In business meetings during my recent European visit, one topic that came up is the widespread liability risks arising out of the opioid crisis. One particular question I was asked was whether, in addition to everything else, the opioid crisis presented D&O risks. I was quick to refer to the various U.S. securities class action claims that have arisen (about which refer here) and to assure my hosts that there were indeed many other opioid-related D&O claims as well. Among the other opioid-related D&O claims is the shareholder derivative action that was filed against the board of McKesson Corp. As it turns out, the McKesson derivative suit recently settled, for an agreement to pay $175 million. As discussed below, this settlement, which is subject to court approval, and which is one of the largest derivative settlements ever, is to be funded entirely by D&O insurance.
McKesson is a pharmaceutical distributor, by some accounts the largest pharmaceutical distributor in the U.S. Beginning in January 2017, McKesson’s was sued in a series of derivative lawsuits, filed in California and Delaware, in which the plaintiffs alleged that the defendants had breached their fiduciary duties by failing to implement and oversee controls over the company’s operations concerning the sale and shipment of opioid drugs.
The plaintiffs in the California action ultimately filed a consolidated amended complaint (here), in which the plaintiff alleged that not only that the defendant board members had breached their fiduciary duties with respect to oversight of the companies’ opioid drug operations, but that also that this breach of duty exposed the company to a substantial civil penalty pursuant to a 2017 regulatory settlement, and exposed the company to massive legal fees and potential liability exposures in connection with the many consumer and regulatory actions brought against the company growing out of the opioid crisis. In May 2018, the court denied in part the defendants’ motion to dismiss. The plaintiffs’ subsequently filed a second amended consolidated complaint.
After extensive proceedings both in California and Delaware, the parties entered into mediated settlement negotiations. In late December 2019, the parties entered into a stipulation of settlement, in which the parties agreed to settle the case for a payment on behalf of the defendants of $175 million. A copy of the parties’ stipulation of settlement can be found here. The derivative settlement apparently is to be funded entirely by D&O insurance.
As part of the settlement, the board agreed to adopt a number of corporate governance reforms, including the separation of the CEO and Chairman roles and the adoption of a number of compensation clawback mechanisms. The settlement is subject to court approval. On January 31, 2020, Northern District of California Judge Claudia Wilken preliminarily approved the settlement.
According to press reports, the plaintiffs’ lawyers intend to court approval of attorneys’ fees of $52 million, which amounts to roughly 30% of the settlement proceeds (all of which is to be funded by D&O insurance).
As I noted last year in connection with the massive settlement of the Wells Fargo shareholder derivative litigation, there was a time when it was relatively rare for shareholder derivative suits to involve a significant cash component. However, in more recent years, significant cash settlement of shareholder derivative suits have become increasingly common.
I have been keeping a running tally of the large shareholder derivative settlements. According to the informal and unofficial tally that I have been maintained, the $175 million McKesson derivative suit settlement, if finally approved, would be the third largest-ever derivative suit settlement. The two larger settlements on my tally are the 2019 Wells Fargo settlement (which had a cash component of $240 million) and the 2014 $275 million Activision Blizzard settlement.
As was also the case with the Wells Fargo settlement, the McKesson settlement reportedly was settled entirely with D&O insurance proceeds. If it were not apparent before, it certainly is clear now that shareholder derivative litigation represents a significant severity risk for D&O insurers.
In thinking about the extent of the severity risk, it is important to keep in mind that there undoubtedly were also massive defense fees incurred in this litigation before the settlement was reached, so the aggregate cost to McKesson’s D&O insurers is much greater than the $175 million settlement amount. Indeed, given the likely aggregate amount of the defense fees, it is interesting that at this point in the proceedings there was still $175 million of D&O insurance left with which to settle the case.
As the massive amount of insurance money that is going toward this settlement demonstrates, the advent of a significant cash contribution component in derivative settlements represents a very serious problem for D&O insurers. The massive increase in the cash component of derivative settlements is one more change in the D&O litigation arena that significantly increases the D&O insurers’ potential exposure.
This increased derivative lawsuit severity arguably is a particular concern for excess D&O insurers, as these massive losses now push into the high attaching excess layers in a way they would not have in the past. These massive derivative settlements are also a significant and troubling development for Excess Side A insurers; to the extent McKesson’s insurance program included Excess Side A insurance, it seems likely that insurance was called upon as part of this settlement. Recurring derivative settlements of this magnitude clearly raise the question of whether Excess Side A insurers are adequately compensated for this kind of severity risk.
The advent of this increase in derivative suit settlements over the last ten years or so has coincided with the period in which D&O insurance premiums were largely decreasing. More recently however, and over the course of the past year, the D&O insurers have been pushing for large premium increases, arguing that they are not being adequately compensated for the risks they are undertaking.
It is also significant in looking at this from the perspective of the D&O insurers that this lawsuit arose out of the opioid crisis. Even though the stratospherically massive liability exposures out of the opioid crisis are elsewhere and primarily involve other lines of coverage, it is clear that before all is said and done the opioid crisis taken in the aggregate could represent a massive potential loss exposure for the D&O insurers as well.
The likelihood is that there will continue to be significant claims of this type. Given the plaintiffs’ lawyers’ hoped-for payday of $52 million, the plaintiffs’ bar will certain have incentives to pursue more claims of this type.
Readers may be interested to note that at the upcoming PLUS D&O Symposium (information here), one of the schedules panels will address the topic “Mega Derivative Settlements: Is Side A Insurance to Blame?” The PLUS D&O Symposium will be held February 25 and 26, 2020, in New York.
Special thanks to a loyal reader for sending me a link to information regarding this settlement.
Alphabet Google+ Related Securities Suit Dismissal Motion Granted: As regular readers know, one trend I have been following is the occurrence of securities class action lawsuits filed in the wake of the data breach disclosures. As discussed here, one of the data breach-related securities suits filed in 2018 involved Google-parent Alphabet, based on reports of Google+ user data. Following the filing of the complaint, the defendants filed a motion to dismiss.
On February 5, 2020, Northern District of California Judge Jeffrey S. White granted the defendants’ motion to dismiss, finding that the plaintiffs had not adequately alleged misrepresentation or scienter. Judge White gave the defendants leave to file an amended complaint in order to try to address the deficiencies in the initial complaint. A copy of Judge White’s opinion can be found here.
Though plaintiffs lawyers continue to file data breach and other cybersecurity incident related securities suits, by and large, the plaintiffs track record in these kinds of lawsuits is not good. With the exception of the Yahoo data breach related securities litigation and derivative litigation, the plaintiffs lawyer have largely come up empty on these kinds of suits. That doesn’t mean that they won’t continue to file these kinds of suits but so far they have little to show for it.