Every year after Labor Day, I take a step back to 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.



How Will the Number of Securities Class Action Lawsuits Filed This Year Compare with Recent Years?

D&O insurers closely follow the statistics on the number of securities class action lawsuit filings. The number of annual filings can provide some indication of the insurers’ loss costs for the calendar year. The current filing patterns can also inform the insurers’ efforts to try to determine the profit-making price for their insurance product.


The fact is that the number of securities suit filings fluctuates. During the period 2017-2019, the annual number of securities suit filings spiked, with over 400 filings each year, largely due to an increase in the number of federal court merger objection lawsuit filings during that period. Beginning in 2020, the number of suit filings began to decline, and the decline accelerated in 2021 (largely because many of the merger objection suits were increasingly being filed as individual actions rather than as class actions). All of which leads to the question of the filing level that can be expected this year.


Based on the filings during the year’s first eight months, it appears that the number of year-end 2022 filings will likely track closer to last year’s lower numbers rather than the elevated numbers that prevailed during the period 2017-2019. Two thirds of the way through 2022, there have been approximately 137 federal court securities class action lawsuit filings (as of August 31, 2022), which projects to roughly 206 federal court securities class action lawsuit filings by year-end. An annual total of 206 securities lawsuits would be slightly below the 211 federal court securities class action lawsuits filed in 2021, and well below the 319 federal court securities class action lawsuits filings in 2020.


Were the year end filing numbers to come in at these projected levels it would represent the third straight year in the decline in the number of federal court securities class action lawsuits. Again, the decline in the number of securities class action lawsuit filings is largely due to a shift in plaintiffs’ lawyers’ tactics with respect to merger objection lawsuits; increasingly, plaintiffs’ lawyers are filing these suits as individual actions rather than as class actions, so these suit filings don’t show up in the class action filing figures.


Because of the potentially distorting impact that the inclusion of the merger objection litigation filings has on the overall filing numbers, observers sometimes exclude the merger suits from the analysis and focus solely on “traditional” or “core” filings (that is, damages actions under Section 10 of the ’34 Act and under Section 11 of the ’33 Act). The 2022 filing levels look slightly different when only core filings are considered.


Of the 137 federal court securities suits filed in the year’s first eight months, 132 were core filings. This level of core filing activity implies a year-end total of core filings of 198, which would actually be slightly above the 192 core federal court securities class action lawsuit filings in 2021, although somewhat below the 234 core filings in 2020. Overall, the general sense is that securities suit filings YTD 2022 are roughly in line with the 2021 filing levels.


Among the factors driving the securities suit filings so far this year is the number of SPAC-related securities class action lawsuit filings (discussed in the second section below) and the number of COVID-19 related securities suit filings (discussed in the third section below). Another factor driving the number of securities suit filings in 2022, in addition to the SPAC-related and COVID-related cases, is the number of Crypto-related securities suits, primarily because of the turmoil in the market for digital assets. By my count, there have been 13 crypto-related securities class action lawsuits YTD this year (through August 31, 2022).


One other feature of the current litigation environment that could affect the number of filings by year end are the large number of macroeconomic factors affecting the business environment, as discussed in the fourth section below.


How Will SPAC-Related Litigation Develop in the Months Ahead?

While SPAC IPO activity has cooled in recent months, given the sheer volume of SPAC-related activity in the recent past – and in particular during the SPAC IPO frenzy in late 2020 and early 2021 — it should hardly come as a surprise that there has been a significant amount of SPAC-related litigation. More seems likely in the months ahead.


By my count, there have been a total of 50 SPAC-related securities class action lawsuits filed since January 1, 2021, including at least 19 so far in 2022, through August 31, 2022. The 19 SPAC-related securities suits represent about 14% of all YTD 2022 federal court securities class action lawsuit filings. Several significant factors have driven this litigation. For example, 20 of 50 (or 40%) of the cases so far have been filed after the defendant company’s share price declined following the publication of a short seller report. In addition, 17 of 50 cases (or 34%) have involved companies in the electric vehicle space.


Although some of the SPAC-related litigation has arisen prior to the completion of the SPAC’s merger with a private company, the merger has tended to be the SPAC life-cycle event that has triggered many of the SPAC-related securities suits. And with (according to SPACInsider) nearly 570 SPACs currently in the search phase, there are likely to be many more SPAC-related mergers in the months ahead, with would seem to suggest that there are likely to be further SPAC-related suits ahead, as well.


