item 303 disclosures appear in the Management Discussion & Analysis (MD&A) sections of their annual reports (and in interim or quarterly reports, where there have been material changes since the last annual report).
The plaintiffs in the Leidos case allege that the SEC filings of SAIC (the predecessor of Leidos) omitted disclosures required by Item 303. The district court granted the defendants’ motion to dismiss, ruling, among other things, that the plaintiff’s claims based on the allegation that the company’s SEC filings omitted disclosures required by Item 303 were insufficiently pled. On appeal, the Second Circuit vacated the portion of the district court’s ruling relating to the Item 303 allegations, at the same time noting the circuit split on the question relating to Item 303 disclosures. The defendants filed a petition seeking Supreme Court review of the Second Circuit’s ruling. The U.S. Supreme Court’s March 27, 2017 order granting the writ of certiorari can be found here.
The Supreme Court’s consideration of these issues will address the circuit split on the question of whether or not Item 303 creates an actionable duty of disclosure under Section 10(b) and applicable regulations. Although some commentators have questioned the significance of this issue, the fact is Court’s consideration of these issues will address an issue that comes in frequently in the securities cases in the lower courts and that the circuit courts have decided in differing ways that could allow cases to go forward in some judicial circuits that would not pass muster in other circuits. The case will be argued on November 6, 2017.
Cyan, Inc. v. Beaver County Employees Retirement Fund: A recurring question that has arisen in recent years is whether or not state courts retain concurrent jurisdiction over lawsuits alleging liability under the Securities Act of 1933.
Section 22(a) of the Securities Act of 1933 provides for concurrent state court jurisdiction for civil actions alleging violations of the ’33 Act’s liability provisions. Section 22(a) specifies further that when an action is brought in state court alleging a ’33 Act violation, the case shall not be removed to federal court.
In the Securities Litigation Uniform Standards Act of 1998 (SLUSA), Congress enacted provisions to preempt state court jurisdiction over federal law securities suits and to require the “covered class actions” to go forward in federal court.
The question that arose after SLUSA was enacted was whether or not SLUSA’s provisions pre-empt the concurrent state court jurisdiction provisions in the ’33 Act. The determinations of these issues have not been uniform, but that in the Ninth Circuit, the state of the law seems to be that ’33 Act cases filed in state court in reliance on Section 22’s concurrent jurisdiction provisions are not removable from state court to federal court notwithstanding the provisions of SLUSA.
The question of whether or not after SLUSA state courts retain jurisdiction for ’33 Act liability lawsuits is a significant one. In recent years, a significant amount of IPO-related securities class action litigation has been filed in state court, particularly in California, as detailed in a recent guest post on this site. The question of whether post-SLUSA state courts retain their concurrent ’33 Act liability lawsuit jurisdiction has vexed the courts and litigants for years. This case offers the opportunity for these questions finally to be resolved. Oral argument in the case has not yet been scheduled.
Digital Realty Trust, Inc. v. Somers: At the end of its last term in June 2017, the Court also agreed to take up the question of whether or not the Dodd-Frank Act’s anti-retaliation provisions apply to and protect individuals who did not make a whistleblower report to the SEC. The lower courts have struggled with the question of whether or not the Act’s anti-retaliation protections extend to individuals who file internal reports within their own companies.
The problem for the courts is that the statutory provisions conflict. The Dodd-Frank Act’s definitions seems to restrict the term “whistleblower” to those filing whistleblower reports with the SEC, but the Act’s anti-retaliation provision seems to extend its protections to other whistleblowers, including, for example, those filing an internal whistleblower report within their own company under the Sarbanes Oxley Act. As one district court said with respect to the tension between these two provisions, “at bottom, it is difficult to find a clear and simple way to read the statutory provisions … in perfect harmony with one another.”
Of potential relevance to the resolution of these issues, the SEC’s regulations in effect interpret the Act’s provisions to extend the anti-retaliation protections to all those who make disclosures of suspected violations, whether the disclosures are made internally or to the SEC.
In taking up the case, the Court will not only have the opportunity to address the split between the circuits on the issues surrounding the Dodd-Frank Act’s whistleblower anti-retaliation protections, but it may also have the opportunity to take up the “Chevron deference” issue. Under this doctrine, which refers to the U.S. Supreme Court 1984 decision in Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc., courts defer to agency interpretations of statutory mandates unless the interpretations are unreasonable. Chevron deference has been a hot button issue in conservative circles for years. It is in fact an issue on which new Supreme Court Justice Neil Gorsuch weighed in while he was on the Tenth Circuit; he called the doctrine “a judge-made doctrine for the abdication of the judicial duty.” To the extent the court takes up the Chevron deference issue, it will address the question of whether or not it should defer to the SEC’s interpretation of the reach of the Dodd-Frank Act’s anti-retaliation provisions.
