As reflected in my recent post, last week I attended the PLUS D&O Symposium in New York. The sessions were great, but based on some comments of various panelists, there are some items for follow-up – for example, references that panelists made that need to be checked out, items that panelists suggested we should pursue, and so on. I have run down these various items, and I link to them below. I emphasize that these items will be of interest even if you didn’t attend the Symposium. I have also included below several other items from around the Internet as well.

A.M. Best Assigns Negative Outlook to U.S. D&O Segment: Several different speakers at the D&O Symposium mentioned the action last week by A.M. Best to assign a negative outlook to the U.S. D&O insurance segment. A copy of A.M. Best’s March 4, 2024 press release discussing the action can be found here.

The press release reports that the rating agency took the action as increased capacity has led to competition and lower pricing in the D&O space. In addition, reduced IPO activity has meant lower demand, as well. The report notes that premium is down 20% from its 2021 peak of $14.9 billion. Best estimates that full-year 2023 premium will come in around $12 billion. The rating agency’s press release quotes one of its senior financial analysts as saying, “The current pricing environment may prove unsustainable based on developing losses and how those losses affect company underwriting results prospectively.”

The Delaware Chancery Court’s Ruling in the Walgreens Case: For those you who attended Wednesday’s securities litigation panel, you will recall that Koji Fukumura of the Cooley law firm suggested, in the context of a discussion about Delaware case law concerning the Duty of Oversight, that we (that is, the audience) should take a look at the recent Delaware Chancery Court opinion in the Walgreens case. I was able to quickly find the February 19, 2024, opinion in the case, here. Upon review of the opinion, it is clear why Fukumura urged the audience to review the opinion.

The Walgreens case involves a shareholder derivative suit relating to various investigative matters concerning the company’s system for dispensing and billing for prescribed insulin pens. A qui tam action and a DOJ investigation raised allegations that the system’s procedures resulted in premature and/or unnecessary insulin pen refills. The DOJ investigation ultimately resulted in a $209.2 million settlement.

In 2021, two shareholders filed the derivative suit against Walgreen’s board, alleging among other things that the directors breached their duty of oversight in connection with the company’s prescription management system as pertained to the insulin pens. The defendants filed a motion to dismiss, arguing that the plaintiff had failed to make the requisite pre-suit demand on the board and that the complaint failed to establish demand futility. In opposing the motion, the plaintiffs argued that demand was futile because a majority of the directors faced a substantial likelihood of unexculpated liability for breach of the duty of oversight.

In a February 19, 2024, opinion, Vice Chancellor Lori Will granted the defendants’ motion to dismiss, holding that the plaintiffs’ complaint failed to establish demand futility. In granting the motion, VC Will expressly rejected the plaintiffs’ argument that a majority of the directors faced a substantial likelihood of liability for breach of the duty of oversight.

In ruling that the plaintiffs had not established a substantial likelihood of liability, VC Will concluded that the plaintiffs had failed to establish either a prong one/information systems oversight duty breach or a prong two/red flags breach.

With respect to the prong one-type claim, VC Will found that the complaint itself showed that the board was aware of and engaged with the company’s compliance issues. The plaintiffs sought to argue that the board’s oversight controls were ineffective. VC Will said that “how directors choose to craft a monitoring system in the context of their company is a discretionary matter.” In any event, she found that the system worked, as the complaint shows that when company officials became aware of the insulin billing concerns, the board was informed, and the company took corrective steps.

VC Will also found that the plaintiffs’ allegations failed to establish a prong two/red flag oversight duty breach. She found that the allegations “reflect a Board that was engaging with its oversight function – not one that decided to turn a blind eye to corporate wrongdoing.”

Having ruled against the plaintiffs, VC Will went on to comment on duty of oversight cases generally. She noted that while there may be the “rare event” when directors “cross the red line of bad faith,” and liability can arise, “more harm than good comes about if Caremark claims are reflexively filed” whenever the company “encounters an adverse circumstance.” Such an expansion of Caremark “risks weakening the ‘core protections’ of the business judgment rule’” and “from a practical standpoint, it drains resources from the very corporations that derivative plaintiffs purport to represent.”

VC Will is clearly dismayed that over the past several years, “Caremark suits have proliferated in Delaware.” The cases of this type that are “viable” are based on corporate records that show “a complete failure to oversee related core risks.” Unfortunately, she observed, “many” cases “fall outside the narrow confines of the Caremark doctrine.” She said of these cases that “Fueled by hindsight bias, they seek to hold directors personally liable for imperfect efforts, operational struggles, business decisions, and even when the corporation is the victim of crime.” This case, she said “is an unexceptional member of this broader group.”

