It will not come as news to anyone that corporate directors face the possibility of direct personal liability for their actions or omissions in the capacities as directors. However, the scope of these individuals’ potential liability exposures can and does change. As a result of recent legal developments, at least two new areas of potential liability exposure for corporate directors have emerged. As discussed below, a recent federal district court decision suggests that directors can be held personally liable under both the Sarbanes-Oxley Act and the Dodd-Frank Act for whistleblower retaliation, and a recent California legislative enactment provides that corporate directors can be held personally liable for violations of the state’s wage and hour laws.
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Dole Shareholders File Securities Suit Based on Executives’ Share Price Deflating Conduct Prior to Going Private Deal
The November 1, 2013 transaction in which David Murdock, Dole Food Company’s Chairman and CEO, acquired the Dole shares he did not already own has already been the subject of extensive litigation. Indeed, in 108-page August 27, 2015 post-trial opinion (here), Delaware Court of Chancery Vice Chancellor Travis Laster found that and Murdock and C. Michael Carter, Dole’s COO and General Counsel, had employed “fraud” to drive down the Dole’s share price to lower the amount Murdock paid in the deal. Laster entered a damages award against Murdock and Carter, jointly and severally, of $148.1 million, as discussed here. On December 7, 2015, Murdock and Dole reached an agreement to pay the shareholders a total (including interest) of $113.5 million, with the remainder of the judgment amount to be paid to the plaintiffs in a separate appraisal action, as discussed here. As part of the settlement, the defendants gave up their right to appeal the Chancery Court rulings and judgment.
The recent settlement seemingly brought an end to the shareholder litigation over the November 2013 transaction. However, it now appears that there may be another round of litigation yet to go.
On December 9, 2015, a plaintiff shareholder filed a securities class action lawsuit in the federal court in Delaware, against Dole, Murdock, and Carter. A copy of the plaintiff’s complaint can be found here. The lawsuit was filed on behalf of a class of Dole shareholders who sold their shares between January 2, 2013 and October 31, 2013. As might be expected, the complaint quotes extensively from Laster’s opinion. Notwithstanding the overlap between the Delaware Chancery suit and the new complaint, there are important differences between the cases. As discussed below, the securities class action complaint also presents a number of interesting issues and questions.
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Wyndham Worldwide Settles Data Breach-Related FTC Enforcement Action
According to the company’s December 9, 2015 press release (here), Wyndham Worldwide has reached a settlement with the Federal Trade Commission in the long-running and high-profile civil action the agency filed against the company and its affiliates in connection with data breaches at the company during the period 2008-2010. Under the terms of the settlement, the company has agreed to undertake certain measures and to continue to meet certain standards with respect to its customers’ payment card information. As the company said in its press release about the settlement, the company’s undertakings in the settlement set “a standard for what the government considers reasonable data security of payment card information.” The FTC’s December 9, 2015 press release about the settlement can be found here. The parties’ stipulated order for injunction, which is subject to court approval, can be found here.
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A Burst Dam in Brazil, a U.S. Securites Lawsuit, and a Heap of Current Litigation Trends
On December 7, 2015, in a complaint that reflects a number of current U.S. securities class action lawsuit filing trends, a plaintiff securityholder filed a securities class action lawsuit in the Southern District of New York under the U.S. securities laws against the Brazilian mining giant Vale, S.A. and two of its officers. The complaint relates to the massive dam failure that occurred on November 5, 2015 near Mariana, in the Minas Gerais state, in Brazil. The failed dam is the property of Samarco Mineração, S.A., a joint venture between Vale and BHP Billiton. The securities suit plaintiff claims that the Vale defendants made misleading statements about the company’s safety and environmental standards and risk management, as well as about the spill itself.
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Corporate Indemnification and the Yates Memo
Although it is not something that is often considered, D&O insurance is in many ways a financial tool allowing companies to manage their indemnification obligations to their directors and officers. The D&O policy’s reimbursement coverage recompenses the company when it honors its indemnification obligations to its corporate officials, and the policy’s individual coverage (usual referred to as Side A coverage) protects the individuals when the company is unable to honor its indemnification obligations, whether due to insolvency or legal prohibition.
D&O insurance is of course a critical part of corporate risk management, but the fact is that indemnification is an even more basic and comprehensive source of protection for corporate executives. Even for companies that purchase and maintain significant levels of D&O insurance, corporate indemnification provides important protection for company officials. D&O insurance is subject to limits of liability, whereas indemnification is theoretically unlimited (although, of course, practically limited by the indemnifying company’s financial resources). Indemnification is often very broad, often extending “to the maximum extent permitted by law,” whereas D&O insurance polices contain numerous exclusions and conditions. In addition, D&O insurance must be renewed each year, with possible changes in terms and conditions. Indemnification rights are much less likely to be changed, particularly, as noted below, for corporate officials who negotiate their own indemnification contracts.