The Supreme Court has not yet scheduled oral argument in the Digital Realty Trust case.
How Will the Federal Court Merger Objection Lawsuits Fare?
As I noted above, an important part of the surge in YTD securities suit filings is a reflection of the shift of merger objection lawsuits from state to federal court. Of the 299 securities suit filings during the first eight months of 2017, 129 (or about 43%) are merger objection suits. The 129 federal court merger objection lawsuit filings YTD far exceed the 80 federal court merger objection lawsuit filings during the full year 2016.
The surge in the number of federal court merger objection lawsuit filings is a direct result of a series of Delaware state court rulings, culminating in the January 2016 ruling in the Trulia case, in which a series of Delaware judges evinced their hostility to the type of disclosure only settlements that frequently characterize the resolution of merger objection lawsuits. As a result of the unfavorable climate in the Delaware courts, the plaintiffs’ lawyers have shifted their filings of many of these suits to federal court.
With merger objection lawsuits now relatively more likely to be filed outside Delaware, the question of whether or not judges in other jurisdictions — and in particular, federal district court judges — will follow the lead of Delaware’s courts in rejecting disclosure-only settlements takes on greater significance. There has been some reason to be concerned that judges in other jurisdictions were not inclined follow Delaware’s lead and might continue to approve disclosure-only settlements of these kinds of cases.
However, as discussed here, last year, in a lawsuit involving Walgreen’s acquisition of Alliance Boots, the Seventh Circuit, in a blistering opinion written by Judge Richard Posner, affirmatively adopted the Delaware Chancery Court’s position on disclosure-only settlements. Saying that these kinds of lawsuits are “a racket” and characterizing the additional disclosure that was the basis of the settlement as “worthless,” the appellate court reversed the district court’s approval of the settlement.
With the number of federal court merger objection lawsuit growing significantly, the question of whether or not the federal courts will, similarly to the Seventh Circuit in the Walgreens case, follow the Delaware courts’ lead in rejecting disclosure-only settlements takes on increased urgency. If the federal courts show the same level of scrutiny and hostility as the Delaware courts, the flood of federal court merger objection suits may prove to be a short-lived phenomenon. However, if the federal courts decline to follow the Delaware courts’ lead, federal court merger objection litigation could remain an important corporate and securities litigation phenomenon, representing a significant litigation exposure for companies and for their D&O insurers.
Will Mandatory Securities Claim Arbitration Become a Serious Possibility?
For a time a few years ago, litigation reform bylaws were all the rage – including forum selection bylaws, fee shifting bylaws, even mandatory arbitration bylaws. More recently, discussion of the topic quieted down, in part because the Delaware legislature enacted legislation allowing Delaware corporations to adopt forum selection bylaws while also prohibiting fee-shifting bylaws. However, the topic of litigation reform bylaws may be back on the docket again. As discussed here, in July 2017 speech, SEC Commissioner Michael Piwowar invited companies heading toward an IPO to adopt arbitration provisions in their corporate bylaws.
According to a July 17, 2017 Reuters article entitled “U.S. SEC’s Piwowar Urges Companies to Pursue Mandatory Arbitration Clauses” (here), Piwowar said in a speech at the Heritage Foundation that “For shareholder lawsuits, companies can come to us to ask for relief to put in mandatory arbitration into their charters. I would encourage companies to come and talk to us about that.”
As Alison Frankel points out on here On the Case blog (here), mandatory arbitration of shareholder claims is not a new idea. Academics have been debating the possibility for decades. And as I noted in a post a few years ago, several courts did uphold the enforceability of one company’s bylaw provision requiring arbitration of shareholder claims.
Nevertheless, at least until now, the view has been that the SEC opposes provisions requiring shareholder claims to be arbitrated. The agency’s position has been a corporate charter provision mandating arbitration of shareholder claims would violate Section 29 of the ’34 Act, which voids any contractual provision that would seek to waive any right under the statute.
Though Piwowar seems to have invited companies planning IPOs to step forward with mandatory securities claim arbitration provisions, there may be some good reasons for companies to hold back. For starters, notwithstanding Piwowar’s comments, it is not entirely clear whether a securities claim arbitration provision would withstand scrutiny. Among other things, a court might conclude that, notwithstanding the SEC’s position, an arbitration provision is contrary to the prohibitions in Section 29.
There may be a more practical reason companies might hesitate to adope a securities claim arbitration provision, and that is concern about the market’s reaction. In her blog post, Frankel raised the question whether big institutional investors might balk at waiving their right to sue. Frankel quotes Columbia Law School Professor John Coffee as noting that a company’s adoption of an arbitration provision could have an impact on the company’s share price at the IPO. On the other hand, Frankel also quotes Michigan Law School Professor Adam Pritchard as suggesting that investors might pay more for shares of companies that could be able to avoid the expenses of securities class action lawsuits.
