Among the companies with D&O litigation in recent years arising from sexual misconduct allegations was the clothing and consumer products company L Brands. The parties to the various legal proceedings arising out of the allegations have reached a settlement in which L Brands has agreed to adopt a number of management and governance measures; in order to fund these initiatives, the company has committed to funding of $90 million over the course of five years. As discussed below, the settlement has several interesting features. The parties’ July 30, 2021 stipulation of settlement can be found here.
In May 2020, a plaintiff shareholder filed a derivative lawsuit in Ohio (Franklin County) Court of Common Pleas against L Brands founder Leslie Wexner; the company’s Chief Marketing Officer, Edward Razek; and former board director David Kollat, as well as the company itself as nominal defendant. The defendants removed the action to the United States District Court for the Southern District of Ohio. A subsequent action raising similar allegations was filed in Delaware Chancery Court. Other shareholder filed other related proceedings as well.
The plaintiff’s complaint in the Ohio action, a copy of which can be found here, accuses the defendants of “major breaches of their fiduciary duties in failing to diligently, consistently, and disinterestedly serve the interests of L Brands.” Specifically, the complaint alleges that the defendants “allowed and enabled L Brands to develop a hostile abusive environment rife with sexual harassment, ultimately erupting into a series of scandals that irreparably harmed the long-time cornerstone of the Company, Victoria’s Secret, destroying the Company’s goodwill, and making it impossible to either fix the Victoria’s Secret business, or sell it off for anywhere near its true value.”
The complaint further alleges that Razek, whom the complaint describes as Wexner’s “right-hand man,” had “presided over a culture of harassment and allegedly personally harassed and even assaulted women associated with the Company.” The “culture of harassment and predation” was “reinforced” after “public reports emerged about the relationship between Wexner and convicted sex predator Jeffrey Epstein.” The reports “show that Wexner took a laissez-faire approach to oversight in contravention of his fiduciary duties as an officer of the Company.”
According to the subsequently filed Stipulation of Settlement, in July 2020, the company’s board formed a Special Committee of directors to review, investigate and evaluate the subject matter of the litigation and other shareholder demands and to take action it deems necessary and in the best interests of the Company. The parties to the litigation agreed to stay the proceedings in light of the Special Committee’s ongoing work. The parties, including the Special Committee, ultimately entered mediation. The mediation resulted in the agreement of settlement terms. The settlement agreement resolves all of the pending matters, including both the Ohio action and the Delaware action.
The terms of the settlement are reflected in the Stipulation of Settlement to which I linked above. As consideration for the settlement, the parties agreed that the company will “implement and maintain” a series of measures (the “Management & Governance Measures) that included a number of initiatives. Among other things the parties agreed that the company will supplement its existing code of conduct with standalone policies on sexual harassment, reporting and anti-retaliation; strengthening and clarifying the process for reporting and investigating sexual harassment claims; instituting new employee and Board training regarding harassment and workplace civility; maintaining a diversity, equity and inclusion council; and updating Board committee charters to reflect board oversight and responsibility for the various reforms.
The stipulation goes on to state that “in order to provide appropriate funding for the Management & Governance Measures, L Brands commits to funding of $90 million over the course of at least five (5) years starting with the Effective Date of the Settlement.” The agreement takes effect when L Brands completes a planned August 2, 2021 spinoff of Victoria’s Secret, with the continuing business to be known by the Bath & Body Works name.
The stipulation further reflects the parties’ agreement that the shareholders’ counsel are entitled to a fee and expense award of $21 million. The stipulation states that “L Brands agrees that Bath & Body Works and/or the Defendants’ insurers will pay for the Fee and Expense Award.”
If nothing else, these related L Brands actions and the settlement show how sexual misconduct allegations and hostile workplace environment actions can lead to serious D&O claims. Indeed, there have now been a number of significant settlements, including this one, arising out of D&O claims based on these kinds of allegations. The largest of these types of settlements is the $310 million derivative settlement by Alphabet, Google’s parent company, in connection with sexual misconduct allegations. The settlement of the L Brands settlement is similar in several respects to the Alphabet settlement, in that in both cases, the settlement consisted of the company’s agreement to adopt various governance reforms and to establish a fund to be used over the course of several years (10 years, in the Alphabet case) to pay for the reform initiatives.
The settlement also both reflects another recent D&O claims trend, and that is the inclusion of significant cash payments in the settlement of a derivative lawsuit. There was a time, until about a half a dozen years or so, when it was very rare for derivative suit settlements to involve a significant cash payment. It used to be that the settlement of a derivative suit involved the company’s agreement to adopt corporate therapeutics and to pay the plaintiffs’ attorneys’ fees. But a few years ago it started to be a regular occurrence that derivative settlements involve a significant cash payment as well. I started tracking these large cash derivative settlements on prior post on this site, which I have updated periodically as new settlements have come in.
The cash portion of the L Brands settlement is interesting because of the way it is structured. Like the prior Alphabet settlement, the cash portion is to be funded over an extended multi-year period. The nominal value of the settlement is $90 million but the present value of the settlement is something less than that; calculating the present value would be tricky exercise since there is nothing that says the settlement will be funded in regular installments over the five-year period.
However, if for purposes of discussion you were to value the L Brands settlement at $90 million, it would rank as one of the largest derivative lawsuit settlements ever. By my count, it would be tied for the 12th largest derivative suit settlement of all time.
The nominal value of the large L Brands derivative suit settlement is the same as the 21st Century Fox #MeToo derivative suits settlement, which was the lawsuit and settlement that set off the round of #MeToo scandal follow-on derivative litigation. These settlements, along with a number of other settlements of their type, underscore that maintaining a non-hostile workplace free of harassment is not just a good practice, it is also an important board risk management approach. These various lawsuits underscore the important for boards of ensuring that their companies avoid workplace practices and environments that can cause harm to employees and bring adverse publicity and even disrepute to the company.
One particular aspect of the allegations highlights these concerns as board level issues. The plaintiffs alleged that as a result of the adverse publicity arising from the alleged misconduct alleged, the company was unable to sell its Victoria’s Secret brand and operations at an attractive price. In other words, these workplace issues can have very real business impact. That is all the more reason that well advised boards will work to ensure that their companies maintain non-hostile workplace free of harassment.
One question about this settlement is the extent of D&O insurer contribution to the $90 million settlement fund. The settlement stipulation is silent about any insurer contribution to the settlement fund. The only mention of insurance in the settlement stipulation was in connection with the plaintiffs’ counsels’ fees; the stipulation states that “L Brands agrees that Bath & Body Works and/or the Defendants’ insurers will pay for the Fee and Expense Award.” The insurers’ contribution if any to the settlement or to the payment of the plaintiffs’ attorneys’ fees is at best unclear. At a minimum, the insurers likely have been funding the defense of this lawsuit; the defense costs likely were not insubstantial.