Every year 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 insurance. This year’s review is set out below. As the following discussion shows, this is a particularly eventful time in the world of D&O.


Will the Number of Federal Court Securities Class Action Lawsuit Filings Continue to Decline Relative to the Heightened Filing Levels Seen During the 2017 to 2019 Time Period?: Each year during the  three-year period from 2017 to 2019, the annual number of federal court securities class action lawsuit filings reached or neared historically high levels. However, in 2020, the number of federal court securities suit declined relative to annual number of securities suit filings during the 2017-2019 period, and this relative decline has continued so far in 2021. The question is whether this relative decline in the number of federal court securities suit filings will continue.


In 2020, there were 324 federal court securities suit filings, representing a decline of nearly 20% compared to the 402 federal court filings in 2019. Through the first eight months of 2021, there has been a total of 146 federal court securities class action lawsuit filings; by way of comparison, at this same point in 2020, there had been 232 federal court securities suit filings, meaning that the YTD 2021 filings declined 37% relative to the same point in 2020. Based on the filings this year through the end of August, the projected number of federal court securities suit filings by year-end is slightly under 200, which is not only well below the annual number of filings each year during the period 2017-2020 but is also much closer to the annual number of filings in the years prior to 2017.


Both the rise in the number of federal court securities suit filings in the years 2017 to 2019 and the decline in the number of federal court filings in 2020 and 2021 reflect changes in the plaintiffs’ lawyers’ approach to merger objection litigation. As a result of Delaware case law developments, beginning in 2016 plaintiffs’ lawyers shifted the forum in which they filed the M&A-related lawsuits from state court (particularly Delaware state court) to federal court. Through 2019, most of these merger objection lawsuits were filed in federal court as class action lawsuits alleging violations of the federal securities laws.


However, beginning in 2020 and continuing in 2021, plaintiffs’ lawyers began filing the federal court merger objection suits as individual actions, rather than as class actions, almost certainly as a way for the plaintiffs’ lawyers to try to avoid judicial scrutiny of their mootness fee “racket.” Thus, there were only 102 federal court merger objection class action lawsuits filed in 2020, compared to 160 in 2019, 182 in 2018, and 198 in 2017. In the six months of 2021, there were only 12 federal court merger objection class action lawsuits filed, compared to 65 in the first half of 2020, representing a decline of over 80%. To be sure, the plaintiffs’ lawyers are still filing the merger objections suits; they are just filings them as individual actions. Because they are not class action lawsuits they are not reflected in the class action statistics.


If the merger objection lawsuits are disregarded and only the “traditional” federal court securities class action lawsuit filings are considered, a decline in the number of filings this year is still apparent, but the decline is less steep that it otherwise appears if the merger objection suits are taken into account. There were 96 traditional federal court securities suit filings first six months of 2021, compared to 117 traditional federal court securities suit filings in the first half of 2020, representing a decline of about 18%.


As I will discuss in the next section, one factor that has contributed significantly to the number of filings so far this year is the number of SPAC-related securities suit. Even with the likely contribution to the number of securities suit filings that the SPAC-related litigation phenomenon will make, it appears that the 2021 federal court securities suit filings could be on pace for the lowest annual number of federal court securities suit filings since 2014. Of course, the final tally remains to be seen, but it does appear that the number of federal court securities suit filings this year likely will be in the more historical range of the annual number of filings than the heightened levels that we saw in the 2017 to 2019 time period.


Will SPAC-Related Securities Class Action Litigation Continue to Pile Up?: One of the most important recent developments in the financial markets has been the surge in the number of SPAC IPOs. According to SPACInsider (here), there were 248 SPAC IPOs in 2020; YTD 2021 (through September 3, 2021), there have been 423 completed SPAC IPOs (though the number of completed SPAC IPOs has tailed off since April 2021 when SEC staff raised questions about the way that many SPACs were accounting for the warrants issued in connection with the offerings). With that much financial activity concentrated in one sector, a certain amount of SPAC-related litigation was bound to develop, and we have in fact seen a notable amount of litigation activity so far, with much more likely to follow.


By my count, through September 3, 2021, there have been 22 SPAC-related federal court securities class action lawsuits filed so far this year, compared to only four during the full-year 2020. There has also been a total of eight SPAC-related shareholder derivative lawsuits filed. As discussed in a later section of this article below, there have also been two SPAC-related SEC enforcement actions filed this year, as well.