However, there have been a number of developments in recent months that have affected the SPAC financial marketplace and that could affect the level of SPAC-related litigation as well. For starters, as noted above, the marketplace for SPAC IPOs has cooled. Indeed, there were no SPAC IPOs at all in the month of July. (Another factor likely driving the decline in SPAC IPOs is the SEC’s introduction in March 2022 of proposed SPAC-related guidelines, which would eliminate most of the perceived advantages of SPACs over traditional IPOs).


Another issue affecting the SPAC market is the sheer number of SPACs out there seeking merger partners. A number of planned SPAC mergers have been called off before the business combination has been completed. Stories are already circulating in the financial press discussing the possibility that many of the searching SPACs may be unable to identify suitable merger partners. Indeed, famous investor Bill Ackerman, unable to find a suitable merger target for his largest-ever SPAC, Pershing Square Tontine Holdings, has already thrown in the towel and liquidated the $4 billion SPAC. There is a likelihood that other SPACs may find that liquidation is their best alternative.


One question that arises over the possibility that a number of the currently searching SPACs may choose to liquidate is whether the liquidations could lead to litigation. On the one hand, the investors will get their money back, plus nominal interest, so where’s the harm? On the other hand, in our litigious society, anytime that expectations are disappointed, litigation can arise. Indeed, in August, investors sued a SPAC that announced its intent to liquidate, disputing the way that the SPAC’s directors and officers intended to deal with a financial asset of the SPAC in connection with the liquidation. Although this situation arguably was unusual in that the SPAC held a valuable financial asset beyond the trust funds, it could well be that there are other circumstances involved with SPAC liquidations that could give rise to litigation as well.


Another possibility that could arise as so many SPACs are struggling to complete merger transactions is that some SPACs, finding themselves coming up against the end of the search period, may push to complete any deal, even if it is disadvantageous or the target is far outside the SPAC’s intended sector. There has in fact already been at least one lawsuit of this type, in which the plaintiff shareholder alleged that the SPAC’s executives, motivated by the personal financial interest in completing a deal, chose to merge with a company far outside the stated target sector. There could be more of this type of litigation as the SPACs push to complete deals as the end of the search period approaches.


Although there have been a significant number of SPAC-related securities lawsuits filed YTD in 2022, the pace of filing of these suits has dropped off as the year has progressed. Indeed, there were no SPAC-related securities suits filed at all between the end of May and the end of August (with two suits filed in August’s final days). This apparent lull could just be a coincidence; the plaintiffs’ lawyers could have just been busy with other things.


On the other hand, many of the factors, noted above, that contributed to the number of lawsuits earlier in the year faded away as the SPAC financial markets cooled off. Thus, while a number of the earlier lawsuits were driven by short seller reports, as the SPAC market cooled off there were fewer hyped SPAC deals for the short sellers to attack. Similarly, so many of the earlier lawsuits targeted over-hyped companies in the electric vehicle sector; much of the hype in that space has drained away, so there may be fewer attractive targets for the plaintiffs’ lawyers to try to target.


As for how these SPAC-related cases will fare, it may be too early to tell yet. Relatively few of the various SPAC-related securities suits have yet reached the motion to dismiss stage. For the few cases that have reached the dismissal stage, the results are mixed. For example, as I noted at the time (here), on July 5, 2022, the court granted the motion to dismiss in the SPAC-related securities suits against Skillz. On the other hand, as discussed here, in June 2022 the court in the SPAC-related securities suit pending against Romeo Power denied the motion to dismiss, and, similarly, in July 2022, the SPAC-related securities suit pending against Velodyne Lidar survived the dismissal motion, albeit with large parts of the complaint dismissed (as discussed here).


In summary, there have been a host of changes in the SPAC environment in recent months, and these developments could affect the amount of SPAC-related litigation. For now at least, the likelihood still seems to be that there will be a significant amount of additional SPAC-related litigation in the months ahead. At a minimum, the level of SPAC-related litigation could have a material impact on overall litigation levels, both for the balance of this year and into next year as well.


What is Next for COVID-19 Related Securities Class Action Litigation?

The COVID-19 pandemic is now well into its third year. From the very beginning of the coronavirus outbreak in the U.S. in March 2020, the pandemic has been accompanied by a significant volume of securities class action litigation activity. Just as the pandemic continues to represent a health threat, the ongoing pandemic has also continued to generate COVID-19-related securities litigation. Indeed, the COVID-19 related litigation is proving to be every bit as persistent as the coronavirus itself.


By my count, there have been a total of 57 coronavirus-related securities class action lawsuits filed since the initial coronavirus outbreak in March 2020, including 14 YTD in 2022. The 14 coronavirus-related securities suits filed so far this year represent roughly 10% of all of the federal court securities suits filed YTD.