In any event, it may not be long before a company takes Piwowar up on his invitation and steps forward for an IPO with a securities claim arbitration provision in its bylaws. If the IPO candidate’s submission passes agency muster, not only will these kinds of provisions quickly become standard for IPO companies, but many of the already public companies will quickly take steps to adopt similar provisions, just as they did with forum selection bylaw provisions a few years ago.
What might it mean if shareholder securities claim arbitration provisions become standard? It could mean serious changes in the way securities claims are litigated in this country. To whatever extent changes of this magnitude are even in the realm of the possible, we are a long way off from any of these kinds of things taking place. Even if these kinds of arbitration provisions actually do take hold, there are still a lot of other things that could happen. As we saw a few years ago when fee-shifting bylaw provisions were all the rage, the Delaware legislature stepped forward and changed the relevant laws, pretty much stopping the fee-shifting bylaw bandwagon in its tracks. By the same token, if securities claim arbitration provisions were to take off, Congress might act.
The one thing that is certain is that if Piwowar’s recent suggestion succeeds on getting things started, it could get very interesting. For now, put the question of mandatory securities claim arbitration provisions on the list of things to watch.
Will the Frequency of Collective Investor Actions Outside the U.S. Continue to Grow?
As the statistics discussed above reflect, securities class action litigation is an important part of the U.S. litigation landscape. By contrast, in the past, and until quite recently, there has not been significant collective investor litigation activity outside the United States, other than in Australia and Canada. However, as underscored by several recent developments, collective investor litigation outside the U.S. is now a significant phenomenon and it not limited just to Australia and Canada. The likelihood is that it will continue to grow.
Two recent developments underscore the significance of the changes. First, as discussed here, in March 2016, shareholder associations acting on behalf of former shareholders of the failed financial firm Fortis entered a $1.3 billion settlement under the Dutch Collective Settlement procedures. Second, as discussed here, in December 2016, collective investor groups negotiated a $1.0 billion partial settlement in the U.K. of the credit crisis-era claims asserted against RBS. Subsequent settlements in the RBS case brought the total value of the RBS settlements close to $1.3 billion.
It must be emphasized that settlements of this magnitude in collective investor actions outside the U.S. is absolutely unprecedented. Indeed, were these settlements to have taken place in the U.S., they would be among the ten largest settlements ever. The fact that the settlements took place outside the U.S makes them all the more significant.
In addition to these massive settlements, there has also been a surge of new collective investor actions filed around the world, driven by a wave of high-profile corporate scandals. New claims have been filed in recent months in a variety of jurisdictions outside the U.S. against a number of companies, including Volkswagen, Tesco, Toshiba, Petrobras, and others.
There are a number of factors driving this litigation activity. The disruption of the global financial crisis engendered a new willingness to try to hold corporate executives accountable. The global financial crisis also spurred increased regulatory enforcement activity and increased cross-border regulatory collaboration. Though the financial crisis has passed, the regulators have remained active. In addition, legislatures around the world have continued to enact legislative reforms that allow for various kinds of collective investor action. For example, in December 2015, Thailand enacted provisions allowing for securities class actions in that country.
Another significant factor in the global rise of collective investor actions has been the growth of third-party litigation funding. Third-party litigation funding has been a major force in the rise of securities class action litigation in Canada and Australia, and is a significant contributing factor behind many of the more recently filed scandal-related collective investor actions.
The spread and growth of litigation funding increases the likelihood that the collective action procedures various countries have recently adopted will be put into use for remedial purposes. The high-profile corporate scandals seems likely to provide ample motivation and incentive for these developments to continue.
These developments have important implications for companies and their directors and officers, as well as for their D&O insurers. For the companies, these developments mean that their D&O claims exposure has expanded, as they face the potential for serious claims across a vastly expanded landscape. For the D&O insurers, these developments represent a radical shift, as the possibilities for D&O claims frequency and severity has changed in ways that defy long-standing assumptions. The future for D&O claims literally represents a whole new world.
Will Cybersecurity Become a Significant D&O Claims Issue?
By now, every organization is aware of the importance of cybersecurity concerns. Indeed, news of a data breach of other type of cybersecurity event is a nearly daily occurrence. Many of these cybersecurity events lead to litigation, though the vast bulk of the litigation has concerned consumer privacy issues. As cybersecurity events have continued to mount, one question that has arisen is whether or not claims cybersecurity incidents will also lead to D&O claims in which the claimants allege that the senior officials at a company should be held liable.
There has in fact been a small number of high profile data security-related D&O lawsuits filed. However, several of those cases – including, for example, the derivative lawsuits filed against Target (about which refer here) Wyndham Worldwide (here), and Home Depot (here ) – were quickly dismissed. (It should be noted, however, that while appeal in the case was pending, the parties to the Home Depot case settled the case, with the defendant agreeing among other things to pay the plaintiffs’ attorneys’ fees of $1.1 million).