In thinking about the potential future SPAC-related litigation, it is important to note that almost all of the lawsuits filed so far this year were filed after the SPACs’ intended merger target has been announced (and in most cases the lawsuit was not filed until after the merger was actually completed). In other words, the lawsuits so far typically have followed after SPAC lifecycle events that have not yet occurred for most of the hundreds of SPACs that completed IPOs during the SPAC IPO frenzy in late 2020 and early 2021. This suggests that much of the SPAC-related litigation may be yet to come.


According to SPACInsider, there are over 440 SPACs out in the financial marketplace seeking to identify a merger target. Over the coming months, as the SPACs announce their merger targets and as the mergers are completed, there will be increasing numbers of companies that are in the danger zone for SPAC-related litigation activity. The likelihood is that we will see more, perhaps much more, SPAC-related litigation activity as the year progresses and as we head into 2022.


One interesting recent development concerning SPAC-related litigation is the filing in August of a series of three derivative lawsuits against three SPAC boards and sponsors by the same set of plaintiffs’ lawyers. The lawsuits allege that the SPACs identified in the complaints are actually investment companies that unlawfully were not registered with the SEC under the Investment Company Act of 1940. The lawsuits are discussed in detail here and here. The team of lawyers filing these lawsuits includes former SEC Commissioner (and current NYU Law Professor) Robert Jackson and Yale Law professor John Morley. The plaintiffs’ theory is that all these SPACs have done since their IPO is invest their offering proceeds in Treasury Securities or T-bill backed money market funds – that is, they have done what pretty much every SPAC has done over the last several years.


In response to these lawsuits, a coalition of now over 50 Wall Street law firms joined a statement criticizing the lawsuits and panning the underlying theory that the SPACs involved are really Investment Companies within the meaning of the 1940 Act. It remains to be seen how these lawsuits will fare; it also remains to be seen whether the plaintiffs’ lawyers involved will file any more of these Investment Company Act lawsuits.


One final note about the possible coming wave of SPAC-related litigation is that these lawsuits could in turn lead to a wave of coverage litigation. As discussed here, prominent Silicon Valley securities litigation defense attorney Boris Feldman wrote an April 2021 article in which he suggested that the nature of SPAC-related litigation — in which claims against a broad range of potential SPAC-transaction-related defendants are asserted — could trigger multiple different towers of insurance, which in turn could lead to a flood of “Tower vs. Tower” insurance disputes. Whether or not the fact that SPAC-related lawsuits trigger multiple insurance programs will actually lead to insurance coverage litigation remains to be seen, but there is no doubt that the inevitable involvement in the SPAC-related litigation of multiple insurance programs will complicate claims processing and resolution and will present a challenge for the D&O insurance industry.


Will COVID-19-Related Litigation Continue to be Filed?: The magnitude and duration of the coronavirus outbreak in the U.S. has defied prediction and expectations. Among many other consequences following the outbreak has been the rise of COVID-19 related litigation. Just as the coronavirus itself has both persisted and evolved, the litigation too has developed and evolved. Though the pace of COVID-19-related lawsuit filings has definitely slowed in recent months, coronavirus-related actions do continue to be filed. The question is whether they will continue as an important litigation phenomenon.


By my count, since the coronavirus outbreak, there have been 34 COVID-19-related federal court securities class action lawsuits filed. The defendants in these lawsuits generally fall in one of three categories: companies that experienced coronavirus outbreaks in their facilities (such as cruise ship lines, private prison systems, and meat packing companies); companies that allegedly tried to promote their ability to profit from the pandemic (such as vaccine development companies, personal protective equipment production companies, and online education services companies); and companies whose finances or operations were disrupted by the pandemic (real estate development companies, hospital systems).


In addition to the securities class action lawsuits, there have also been 12 COVID-19-related shareholder derivative lawsuits, almost all against companies that had previously been hit with securities suits. In addition, the SEC has filed ten enforcement actions alleging COVID-19-related securities violations. The SEC actions largely have been against penny stock companies that allegedly ran pump-and-dump schemes based on the companies’ attempt to drive up their share prices by promoting the companies’ abilities to profit from the pandemic.


Though there have been a number of COVID-19-related actions filed, the pace of filing activity has slowed. Of the 34 COVID-19 related securities class action lawsuits, only ten were filed in 2021, and none at all have been filed since June 2021. But while the pace of securities lawsuit filings has slowed, COVID-19-related actions do continue to be filed.