Indemnification, then, is a very important consideration for all corporate directors and officers. While this has long been true, indemnification arguably has taken on an increased importance in light of the recent action by the U.S. Department of Justice. As I discussed in a post at the time (here), in September the U.S. Department of Justice released a directive — referred to as “the Yates Memo” –restating and reinforcing the agency’s commitment to targeting corporate executives in cases of corporate wrongdoing. The cornerstone of the agency’s new policies is the specification that in order for a company to qualify for any cooperation credit in connection with a DoJ investigation, the company must provide the agency with all relevant facts about the individuals involved in the misconduct.
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JOBS Act 2.0 Poised to Become Law
The five-year transportation bill known as the Fixing America’s Surface Transportation (FAST) Act that a House-Senate conference committee agreed on earlier this week is not something we ordinarily would comment on here. But in that inestimable way that Congress manages to do things, the transportation bill contains so many provisions affecting public company financing and reporting that Broc Romanek of TheCorporateCounsel.net blog described the provisions collectively as “JOBS Act 2.0.” The House and Senate passed the bill on Dec. 3, 2015, and President Obama is expected to sign it into law shortly.
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2015 YTD Securities Suit Filings Reflect Increased Numbers of IPO-Related Lawsuits
Though the number of IPOs completed so far this year is below the elevated levels evidenced during 2014 and 2013, IPO activity still remains above 2008-2012 levels. As a direct reflection of the higher number of IPOs completed during the period 2013-15, we are also now seeing an increase in the numbers of IPO-related securities lawsuit filings. IPO-related suits were an important part of the 2014 securities class action lawsuit filings, and they represent an even more significant part of 2015 YTD securities suit filings.
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Litigation Funding Firm to Close Its Doors
One of the most significant recent developments in the commercial litigation arena has been the recent rise of litigation funding. Though it remains controversial in some quarters, litigation funding is, in the words of a recent Above the Law post, “here to stay.” One reason that litigation funding is likely to remain an important factor in the litigation environment is that litigation funding in general has proven to be a lucrative investment, as I have previously noted (here). But while litigation funding in general may be profitable, that does not mean that investment success is assured. Indeed, while there are several very successful litigation funding firms, other firms have stumbled.
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FTC Data Breach-Related Enforcement Action Dismissed Based on Lack of Alleged Consumer Harm
Following the Third Circuit’s August 2015 decision in which the appellate court affirmed the Federal Trade Commission’s authority to pursue an enforcement action against Wyndham Worldwide alleging that the company failed to make reasonable efforts to protect consumers’ private information, there have been concerns that other companies experiencing data breaches could be the target of enforcement actions by the FTC and other regulatory agencies. However, a recent decision by the FTC’s Chief Administrative Law Judge has set a high bar for the degree and kind of consumer harm that must be shown in order for the FTC to be able to pursue a data breach-related claim under Section 5 of the FTC Act.
In a 92-page November 13, 2015 opinion (here), FTC Chief Administrative Law Judge D. Michael Chappell dismissed the FTC’s complaint against LabMD, Inc., based on his holding that the FTC had failed to meet its burden to show that the company’s data security practices has caused or were likely to cause harm to consumers. As discussed below, the agency intends to appeal the ALJ’s ruling, but as it stands the ruling could provide companies that are the target of an FTC data breach-related enforcement action a basis upon which to try to challenge the sufficiency of the FTC’s allegations.
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Guest Post: Notice-Prejudice Requirements in D&O Policies: Diverse Trends in Contract Language and Case Law
Among the perennial coverage issues arising under D&O and E&O policies are questions involving timely notice of claim. Recently, the notice provisions many professional liability insurance policies relating to notice timeliness have been revised to lengthen the time period within which notice must be given and even specifying that if in order to assert late notice of claim, an insurer must demonstrate that it has been prejudiced by the late provision of notice. In the following guest post, industry veteran and well-known insurer-side coverage attorney Joseph P. Monteleone of the Rivkin Radler law firm takes a look at these policy wording changes as well as the case law context within which these changes have arisen.
I would like to thank Joe for his willingness to publish his article on this blog. I welcome guest post submissions from responsible authors on topics of interest to readers of this site. Please contact me directly if you are interested in submitting a guest blog post. Here is Joe’s guest post.
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One of the hallmarks of a claims-made and reported policy historically has been the two-pronged requirement that (1) the claim against the insured must be first made during the policy period, and (2) the claim had to be reported to the insurer, if not strictly within the policy period, at least no later than a “bright line” cut-off date after policy expiration. These cut-off dates were generally thirty (30) or sixty (60) after policy expiration.
Contrast these with so-called pure claims-made policies, which have the first of the two-pronged component discussed above, but the reporting requirement is typically “as soon as practicable”[i], similar to reporting requirements under occurrence-triggered policies such as the Commercial General Liability (CGL) policy.
As part of the inexorable trend of policy wordings becoming ever broader for the benefit of the policyholder, notwithstanding any hardening or softening of rates for the policies, we have seen significant modifications to the policy reporting provisions.