With the dismissal of these cases, the plaintiffs’ prospects in these kinds of cases appeared dim. However, within days of Home Depot suit dismissal and just at the point where it seemed as if these kinds of cases might dwindle altogether, a plaintiff shareholder filed a new shareholder derivative lawsuit against the board of Wendy’s, as discussed here.
In addition, in January 2017, plaintiffs filed a data breach-related securities lawsuit against Yahoo!, as discussed here. The securities suit filing followed the company’s two announcements, in September and December 2016, that several years earlier the company had experienced separate data breaches in which hackers had obtained access to hundreds of millions of users’ accounts. Among other things, the plaintiffs in the securities suit alleged that the announcement of the data breaches led to the delay and renegotiation of the terms of Verizon’s planned acquisition of Yahoo!
The lawsuits against Wendy’s and Yahoo were only recently filed. It remains to be seen whether they will fare any better than the earlier suits. It also remains to be seen whether other prospective data breach claimants will choose to file D&O lawsuits. However, the arrival of the Wendy’s and Yahoo lawsuits is a reminder that it is far too early to conclude that we don’t need to be worried about the possibility of cybersecurity-related D&O litigation.
The reality is that the plaintiffs’ lawyers are still trying to find the right approach (or perhaps to find a case with just the right facts). The plaintiffs’ bar is creative and entrepreneurial and they have significant incentives to try to find a way to capitalize on the chronic cybersecurity risks and exposures that companies face. The plaintiffs’ lawyers will continue to experiment, and for that reason alone we are going to see further cybersecurity-related D&O lawsuits. The more important question for companies and their advisors is how frequent and how severe these claims will prove to be.
Will Climate Change-Related Concerns Lead to More D&O Claims?
Even though President Trump announced on June 1, 2017 the withdrawal of the United States from the Paris Climate Accords, it seems likely that climate change will remain a high profile issue for many corporate boards, and potentially could be a source of future corporate claim activity.
Climate change-related issues have in fact already been the source of claims against corporate officials. As noted in a prior post (here), in November 2016, shareholders filed a climate change-related securities class action lawsuit against ExxonMobil, in which the claimants allege that the company’s did not adequately disclose that its own internal analyses of the likely impact from climate change-related issues on its ability to realize the full value of the hydrocarbon assets on its balance sheet. Although one claim does not represent a trend, the ExxonMobil lawsuit does highlight the possibility of other investor claims based on climate change-related disclosure issues.
Beyond the possibilities for these kinds of investor-related damages claims, activists and others frustrated by climate change-related developments in the political arena increasingly may to use the courts as a way to advance their agendas.
A recent lawsuit filed in Australia provides a good example of the way in which climate change activists may seek to use the courts. As discussed here, on August 8, 2017, Environmental Justice Australia filed an action in the Federal Court of Australia, Victoria Registry, against Commonwealth Bank of Australia, on behalf of two Commonwealth Bank (CBA) shareholders.
In their complaint (here), the plaintiffs allege the bank’s Annual Report reflected omissions with respect to climate change-related issues. Among other things, the complaint alleges that the Annual Report did not report on the company’s climate change business risk or its management of climate change risks. The complaint alleges that in making these omissions, the Annual Report “contravened” the requirements of the Corporations Act, by “failing to give a true and fair view of the financial position and performance” of the company and by failing to include information that the company’s shareholders “would reasonably require to make an informed assessment of: the operations of CBA; the financial position of CBA; and the business strategies, and prospects for future financial years, of CBA.”
The complaint seeks a judicial declaration that in failing to report the company’s climate change risks, the 2016 Annual Report “contravened” the relevant sections of the Corporations Act. The complaint also seeks an injunction restraining the company from continuing to fail to report on its climate change- related risks.
The lawsuit has only just been filed and it remains to be seen how it will fare. While the shareholders who filed the lawsuit undoubtedly would be happy to have the court grant their requests for declaratory and injunctive relief, their objectives in filing the lawsuit do not depend on successfully obtaining this relief. Rather, the litigants and the lawyers that represent them are seeking to draw attention to climate change related issues and to use publicity measure to put pressure on companies to focus on and to address climate change issues.
The lawsuit surely will not be the last one of the type, as activists seek to use the use the courts and the publicity surrounding their lawsuits as a way to advance climate change-related awareness. The bottom line is that notwithstanding – and perhaps even because of – the Trump administration’s move to withdraw the U.S. from the Paris climate accords, climate change issues likely will remain an area of concern for corporate boards. Climate change-related disclosure seems likely to remain a particular area of focus, as I previously discussed here.