For example, as discussed here, in July 2021, plaintiff shareholders filed a shareholder derivative suit in Delaware Chancery Court in which the plaintiffs alleged that company insiders profited through what amounted to options springloading when the company’s share price declined at the very outset of the pandemic. Similarly, as discussed here, in August 2021, the SEC filed an enforcement action against an Ohio health company which experienced a dramatic increase in its share price after the company promoted its ability to profit from the pandemic. In addition, on August 30, 2021, a plaintiff shareholder filed a COVID-19-related shareholder derivative complaint against the board of Ocugen, a pharmaceutical company that previously had been hit with a COVID-19-related securities suit.


The interesting thing about the July filing in the Delaware Chancery Court is that it illustrates how the COVID-19-related litigation is continuing to develop variants, just like the coronavirus itself. All of the latest filings discussed in the preceding paragraph, and the possibility for further variants, suggest that we may continue to see pandemic-related litigation filed, albeit perhaps at a slower pace than was the case earlier in the pandemic.


Will Cybersecurity Incidents and Privacy Concerns Continue to Lead to D&O Claims?: Over the last few years, one recurring theme has been the risk of D&O claims following in the wake of cybersecurity incidents. Claims of this type have indeed continued to occur, with cybersecurity related securities class action lawsuits filed this calendar year against Solar Winds (as discussed here) and Ubiquiti (discussed here). Though plaintiffs’ lawyers have continued to file these kinds of claims, the claims have never accumulated in volume, due at least in part to the fact that investors seem to be inured to news of cybersecurity incidents and so the news often does not lead to the kind of stock price drop that would make filing suit rewarding for the plaintiffs’ lawyers.


Beyond the question of the extent to which plaintiffs’ lawyers will seek to pursue these kinds of claims is the related question of whether these kinds of cybersecurity-related D&O lawsuits actually make good cases for the plaintiffs’ lawyers. The track record for the plaintiffs in these cases has been mixed, particularly recently.  So far during 2021, two of the pending high-profile cybersecurity-related D&O lawsuits have been dismissed: in February 2021, the FedEx/NotPetya securities class action lawsuit was dismissed  (as discussed here), and in June 2021, the long-running Marriott data breach securities suit was dismissed, as was the related shareholder derivative suit (discussed here).


While these dismissals may seem to provide some comfort for companies that may in the future be targeted with these kinds of lawsuits, developments in another cybersecurity-related securities suit may provide cause for concern. In June 2021, the Ninth Circuit reversed the district court dismissal of the securities lawsuit filed against Google-parent Alphabet based on allegations that the company had wrongfully failed to disclose a breach of Google+ user data. The appellate court’s reversal of the dismissal, and especially the court’s willingness to give credence to many of the plaintiff’s allegations, puts the cybersecurity incident-related D&O claims in a new light, is troubling, as I discussed in detail in a post about the appellate court’s decision. In addition, as discussed in the next section, cybersecurity disclosure issues appear to be an SEC enforcement priority, as well.


A series of securities suits filed this summer against U.S.-listed Chinese companies also highlighted another sort of cybersecurity-related D&O risk. In July 2021, shareholder plaintiffs filed securities class action lawsuits against four U.S.-listed Chinese companies: Didi Global (about which refer here); Kanzhun Limited (discussed here); Full Truck Alliance Co. Ltd. (here),  and 360 DigiTech (here). Three of the four had recently completed IPOs in the U.S. In each of the cases, the companies had experienced share price declines after announcing that they had been subject of regulatory action by the Chinese cybersecurity regulator.


Although these new cybersecurity regulation-related lawsuits reflect political issues unique to China, the suits do show how cybersecurity-related regulatory actions can lead to D&O claims. The twist in these lawsuits is that the D&O claims are not following on a data breach or other cybersecurity incident; instead, the D&O claims arose after the cybersecurity regulator raised concerns about the defendant companies’ cybersecurity protocols and protections. Clearly, increased regulator scrutiny of cybersecurity issues could lead to further D&O claims.


