Director and Officer Liability

One of the now-standard storylines about the global financial crisis is that despite all the chaos very few corporate executives were prosecuted and even fewer went to jail. However, rather than interpreting these circumstances to suggest that there was insufficient evidence to convict corporate executives beyond a reasonable doubt, some observers have decided that the problem was that there is something wrong with our criminal justice system.

One observer who has made a hobby horse out of these issues is the U.S. Senator and Presidential Candidate, Elizabeth Warren. Senator Warren has now introduced new legislation that would lower the standard of criminal liability for corporate executive. Among other things, the new legislation would make corporate executives criminally liable for mere negligence in certain circumstances, even in the absence of the degree of intent that has for centuries been viewed in our legal system as the indispensable basis for a criminal conviction. As discussed below, this legislation is not only a bad idea in terms of our country’s corporate competitiveness, it also threatens one of our legal system’s bedrock principles.
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In the now more than a year since the #MeToo phenomenon first arose, there have been a number of D&O lawsuits filed against companies and their boards in which the plaintiffs allege that company officials either allowed the alleged sexual misconduct to take place or turned a blind eye. In the latest D&O lawsuits to follow in the wake of allegations of sexual misconduct, two Alphabet shareholders have filed separate derivative lawsuits in California state court against the company’s board based on underlying allegations of alleged sexual misconduct at the company’s Google unit.
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Back in 2015, the California Legislature enacted Labor Law Section 558.1, making an “other person” acting for an employer (defined as any natural person who is owner, director, officer, or managing agent of the employer) who causes the employer to violate the state’s wage and hour laws liable as the employer for the violation. As I noted at the time, this new statutory provision, which created personal liability for individuals for the employer’s wage law obligations, was quite controversial. However, as noted in a December 21, 2018 post on the Sheppard Mullin law firm’s Labor & Employment Law Blog entitled “Managers Beware: Can You Be Held Personally Liable for Wage and Hour Violations” (here), a California appellate court recently confirmed that “even in the absence of this new section, the labor code imposes personal liability” for California minimum wage and overtime violations.
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The world of directors’ and officers’ liability is always dynamic, but 2018 was a particularly eventful year in the D&O liability arena. The past year’s many developments have significant implications for what may lie ahead in 2019 – and possibly for years to come. I have set out below the Top Ten D&O Stories of 2018, with an eye toward future possibilities.
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Francis Kean

In the following guest post, Francis Kean, Executive Director FINEX Willis Towers Watson, reviews some interesting recent historical academic research on directors’ duties and the business judgment rule in the U.K.  A version of this article previously was published on the Willis Towers Watson Wire blog (here). I would like to thank Francis for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to thig blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Francis’s article.
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If the uncertainty creates risk, then the current state of play on the United Kingdom’s efforts to withdraw from the European Union represents risk in a highly concentrated form. On November 25, 2018, the 27 EU members approved the divorce pact that the U.K. negotiated with its EU counterparts, but the pact must now face a Parliamentary vote, on December 11, 2018. In the meantime, the March 29, 2019 withdrawal date looms. These upcoming events present uncertainties at both the economic and enterprise levels. The uncertainties in turn create challenges for potentially affected companies, including among other things the challenge of communicating about these issues to investors. As discussed below, SEC Chair Jay Clayton recently emphasized that the agency is “sharpening its focus” on Brexit-related disclosures, highlighting the significance of the disclosure-related concerns.
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The Northern California wildfire known as the Camp Fire – reportedly the deadliest and most destructive wildfire in California history – has finally been fully contained. But while the fire has been doused, the fight about the fire has only just begun. Investigators will now undertake to determine the fire’s cause. And the inevitable lawsuits will now get rolling as well.

As I noted last week, investors already filed a wildfire-related securities class action lawsuit while the fires were still burning. And now a shareholder has filed a shareholder derivative lawsuit in federal court against the board and certain officers of PG&E Corp., and its regulated utility operating company, Pacific Gas and Electric Company, relating to the companies’ alleged role in causing the Camp Fire. As discussed below, this recent lawsuits may represent examples of the kinds of lawsuits we may expect to see in increasing numbers as a result of climate change-related effects. The derivative lawsuit complaint, filed in the Northern District of California on November 21, 2018, can be found in two parts here and here.
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In the latest example of a D&O lawsuit following in the wake of allegations of sexual misconduct, three shareholders have filed a state court derivative lawsuit in Oregon against Nike’s Board of Directors alleging that the defendants failed in their oversight duties and allowing a toxic “boys club” culture of sexual harassment and bullying to take hold. The Nike complaint shows yet again that the accountability process that has emerged as part of the #MeToo movement in many cases has involved efforts to hold company’s boards accountable for permitting misconduct or turning a blind eye. The Nike derivative complaint can be found here.
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John Reed Stark

 As I detailed in a post at the time (here), on Thursday last week, the SEC filed a securities fraud enforcement action against Tesla Chairman and CEO Elon Musk in connection with his now infamous tweets, in which he said he had “secured” funding to take the company private at a substantial premium over the company’s then-current share price. On Saturday, September 29, 2018, the SEC announced in a press release (here) that it had reached a settlement of the action with Musk, as well as in a separate action against Tesla filed simultaneously with the settlement. In the following guest post, John Reed Stark, the President of John Reed Stark Consulting and former Chief of the SEC’s Office of Internet Enforcement, takes a look at the SEC’s enforcement actions and settlements with Musk and Tesla and provides his insight about what these developments may signify as far as the SEC’s enforcement posture regarding communications on the Internet. A version of this article originally appeared on the Securities Docket. I would like to thank John for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is John’s article.
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