As readers of this blog know, from the very early days of the coronavirus outbreak COVID-19 related D&O lawsuits have been filed. Just as there have been new variants of the virus itself over the course of the pandemic, there have also been variants of the D&O lawsuits. The most recent variant of the COVID-19-related D&O lawsuit is the Delaware Chancery Court complaint filed earlier this month, in which the plaintiff in the derivative action alleges that corporate insiders profited by taking advantage of a drop in the company’s share price to grant themselves lucrative stock options. A copy of a redacted version of the shareholder plaintiff’s July 9, 2021 complaint can be found here. A copy of a July 21, 2021 Proskauer law firm blog post about the lawsuit can be found here.
Universal Health Services is a healthcare company that owns and operates hospitals. The company is controlled by the founder, Alan Miller, and his son, Marc Miller. In March 2020, the company’s share price fell sharply, along with the rest of the market, on spreading news about the coronavirus outbreak. At the bottom, the company’s share price was over 50% lower than it was the preceding month.
The Chancery Court complaint alleges that the controllers and other company insiders “took advantage of the temporary drop in the Company’s stock price to grant and receive options to by the Company’s stock at rock bottom prices, thereby showering themselves in excessive compensation.” The complaint alleges further that “the precipitous decline in the Company’s stock price was due to the impact of COVID-19 … and was not cause by any changes in the Company’s fundamentals” and also knew that” the federal government would imminently inject billions of dollars into the Company’s industry.”
The defendants, the complaint alleges, “abused their discretion and opportunistically took advantage of this confluence of events to grant themselves heavily-discounted options while having every reason to know that the Company’s stock price would recover imminently.” In fact, the day after the options grant, the Company’s share price jumped by 25% and within a week it had sourced by 47%. In 12 days, the defendants “reaped over $30 million in gains on granted options.”
The complaint names as defendants the two Millers; the other members of the company’s board, and certain of the company’s officers. The complaint asserts claims against the defendants for breach of fiduciary duty, waste of corporate assets, and unjust enrichment. The complaint alleges that option grants were “grossly unfair” to the Company and its stockholders and were “facilitated through an unfair process, with no shareholder vote.” The grants resulted in the controllers and other company insiders “receiving excessive compensation at the Company’s expense.” The complaint seeks damages, as well as the defendants’ rescission of the grants and disgorgement of any proceeds derived therefrom.
There have of course been other shareholder derivative lawsuits filed as part of the COVID-19-related litigation phenomenon. I am aware of at least ten pandemic-related shareholder derivative lawsuits that have been filed since last March. However, in these prior cases, the defendant companies involved all were previously also hit with related securities class action litigation. In other words, the prior derivative suits were all tagalong actions. This latest suit is the first of which I am aware to be filed against a company that had not previously been hit with a related securities suit.
The theory of the lawsuit is also, as the Proskauer blog post to which I linked above puts it, “novel.” That the defendants granted themselves stock options that proved to be quickly lucrative seems clear. However, the element of supposed wrongdoing alleged depends a lot on the defendants’ supposed clairvoyance about the future direction of the company’s share price. With the benefit of hindsight, the defendants’ actions seem remarkably prescient. However, the possibility that the company’s share price would quickly rebound was far from certain when the market was at its lowest point. The possibilities that the defendants somehow knew in advance which direction the share price was going to move, or that the federal government would take actions that would buoy the company, seems conjectural at best.
If nothing else, this latest complaint shows that the possibilities for COVID-19-related shareholder litigation are far from exhausted. As the Proskauer blog post notes, the theories in the case “could provide another avenue for shareholder litigation in the wake of the COVID-19 pandemic.”
This latest suit filing also shows that now 16 months into the pandemic that COVID-19-related D&O lawsuits continue to arrive. The novel theories advanced in this case suggests the possibility that new lawsuit variations will continue to develop. The possibilities also suggest that pandemic-related lawsuits will continue to be filed in the weeks and months ahead, even if not at the pace or frequency seen earlier in the pandemic.