There was one other development during 2021 that is also relevant to cybersecurity and privacy-related concerns. As discussed here, in January 2021, a federal district court judge denied in part the motion to dismiss the GDPR-related securities class action lawsuit that had been filed against U.K. media tracking firm Nielsen Holdings. Of most significance in this context was the court’s dismissal motion denial with respect to the plaintiff’s allegations concerning defendants’ statements after GDPR went into effect, about GDPR’s impact on the company.  At a minimum, this court ruling shows how a company’s statements concerning the impact of GDPR can lead to claims against a company, and indeed how those GDPR-impact type statements could be held to be actionable under the U.S. federal securities laws.



Will SPACs and Cybersecurity Disclosure Issues Continue as SEC Enforcement Priorities?: Over the last several weeks, SEC Chair Gary Gensler has signaled a number of areas that will be the subject of regulatory attention at the agency, including, for example, cryptocurrency, online trading platforms for retail investors, and meme stock trading. The agency has also demonstrated its priority of ESG issues, among other things by approving proposed Nasdaq board diversity guidelines and establishing a Climate and ESG Task Force and initiating a proposal for possible climate change disclosure guidelines.


Amidst this regulatory activity, the agency has also taken actions demonstrating the agency’s emerging enforcement priorities. The enforcement-related action starts with Gensler’s appointment of former New Jersey Attorney General Gerbir Grewal as the Director of the SEC’s Division of Enforcement. In a recent memo (here), the Cooley law firm said that it expects the Enforcement Division under Grewal and with Gensler’s leadership  to be “better resourced, highly active, and more aggressive.”


In addition, several recent enforcement actions suggest that, among other things, SPACs and cybersecurity disclosure could be important areas of enforcement priority for the agency.  After several public statements by Gensler and others agency officials expressing concerns about SPACs, it arguably comes as no surprise that the agency has in recent weeks has initiated SPAC-related enforcement actions.


On July 13, 2021, as discussed here, the agency filed settled administrative charges against Stable Road Acquisition Corp., a special purpose acquisition company (SPAC); the SPAC’s CEO; and its proposed Merger target, Momentus, an early-stage space travel company. The agency separately filed a civil enforcement action against Momentus’s CEO. The agency asserted securities law violations against the defendants for allegedly falsely stating that the target company’s rocket system had been successfully tested in space. The SPAC and SPAC CEO were also charged for inadequate due diligence in connection with the proposed merger with Momentus. In connection with the filing of the settled charges, Gensler took the unusual step of issuing a separate statement about the charges, noting that “This case illustrates risks inherent to SPAC transaction, as those who stand to earn significant profits from a SPAC merger may conduct inadequate due diligence and mislead investors.”


The SEC filed a second SPAC-related enforcement action in late July when, in conjunction with the presentation of a criminal indictment against electric vehicle company Nikola’s founder, Trever Milton, the SEC filed parallel enforcement charges against Milton, as discussed here. Nikola completed its merger with a publicly traded SPAC in June 2020. The SEC enforcement action and the indictment relate to Milton’s alleged misrepresentations about the operability of the company’s vehicle prototype; about the source of parts used in constructing the company’s “Badger” vehicle; about the company’s production of hydrogen; and about the company’s development of parts that had actually been acquired by another company. (Many of the allegations in the SEC enforcement action are also alleged in a separate securities class action lawsuit that was filed against Nikola in September 2020.)


In addition to the agency’s SPAC-related enforcement activity, the SEC has recently stepped up its enforcement activity in connection with cybersecurity disclosure. The agency has of course filed cybersecurity-related disclosure enforcement actions in the past. But the recent actions suggest a renewed and heightened focus on the topic.


The first of these latest cybersecurity enforcement actions involved settled charges filed in June 2021 against title insurer First American Financial Corp., as discussed here. After the company learned from a journalist’s inquiry about a vulnerability in the company’s online systems that potentially exposed hundreds of millions of title and escrow records, the company issued a press release and statement about the vulnerability. However, the company officials responsible for the press release and statement were unaware the company’s IT security officials had discovered the vulnerability earlier; though known, the vulnerability had not been remediated prior to the journalist’s contact, and the prior discovery had not been disclosed. In its statement about the settled charges, the agency said that it is the responsibility of every issuer to “maintain disclosure controls and procedures designed to ensure that information required to be disclosed by an issuer in reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the Commission’s rules and forms.”