From early on, the COVID-19-related securities suits generally fell into one of three categories: First, there was lawsuits against companies that experienced coronavirus outbreaks in their facilities (cruise ship lines, private prison systems); second, there were lawsuits against companies that tried to establish that they would prosper as a result of the pandemic (diagnostic testing companies, vaccine developers); and third, there were lawsuits involving companies that experienced a downturn in their business operations or financial results as a result of the pandemic (hospital systems, real estate developers).


More recently, a fourth category of cases has emerged. These cases involve companies that prospered at the outset of the pandemic but whose fortunes flagged as the conditions resulting from the pandemic evolved. A high-profile example of the cases of this type is the lawsuit filed in July 2022 against the Internet commerce giant, Amazon. As discussed here, the complaint in the lawsuit alleges that, in response to huge spikes in Internet commerce at the outset of the pandemic, Amazon ramped up its distribution infrastructure, saying at the time that the infrastructure investment was justified because of what were believed to be permanent changes in consumer buying habits. However, the lawsuit alleges that as the pandemic evolved, many consumers returned to prior buying patterns, leaving Amazon with infrastructure overcapacity. The continuing evolution of the pandemic and resulting business conditions suggest we may see more of these kinds of “fourth category” cases in the months ahead.


The results for the plaintiffs in these cases has been mixed. Many of these cases are still in the early stages and have not yet reached the motion to dismiss stage. Of the cases that have reached the dismissal motions, a number of the cases have been dismissed, though some cases survive dismissal motions as well. Two of the cases that survived dismissal motions have now been settled. In August, Inovio Pharmaceuticals announced that it had reached an agreement to settle the COVID-19-related securities suit that had been filed against the company for cash and stock totaling $44 million. Also in August, Vaxart announced that it had agreed to settle the COVID-19 related securities suit pending against the company for $12 million.


Just as the coronavirus itself has proven to be surprisingly persistent, the related litigation phenomenon has proven to be unexpectedly resistant as well. Not only have plaintiffs continued to file COVID-19 related securities class action lawsuits this year, but there were three of these cases filed in August alone. All signs are that these kinds of lawsuits will continue to be filed as the year progresses.


Will the Current Macroeconomic Challenges Lead to Corporate and Securities Litigation?

Anyone who reads the business pages knows that companies face a daunting array of macroeconomic challenges – rampant inflation, rising interest rates, supply chain disruptions, labor supply challenges, the war in Ukraine, and even the continuing disruptive impact of the pandemic. These various challenges will almost certainly affect the business operations and financial results of many companies. The factors may also contribute to business litigation risk as well.


A lawsuit filed in June 2022 against the consumer products company Tupperware illustrates the way in which these various macro factors can translate into securities litigation. During the company’s execution of a multi-year turnaround plan, the company had touted its successful plan execution and projected expansion. However, in a May 2022 earnings release, the company reported results that were “below expectations” and that the company was withdrawing its year-end earning guidance. The company cited several factors in connection with the disappointing results, including the war in Ukraine and COVID-related lockdowns in China. The company also said that its profitability was “significantly impacted by persistent inflationary pressures and the latency between rising input costs and our decision to increase prices.”


Another lawsuit, filed in March 2022, illustrates how the impact of economic inflation can translate into securities litigation. Vertiv, a company that makes data storage and transmission products, reported disappointing results in its year-end 2021 earnings release. In explaining the results, the company’s CEO attributed the disappointing results to management “consistently underestimating inflation and supply chain constraints for both time and degree, which dictated a tepid 2021 pricing response.” The company’s CFO said “We significantly underestimated the magnitude of material and freight inflation in the fourth quarter forecast, mostly in America, by approximately $36 million.”


Other recent securities suit filings illustrate how supply chain disruption can lead to securities litigation. For example, as discussed here, the software company Cerence was hit with a securities suit when it announced disappointing results after the company experienced a reduction in automobile industry demand for its products and services due to the global semiconductor shortage.


As these examples show, a variety of macroeconomic factors threaten to disrupt many companies’ business operations and financial results, which in turn could affect the companies’ share prices. Whether or not these circumstances will lead to securities litigation or other D&O claims arguably depends not only on how the company deals with the adverse business conditions but what the company says about how the adverse conditions are affecting the company and its business. Another factor that could contribute to the litigation risk is the extent of a company’s willingness to soft-pedal or downplay the magnitude of the impact on the company from these macro factors.