VC Will’s opinion in this case is something of a companion to her December 2023 opinion in the Segway case, discussed at length here. Both opinions seem calculated to try to address what she expressly references as the “proliferation” of oversight duty breach cases. In both opinions, she seems to expressly aim to cut off oversight duty breach cases based on nothing more than allegations of “imperfect efforts, operational struggles, and business decisions.”

VC Will’s message matters, in my opinion, not just in the specific context of these cases, in the larger context as well. There has been a been a great deal of speculation amongst various commentators and observers that oversight duty breach cases could emerge from various kinds of current litigation risk exposures, such as, for example, with respect to cybersecurity, ESG, and AI. VC Will’s opinions in both the Segway case and the Walgreens case seem to be intended to communicate to would-be oversight duty breach claimants “Not so fast.”

Securities Litigation Settlement Data: Those who attended Wednesday’s securities litigation panel at the D&O Symposium also received some information about recent securities class action lawsuit settlement trends. Those who would like to have the data behind the settlement statistics will want to refer to Cornerstone Research’s recent publication, “Securities Class Action Settlements: 2023 Review and Analysis,” which can be found here. This new report was actually released on Wednesday, the same day as the D&O Symposium securities litigation panel. Cornerstone Research’s March 6, 2024, press release about the report can be found here.

Among other things, the report shows that the number of securities class action lawsuit settlements in 2023 declined 21% compared to 2022, but that the median settlement during the year of $15 million was the highest amount since 2010. The average settlement during 2023 of $47.3 million was higher both than the 2022 average of $37.9 million and the 2018-2022 average of $46.5 million. The higher median and average settlements in 2023 may be reflection of the increased involvement in settlements during the year of larger companies.

SolarWinds: The government regulation and investigations panel on Wednesday morning was excellent. However, I suspect that there were a fair number of audience members who were confused about the panelists’ discussion of the potential liabilities of “See-sohs.” I confess that at first even I was not sure what the speakers were talking about. It took me a few beats, but I realized that there was talking about what I have always referred to as “See-eye-ess-ohs” – that is, CISOs, or Chief Information Security Officers. (I suspect that there are a number of readers that, have read the prior sentence, said to themselves, “Oh! That is what they were talking about!”).

The discussion of CISOs’ potential liability exposures related specifically to the SEC’s enforcement action in the SolarWinds case, which is discussed at length here. Readers may also want to refer to the recent guest post by Priya Huskins of the Woodruff Sawyer firm about the SolarWinds case, possible CISO liability, and related insurance issues.

Shortest Class Period Ever?: Many attending the PLUS D&O Symposium may not have seen that on March 5, 2024, a plaintiff shareholder filed a securities class action lawsuit against Lyft and certain of its directors and officers. The lawsuit relates to the snafu in Lyft’s February 14, 2024, earnings release. The release said that the company’s profit margin had increased by 500 basis points, which caused the company’s share price to surge (according to the Wall Street Journal, the company’s share price rose over 60%). In an analyst call shortly after the press release was disseminated, the company’s CFO clarified that the earnings release should have stated that the company’s profit margins increased by 50 basis points, not 500 basis points. The company’s CEO said, “That’s a bad error, and that’s on me.”

In their complaint, the plaintiffs purport to have filed the lawsuit “on behalf of a Class of all persons who purchased or otherwise acquired Lyft common shares on a U.S. open market during the class period February 13, 2024, at 4:05 p.m. through February 13, 2024 at 4:51 p.m.” In other words, the plaintiff is seeking a class period that is 46 minutes long.

I don’t know if that is the shortest class period ever, but it has be right up there. The one thing I do know is that the plaintiff in this case is going to have a really hard time showing scienter.

Fed Chair: There Will Be Bank Failures: Symposium attendees who were on their way home last Thursday may not have seen the news about Fed Chair Jerome Powell’s testimony on March 7, 2024, before the Senate Banking Committee. Powell, who was testifying about current Fed monetary policy, was asked about possible problems for banks due to problems in the commercial real estate (CRE) sector. (Regular readers know that I have written frequently on this site about the challenges some banks are facing owing to their CRE exposures, most recently here.)

As reported in a March 7, 2024, article in The Hill (here), Powell said during his Senate testimony that he expects to see some banks fail due to their exposure to the commercial real estate sector, which has declined significantly in value following the shift to remote work. The article quotes Powell as saying “This is a problem we’ll be working on for years more, I’m sure. There will be bank failures.” Powell said doesn’t expect these issues to affect the larger banks; it is, he said, more of a problem for “smaller and medium-sized banks.”

For anyone concerned about the health of the banking sector, these statements are deeply troublesome, in two ways: first, because of the prospect of bank failures ahead, and second, that the current adverse circumstances in the banking sector are going to be around “for years.” That the problems are unlikely to affect the large banks is some consolation, but the prospects for small and medium sized banks, or at least some of them, according to the Fed Chair’s remarks, look gloomy.