The second recent SEC cybersecurity enforcement action involved the U.S.-listed U.K. education services firm Pearson plc, as discussed here. In March 2019, the company discovered that an intruder had accessed and downloaded data pertaining to students and school officials. The company provided breach notices to the affected individuals but elected not to disclose the incident in its next SEC report; instead, the company’s report merely said, repeating prior disclosure statements, that a data breach could cause damage to customer experience and the company’s reputation. The SEC later alleged that in this way, the company “referred to a data privacy incident as a hypothetical risk, when, in fact, the 2018 cyber intrusion had already occurred.” The SEC also alleged that the company failed to disclose the incident in a subsequent media inquiry. The SEC filed settled administrative charges against the company in August 2021. The company agreed to take remedial steps and paid a $1 million civil money penalty.


These enforcement actions against First American and Pearson underscore that cybersecurity-related disclosure issues are an important agency priority and that the SEC is prepared to take actions relating to cybersecurity disclosures. The agency’s press release in connection with the Pearson enforcement action emphasized the priority the agency is giving to cybersecurity disclosure issues; the press release quotes the chief of the enforcement division’s cyber unit as saying that “As public companies face the growing threat of cyber intrusions, they must provide accurate information to investors about material cyber incidents.”


In addition to the enforcement actions against First American and Pearson relating to cybersecurity disclosure issues, on August 30, 2021, the agency announced settled administrative charges against eight broker dealers and investment advisors. The concerned firms agreed to pay civil money penalties to resolve the enforcement actions arising from cybersecurity incidents that led to the exposure of personal identifying information of thousands of customers and clients. According to a September 1, 2021 memo from the Skadden law firm, these most recent enforcement actions, together with the prior cybersecurity disclosure-related enforcement actions, “signal that cybersecurity will continue to be a priority area for the SEC.”


Will Antitrust-Related Claims Emerge as an Important D&O Concern?: An interesting August 28, 2021 Wall Street Journal article entitled “The Return of the Trustbusters” (here) discusses how a new generation of academics and activists, inspired by the ideas of 20th century progressive and Supreme Court Justice Louis Brandeis, are seeking to advance a more aggressive antitrust enforcement approach. Some of the most prominent proponents of this view have made their way into key antitrust enforcement positions in the Biden Administration. Lina Kahn has been named as the head of the Federal Trade Commission. Johnathan Kanter has been named head of the Justice Department’s antitrust division. Tim Wu has been named as the White House’s antitrust policy advisor.


Those wondering what these activists’ impact might be will want to consider the White House’s July 2021 Executive Order — reportedly written by Tim Wu and discussed in detail here – which makes it clear that competition and antitrust enforcement are going to be a priority for the Biden Administration. The Order “affirms that it is the policy of the [Biden] Administration to enforce the anti-trust laws to combat excessive concentration of industry, the abuses of market power, and the harmful effects of monopoly and monopsony” and to “enforce the antitrust laws to meet the challenge posed by new industries and technologies.”


The Order describes a “Whole-of-Government” approach toward the enforcement of the federal antitrust laws and the advancement of the policies behind those laws, involving a host of federal agencies in the effort. The Order also lays out a roadmap for greater agency coordination with respect to antitrust oversight, investigation, and remedies. The Order also creates a new White House Competition Council to coordinate and promote efforts “to address overconcentration, monopolization, and unfair competition” in the U.S. economy.


In addition, the Order lays out a total of 72 initiatives proposed in order to try to promote competition and the policy goals behind the promotion of competition. The topics addressed range from very specific consumer items, such as the pricing for hearing aids and baggage fees, to broader concerns such as providing competition regulation for internet platforms.


It seems likely that as a result of the Executive Order there will be increased antitrust oversight, scrutiny, and enforcement activity. These possibilities seem to present many companies with a heightened risk of legal action by regulators. These possibilities could also translate into an increased risk of D&O claims.


In many antitrust enforcement actions and in many civil antitrust lawsuits, the main target or one of the main targets is going to be the company itself. However, public company D&O policies typically provide insurance coverage for securities claims only. Because an antitrust enforcement action typically will not include an alleged violation of the securities laws, the typical public company D&O insurance policy will not provide coverage for the antitrust enforcement actions.


