For those whose job it is to worry about the U.S. litigation risk for non-U.S. companies, the focus historically has been on the risk of U.S. securities class action litigation. However, as detailed in a new white paper from AIG and the Clyde & Co law firm, over the last 18 months a small group of U.S. plaintiffs’ law firms has filed a series of shareholder derivative lawsuits in U.S. courts on behalf of non-U.S. companies and alleging violations of the companies’ home country laws. As discussed below, these lawsuits potentially could represent a significant new source of U.S. litigation exposure and D&O liability risk for directors and officers of non-U.S. companies. A copy of the paper, which is entitled “Shareholders Increasingly Targeting D&Os of Foreign Companies in New York Derivative Actions,” can be found here.
As the paper details, between March 2020 and January 2021, a small group of plaintiffs’ law firms has filed a total of ten shareholder derivative lawsuit in New York state courts against the Non-U.S. companies’ directors and officers alleging violations of the companies’ home country laws. Among the companies involved are five European banks and two pharmaceutical companies. The white paper does not name the specific companies involved, but at least one of the companies is the German pharmaceutical firm Bayer AG, certain of whose directors and officers were, as I detailed in a post at the time, sued in March 2020 in a New York state court derivative action alleging violations of substantive German law. The Bayer lawsuit alleges wrongdoing by the company’s supervisory board in connection with the company’s ill-fated merger with Monsanto.
There are, as the paper details, numerous reasons why prospective claimants might seek to pursue these kinds of claims in U.S. court rather than in the courts of a company’s home country. First, the claimants may want to try to avoid “what are perceived as onerous procedural requirements of the foreign jurisdiction,” such as, for example, requirements in some jurisdictions that claimants meet substantial minimum ownership thresholds or produce evidence of “gross” wrongdoing in order to survive a pre-filing adversarial hearing on the merits.
Second, prospective claimants might hope to take advantage the opportunity to pursue the claims in “the more plaintiff-friendly U.S. litigation system,” which includes features typically not available outside the U.S., such as the availability of trial by jury and broad pre-trial factual discovery. Perhaps even more significantly, the prospective claimants might want to take advantage of the so-called “American Rule” with respect to legal fees, under which each litigant bears its own legal expense (as opposed to the loser pays rule in effect in many other jurisdictions).
Interestingly, and as the paper also notes, six on the New York complaints (including the action filed against the Supervisory Board members of Bayer mentioned above) “openly suggest that the true goal of the derivative actions is to access the limits of each company’s D&O insurance program.” The complaints (including, in particular, the complaint filed in the Bayer action I mentioned above) “describe the D&O policies as corporate assets that should be accessed to compensate the company for the D&Os’ alleged wrongdoing.” These complaints, the paper notes, describe the defendant boards’ failure to pursue the D&O policy proceeds as an active omission by the defendants, noting further that the insured vs. insured exclusion typically does not apply to derivative claims, making derivative suits the “best available vehicle” to “attain these corporate assets for the companies.”
These lawsuits are of course subject to numerous defenses. First, the suits arguably may be subject to procedural requirements applicable under the laws of the home countries to substantive claims under the home countries’ laws. For example, as the paper notes, in one case, the defendants have argued that the plaintiff lacks standing to pursue her claim based on her failure to obtain leave to proceed from the local regional court where the company has its corporate headquarters. The plaintiffs in these cases, seeking to avoid these procedural requirements, argue that New York procedural provisions apply rather than the procedural requirements under the companies’ home country laws.
The defendants will also argue that the courts involved should exercise their broad discretion to dismiss the case under the doctrine of forum non conveniens in favor of the more appropriate local country forum. Particularly where the defendants can show that the plaintiff has an adequate alternative local forum to pursue his or her claims, there would seem to be little reason why New York’s courts should be burdened by disputes involving foreign companies and under foreign law, particularly where most or even all of the witnesses and documents are located outside the U.S.
Given these defenses, and numerous others as well, it remains to be seen whether or not these various actions will survive the initial pleading hurdles. However, given the not-insubstantial possibility that these kinds of cases, or at least some of them, might be permitted to go forward, the directors and officers involved and their D&O insurers “may face substantial litigation risk and substantial exposure to both defense costs and a settlement or judgment.”
Readers interested in knowing what these circumstances might look like will want to review my recent post in which I described the recent settlement in the Renren derivative litigation. Renren is a China-based company organized under the laws of Cayman Islands. Renren shareholders sued certain Renren directors and officers in a derivative lawsuit in New York state court. The trial court judge denied the defendants’ motion to dismiss, finding that numerous wrongful acts had been alleged to have taken place in New York. An intermediate appellate court affirmed the lower court’s ruling. The parties ultimately settled the action for a minimum of $300 million (which is in fact one of the largest derivative lawsuit settlements ever in the U.S.). At a minimum, the Renren case shows that New York derivative suits against directors and officers of non-U.S. companies can in at least certain circumstance survive a motion to dismiss, and potentially could lead to substantial settlements.
Notwithstanding examples like the recent Renren lawsuit and settlement, up until now U.S. derivative lawsuits have, according to the white paper, “not been considered a significant exposure for non-U.S. companies and their D&O insurers, and they are rarely taken into consideration in the pricing of non-U.S. firms.”
However, the recent spate of New York derivative lawsuit filed against non-U.S. companies shows that U.S. plaintiffs’ law firms “are interested in pursuing derivative claims against D&Os of foreign companies under plaintiff-friendly U.S. litigation rules and in order to cash in on the companies’ D&O insurance program.” As the Renren case itself shows, “the potential size of these claims … can escalate quickly and for underwriters outside the U.S., this type of potential aggregation is something that merits closer attention going forward.”
There is no doubt that this recent surge of U.S. derivative litigation against the boards of non-U.S. companies represents a potentially significant development. Indeed, given the Renren lawsuit and settlement, the possibilities of these kinds of lawsuit in the future should not be disregarded or overlooked regardless of what happens to the ten recent derivative lawsuit filings. The white paper is correct that the risk of U.S.-based derivative litigation may not always have been fully taken into account in the underwriting and pricing of non-U.S. companies, and to that extent all of these recent developments are important considerations for D&O insurers considering providing insurance for non-U.S. companies should be taking into account.
One comment about the plaintiffs’ liability theories concerning the D&O insurance in their complaints against the various boards of the companies involved. The plaintiffs’ insurance related allegations seem to assume that the D&O insurance policy is an asset that exists for the benefit of the company, as a source of funds to compensate alleged victims of wrongdoing. This way of thinking stands the value proposition of D&O insurance on its head. Companies don’t buy D&O insurance so that there is a source of funds to compensation victims. Rather, companies buy D&O Insurance to protect their directors and officers against the liability claims – that is, against the very kinds of claims the plaintiffs in these cases have asserted against the various companies’ board members. The plaintiffs lawyers may confused about this, but readers of this blog and (I hope) the courts should not.