In any event, these macroeconomic factors seem likely to persist in the coming months. The disclosure statements of companies experiencing a negative impact from these factors are likely to be closely scrutinized. In some cases, the scrutiny may lead to securities litigation.


How Will “ESG” Impact D&O Risk?

The hot topic in the financial press, the corporate world, and the legal arena these days is “ESG.” The expression “ESG” is meant to encompass a wide range of diverse and unrelated concepts, ideas, and concerns. The reality is that it is hard to say simply what “ESG” means; and not just “ESG” itself but each of the three pillars, E, S, and G, are subject to the same definitional imprecision.


Yet notwithstanding these definitional issues, ESG-related issues dominate much of the conversation about business and litigation risk. Indeed, just in the last week a story circulated in the financial press citing unnamed sources as saying that litigation brought by activist groups against companies the groups believe have been ESG laggards could drive up the cost of D&O insurance.


The problem with this type of analysis is that it doesn’t necessarily square with the cases that are actually being filed. The fact is that the ESG-related lawsuits that are being filed aren’t being filed against companies that are ESG laggards; the cases that are being filed are targeting companies that have been proactive on ESG issues, and that have had execution issues on their ESG promises, have fallen short of established goals, or have become mired in controversy because of the companies’ ESG positions.


In recent months shareholder claimants have initiated securities class action lawsuits against, for example, Unilever (discussed here) and Wells Fargo (discussed here) based on the companies’ ESG activities. The lawsuit against Unilever relates to the social activism of its ice cream subsidiary, Ben and Jerry’s, on issues pertaining to what the subsidiary characterizes as Israeli occupied territories. The lawsuit against Wells Fargo relates to adverse publicity that followed revelations about the company’s poor execution of its diversity, equity, and inclusion initiative.


By the same token, the SEC’s ESG Task Force has filed enforcement actions relating to, for example, a company’s assertions in its Sustainability statement about its mining dam safety (discussed here) and an investment fund’s claims about its “green” investing options (discussed here).


As the foregoing examples show, it may be that companies that taking the ESG initiative are not necessarily better D&O risks. As if that possibility were not enough to confuse things concerning ESG, an anti-ESG backlash has now developed. As I noted in a recent post (here), as many as 17 states have adopted or proposed anti-ESG legislation. This legislation limits the ability of state governments, including public retirement plans, to do business with entities “boycotting” industries based on ESG criteria or considering ESG factors in their investment processes.


The anti-ESG movement is not limited just to legislation. There has now also been litigation. Just last week, a conservative think tank (and shareholder of Starbucks) filed a breach of fiduciary duty lawsuit against directors and officers of Starbucks alleging that the company’s diversity, equity and inclusion program violates state and federal civil rights laws. The complaint alleges that the defendants’ action in adopting and implementing the program create corporate liability and violate the individuals’ fiduciary duties. The lawsuit seeks to bar the executive from continuing to implement “racially discriminatory policies” and “to hold them accountable for the harms those policies have done to shareholders.” The think tank’s press release about the lawsuit quotes one of the lawyers in the case as saying that the lawsuit seeks to “use long-established principles of American corporate law to halt, at the wholesale level, corporate America’s ‘woke’ embrace of illegal racial discrimination.”


The emergence of the anti-ESG backlash further complicates the circumstances for companies as they grapple with the need to address ESG-related issues. Companies that have been pushing to burnish their ESG credentials could now find themselves caught in the middle of a politically charged firestorm. As one law firm put it in a memo about these developments, companies may be “damned if you do and damned if you don’t.”


The working assumption in the D&O insurance industry is that underwriters should be trying to figure out if companies are “good” at ESG based on a generalized theory that a company’s ability to demonstrate ESG virtue means that the company is a better D&O risk. This theory may be valid but at the same time some other considerations also need to be considered.


First, as suggested above, it may be a company’s very ESG initiatives that attract litigation. And second, a company making high-profile claims about its ESG credentials could get caught in politically complicated circumstances that could mean adverse or at least complicated publicity, disruption of company operations, and even D&O claims.


It needs to be recognized that the ESG risks for companies may be more extensive and more complicated than is generally recognized. The broader range of ESG risks may include claims risks that are far different than is usually assumed in discussions of potential future ESG claims.


Will the Plaintiffs’ Lawyers Continue to Pursue Cybersecurity-Related Securities Claims?

One of the continuing D&O litigation trends over the last several years has been the incidence of securities class action lawsuits and other litigation arising out of cybersecurity incidents at the defendant company. While in many instances these suits have not fared particularly well, plaintiffs’ lawyers have nevertheless continued to file the suits.