The coverage for the corporate entity afforded in private company D&O insurance policies is broader; it typically is not limited to securities claims only. However, many private company policies include an antitrust exclusion in their base policy forms. (As discussed here, the preclusive effect of the typical private company D&O insurance policy antitrust exclusion is usually much broader than just antitrust claims but also includes many other kinds of unfair and deceptive trade practices claims as well.). Some – but not all – carriers will agree to remove this exclusion upon request, while others will provide defense cost only protection for antitrust claims, or otherwise restrict the coverage available for antitrust claims through sublimits or coinsurance provisions. In other words, even under private company D&O insurance policies, the extent of coverage available for antitrust claims against the corporate entity often may be limited at best.


It is a different story with respect to antitrust claims against individuals. Subject only to the preclusive effect of any antitrust exclusions and any other potentially applicable exclusions, the typical D&O insurance policy would provide coverage for individual defendants in antitrust enforcement actions or follow-on civil actions. However, antitrust enforcement actions rarely target individuals.


One area where the D&O policy may be more responsive is in connection with civil actions following-on in the wake of antitrust enforcement actions, particularly follow-on securities class action lawsuits. Some recent examples of securities class action activity following on after antitrust enforcement include the securities suits filed against various generic drug businesses following civil and criminal charges based on alleged price-collusion in the industry (discussed here); similar securities litigation against companies in the poultry companies also followed in the wake of price-collusion enforcement activity in that industry (discussed here). The pattern of civil damages litigation following in the wake of antitrust enforcement goes back many years; and over the years, there have been many instances of this type of follow-on litigation – for example, as noted here, and here.


The pattern of follow-on securities litigation in the wake of antitrust and anticompetitive enforcement activity is sufficiently well-established that it can reasonably be predicted that, to the extent the initiatives in the new Executive Order result in increased antitrust and anticompetitive enforcement activity, we will see corresponding follow-on securities litigation. In other words, the initiatives in the Executive Order not only means increased competition-related scrutiny, rulemaking, and enforcement, the initiatives may also translate to increased risk of D&O claims activity.


What is Next With Respect to Board Diversity Initiatives?: In the wake of the social unrest that followed the May 2020 death of George Floyd, social justice concerns became the source of a great deal of attention. Many settled practices were subjected to scrutiny and concern. This scrutiny in turn drew attention to the lack of diversity in many corporate board rooms. Board diversity questions have in turn led to legislation, regulatory action, and even litigation.


The most specific legislative action addressing board diversity issues are two California bills that have been enacted into law, the 2018 California legislation requiring board gender diversity and the 2020 legislation mandating the inclusion on boards of California-headquartered companies of representatives of “underrepresented communities.” Both of these bills have been subjected to legal challenge, and indeed in June 2021, the Ninth Circuit revived the previously dismissed legal challenge to the board gender diversity statute.


A development of even greater potential impact relates to the Nasdaq “comply or explain” board diversity guidelines, which the SEC approved in early August 2021, as discussed here. Under the Nasdaq guidelines, each Nasdaq-listed company (other than Foreign Issuers, Smaller Reporting Company, and Companies with Smaller Boards) is required, according to timetables specified in the guidelines, to have, or to explain why it does not have, at least two members of its board of directors who are “Diverse,” including at least one Diverse director who self-identifies as Female and at least one Diverse director who self-identifies as an Underrepresented Minority or LGBTQ+. The SEC-approved Nasdaq guidelines are also subject to legal challenge, as a non-profit directors organization filed a petition for review of the guidelines (as discussed here).


In addition to legislation and regulatory action, board diversity issues have also been the subject of litigation. In late 2020 and early 2021, the boards of ten companies were hit with shareholder derivative suits in which the shareholder plaintiff alleged that the board members breached their fiduciary duties by failing to elect or appoint diverse board members. These lawsuits have fared poorly. So far this year, courts have granted motions to dismiss in the board diversity lawsuit filed against the boards of Facebook (discussed here); The Gap (here); Oracle (here); the Danaher Corporation (here); NortonLifeLock (here); and OPKO Health (here).


Though the California statutes and the Nasdaq guidelines have been subjected to legal challenge, and though the board diversity lawsuits have fared poorly, board diversity issues remain a high-profile issue and a concern for many companies. Among other things, several prominent institutional investors have made it clear that board diversity is a priority issue for them. Companies without diverse boards likely will continue to find themselves subject to scrutiny and pressure. And though the California statutes and the Nasdaq guidelines have been challenged in court, they remain in effect and companies subject to their requirements will need to take steps to comply. The bottom line is that board diversity issues will continue to be a concern and a priority for all corporate boards.


Will Sexual Misconduct Allegations Continue to Lead to D&O Claims?: Going back to 2017, when a plaintiff shareholder filed a shareholder derivative action against the board of 21st Century Fox (a suit that settled the same day as the complaint was filed for $90 million), there have been a number of  D&O claims filed against companies that are alleged, or whose boards are alleged, to have permitted an atmosphere in which sexual conduct was tolerated or to have misrepresented to investors the measures the company had taken to prevent or respond to misconduct.


Some of these earlier claims remain pending or have only recently been resolved. For example, as discussed in detail here, in late July 2021, the parties to the L Brands shareholder derivative lawsuit, in which the plaintiffs alleged that the companies’ senior management permitted a hostile work environment where women were demeaned or disadvantaged in terms of their pay and opportunities for promotion, agreed to settle the case for a payment of $90 million and the company’s agreement to adopt a number of remedial measures.


There is a perception in certain quarters in the D&O insurance industry that the risk of D&O claims of the type that followed immediately in the wake of the #MeToo movement has declined and  is becoming a thing of the past.


The securities class action lawsuit filed in August 2021 against the gaming company Activision Blizzard suggests that the risk of these types of claims is continuing. In July 2021, Activision had been named as a defendant in a state court civil rights complaint filed by the California Department of Fair Housing and Employment (DHFE). In response, the company put out a statement that while it took allegations of misconduct seriously, the DFHE complaint was “meritless” and painted a “false” picture of the company’s past and does not accurately portray the company’s workplace. In response to the company’s statement, over 2,000 current and former Activision employees signed a petition saying the that the company’s response was “abhorrent and insulting” and stating that for the company to call the DFHE complaint “meritless and irresponsible” was “simply unacceptable.” Activision worker staged a walkout. The company issued a statement apologizing the “tone deaf” response to the DFHE complaint and a management shakeup followed. The securities suit alleges that the company and senior management had failed to inform investors about the reality of its workplace environment and the risks it presented to the company’s reputation and for the possibility of regulatory action.


If nothing else, the Activision lawsuit shows that the risk of D&O claims arising out of allegations of sexual misconduct or harassment, or of a hostile workplace, continues, even though it has now been several years since the #MeToo movement first emerged. These kinds of claims seem likely to continue as long as these kinds of workplace circumstances persist. The recurrent message from these cases, and especially from the numerous settlements in these kinds of cases, is that boards have a responsibility to ensure that their companies maintain a safe atmosphere where all employees are treated fairly and respectfully.


How Long Will the Current Hard Market for D&O Insurance Continue?: The D&O insurance marketplace has been in a “hard market” for several years now – that is, a market in which insurance buyers face significant price increases and increased retentions, and in which insurers are willing to offer only reduced limits for many accounts. The current hard market began in 2018, accelerated in 2019, and was even further exacerbated by the coronavirus outbreak in early 2020. While there was some speculation at the end of last year that the hard market might start to ease by mid-year 2021, that has not happened.


But while we unquestionably remain in a hard market for D&O insurance, there are signs that could be interpreted to suggest that market could move into the next phase of the cycle. For starters, the pace of price increases has started to relent. Pricing is continuing to increase but the magnitude of the increases is decelerating. Another sign pointing toward a potential shift to the next phase in the cycle is the number of new entrants that have come into the marketplace in recent months. These new players (and the amount of fresh capital they bring to the market) could contribute a healthy dose of competition to the market, especially now that many of the new players are now up and running. This process may already have started. There is some sign of easing on high attachment excess layers and on Excess Side A layers; the increased limits factors on these layers have — in some instances and for some accounts — lessened compared to earlier this year.


The D&O insurance business, like the insurance marketplace as a whole, is reliably cyclical, and inevitably, at some point, the cycle will kick in and the market will start to soften. For now, though, the hard market continues. Most buyers continue to see price increases or at least prices at significantly elevated levels compared to the recent past. Most buyers continue to see significantly elevated retentions as well. Certain segments of the D&O insurance market, such as the segments for IPO companies and for SPACs, are disrupted, and coverage in those sectors is available only at upset pricing and with significantly elevated retentions.


When the market will start to move into the next phase of the cycle is difficult to predict. It does seem likely that the current hard market for D&O insurance will continue at least for the rest of this year.  For now at least, D&O insurance buyers should continue to expect elevated pricing and retentions to continue.