For example, in February 2022, secure technology company Telos Corporation was hit with a securities suit following a decline in the price of its shares after the company experienced revenue delays owing to cybersecurity and coronavirus-related “headwinds” that postponed the company’s performance of two key contracts.


Similarly, on May 20, 2022, a plaintiff shareholder filed a securities suit against the cybersecurity firm Octa, Inc., relating to the decline in the company’s share price following revelations of a data breach at the firm


Plaintiffs’ lawyers’ interest in pursuing cybersecurity-related securities suits may have been boosted by the March 2022 ruling (discussed here) in the cybersecurity-related securities suits pending against the cyber technology firm Solar Winds. The federal judge presiding over the SolarWinds cybersecurity-related securities suits substantially denied the defendants’ motions to dismiss. At a minimum, the court’s ruling shows that at least in some circumstances plaintiffs can assert cybersecurity-related D&O claims sufficient to survive a motion to dismiss.


On the other hand, and notwithstanding the outcome of the dismissal motion in the Solar Winds case, the overall record for the plaintiffs in cybersecurity-related securities suits is not particularly good. For example, as discussed here, in March 2022, the Ninth Circuit affirmed the dismissal of the cybersecurity related securities suit that had been filed against Zendesk, and in April 2022, the Fourth Circuit affirmed the dismissal of the high-profile data breach-related securities suit that had been filed against Marriott (as discussed here).


It may be the plaintiffs’ lawyers are not as focused on the mixed record on motions to dismiss as they are in the possibility of making a big score in one of these cases.  The $149 million settlement in the Equifax cybersecurity-related securities lawsuit certainly provides incentive enough for plaintiffs to pursue these kinds of claims. The likelihood is that notwithstanding the plaintiffs’ relatively poor record overall in these kinds of cases, cybersecurity-related securities suits and other D&O claims are likely to continue to be filed.


One important development worth watching in connection with this issue is the SEC’s pending action on the agency’s proposed cybersecurity disclosure guidelines. The guidelines, which the agency proposed in March 2022, include both incident reporting guidelines and risk management and governance disclosure guidelines. Agency action on the proposed guidelines is expected before year end. The agency’s guidelines will impose significant new reporting and disclosure requirements. The guidelines’ requirements could create significant new litigation risk for companies whose disclosures fall short of the requirements or whose actual cybersecurity experience differs from circumstances described in the company’s cybersecurity disclosures.


What is Next for the D&O Insurance Market?

From late 2018 through the end of 2021, the D&O insurance marketplace was in a so-called “hard” market, meaning that most buyers saw their D&O insurance premiums increase significantly. Some D&O insurance risks were “hard to place,” meaning that the insurance was available for those companies, if at all, only at a very high cost and subject to very large self-insured retentions.


The hard market conditions persisted for a considerable amount of time, but insurance is a cyclical business, and it was perhaps inevitable that the market would eventually move on to the next phase of the cycle. At the outset of 2022, signs emerged in the marketplace that the shift had begun. Initially, the easing was solely with respect to high attachment excess placements, but as the year has progressed now for many insurance buyers, the easing has spread to all layers in their program. The upshot is that many insurance buyers are seeing improved pricing for their D&O insurance, at least compared to the pricing available during the hard market.


At least two things are contributing to this shift. The first is that the elevated pricing during the hard market phase attracted new capacity to the marketplace. Initially, the new players’ presence did not impact the market, but as they have scrambled for business, competition has returned to the placement process. The second factor is that the doldrums in the market for IPOs and the drop off in SPAC activity means that there is relatively little new business available. Insurers are now in many instances vying for each other’s business.


The result for many buyers is that, at least for now, the D&O insurance pricing environment has improved. Many buyers will see their overall D&O insurance costs decrease at their next renewal. (There will of course be individual cases where due a company’s circumstances it may find that it is unable to benefit from the changes in the overall market.) However, the pricing available will for now not yet be at levels last seen before the hard market; however, for the first time in years, most D&O insurance buyers will not see an increase at their next renewal and may see some improvement.


When it comes to the insurance cycle, the hardest part is predicting what may be coming next. The adverse financial circumstances discussed above could have a dramatic impact on the business environment and there is a risk that the economy overall could slip into a recession. Were that to happen it would impact the insurance marketplace and could include the possibility that the market for D&O insurance could move back into the hard market phase of the cycle. There is no doubt that the insurers are nervous and watchful. As I noted at the outset, there is a lot to watch these days in the world of D&O.