Earlier this month, the U.S. Center for Disease Control announced the end in the U.S. of the COVID-19-related public health emergency that began in March 2020. Yet even though the public health emergency has now officially ended, the pandemic’s effects still continue to affect company’s financial results, and still continue to result in COVID-19-related securities class action lawsuits. In the latest litigation example, late last week a plaintiff shareholder filed a securities class action lawsuit against The Walt Disney Company related to the fallout from the company’s early pandemic-related success with and commitment to its Disney+ streaming services, a bet that soured as the pandemic progressed. The new filing shows that though the public health emergency may have ended, the pandemic-related securities litigation risk continues.

Continue Reading Disney Hit With Securities Suit with COVID-Related Allegations

In a ruling last week, Delaware Vice Chancellor Travis Laster denied motions to dismiss in the shareholder derivative suit against Facebook executives for failing over the course of several years to protect users’ data privacy. The alleged privacy violations to which the lawsuit relates were the subject of a massive $5 billion penalty that Facebook agreed to pay to the FTC to settle charges that the company had violated a 2012 consent order relating to protecting users’ privacy. As discussed in a May 10, 2023, Law360 article (here), Vice Chancellor Laster made his ruling from the bench in a telephonic hearing. Vice Chancellor Laster’s ruling is also discussed in a May 10, 2023, Associated Press article (here). As discussed below, Vice Chancellor Laster’s ruling underscores the extent to which privacy-related issues represent an area of significant corporate liability exposure.

Continue Reading Court Denies Dismissal Motion in Facebook User Data Privacy Derivative Suit

The parties in the Kraft Heinz Securities Group securities class action litigation have agreed to settle the case for $450 million, a massive settlement that makes the list of all-time largest settlements. The settlement is subject to court approval. A copy of the parties’ stipulation and agreement of settlement, which was filed with the court on May 5, 2023, can be found here.

Continue Reading Kraft Heinz Securities Litigation Settles for $450 Million

The U.S. Supreme Court has agreed to take up a case that will address the question of whether or not a claimant alleging that his employer fired him in retaliation for whistleblowing must prove that the employer acted with retaliatory intent. The court’s consideration of the case has important implications for claimants under the Sarbanes-Oxley Act’s anti-retaliation provisions, because claimants could face significantly greater difficulty in establishing their claims if they must prove that the employer acted with subjective intent to retaliate. The case could also have important implications for retaliation claims under other federal whistleblower protection laws. The Court’s May 1, 2023, order agreeing to take up the case can be found here.

Continue Reading Supreme Court To Consider Whether Whistleblower Must Show Retaliatory Intent
The Court of the Myrtles at the Alhambra

The D&O Diary’s European assignment continued this past week with a visit to Andalusia, the Southernmost region of Spain. After the cool cloudiness of Northern Germany, the hot, brilliant Andalusian sunlight came as something of a shock. This was a first-time ever visit for us to the venerable and culturally rich cities of Sevilla, Cordoba, and Granada. Our expectations were high; our experience far exceeded our expectations.

Continue Reading Andalusia
Frankfurt Skyline

The D&O Diary is on assignment this week in Europe, with a first stop in Frankfurt, Germany. I have been to Frankfurt on several prior visits, and the city’s streets, sites, and public transportation system are pleasantly familiar. The weather was cool and mostly cloudy for most of the visit, but just the same it was great being back and enjoying the city again.

Continue Reading Back in Frankfurt

In the past, shareholder derivative lawsuits tended to settle for the defendants’ agreement to adopt corporate therapeutics and the payment of plaintiffs’ attorneys’ fees. There typically was not a cash component to the settlement, and rarely a substantial cash component. In more recent years, settlement patterns have changed, and, increasingly, derivative suit settlements have entailed large amounts of cash. The latest example of these new derivative suit settlement patterns is the $167.5 settlement of the derivative lawsuit brought by CBS shareholders in Delaware Chancery Court in connection with CBS’s $30 billion 2019 acquisition of Viacom. (The combined company was known as ViacomCBS, which changed its named to Paramount Global in February 2022.) Paramount Global disclosed the settlement of the CBS shareholder derivative lawsuit it its April 21, 2023 filing on Form 8-K, here.

Continue Reading CBS Shareholder Derivative Suit Relating to Viacom Merger Settles for $167.5 Million

              

In the immediate aftermath of the banking crisis in mid-March, several of the key banks at the center of the crisis – including Silicon Valley Bank, Signature Bank, and Credit Suisse – were quickly hit with securities class action lawsuits. First Republic, another bank that suffered massive deposit withdrawals in March and that received a $30 billion infusion from J.P. Morgan and other large banks, has now been hit with a securities class action lawsuit after it announced its fiscal first quarter financial results on Monday. This latest lawsuit, only coming in as it does now, may fuel further uneasiness that the March banking crisis-related events, might not represent the end of the banking crisis story, nor the end of the related lawsuits.

Continue Reading First Republic Bank Hit with Banking Crisis-Related Securities Suit   
Sarah Abrams

In this guest post, Sarah Abrams, Head of Professional Liability Claims at Bowhead Specialty, examines Sovereign Wealth Funds’ increasing investment in U.S. private equity firms and considers whether there are unique regulatory and professional liability risk exposures for PE firms that partner with Sovereign Wealth Funds. I would like to thank Sarah for allowing me to publish her article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Sarah’s article.

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Institutional investors have been aggressively seeking out opportunities to direct and co-invest in recent years to have more control of private equity (PE) transactions and bypass hefty fees charged by commingled PE funds. These funds have a similar fee structure to that of hedge funds, typically consisting of a management fee (generally 2%) and a performance fee (usually 20%)[i]. Sovereign Wealth Funds (SWF) have not only sought out this control, but in the past year have surpassed US institutional investors in executing on this strategy.[ii] 

All of this activity begs the question, are there unique regulatory and professional liability exposures to PE firms that partner with SWFs?

April 2023 PitchBook data revealed that the Limited Partners (LPs) completing the most buyout and growth investments outside of a fund last year were SWF managers based in the Middle East, Europe and Asia.[iii] The majority of the SWF transactions were co-investment and direct investment opportunities.[iv]

D&O underwriters of PE risk must consider the liability and regulatory exposure the increased SWF investment brings along with its capital.  As with all foreign investment, there needs to be consideration as to whether a direct or co-investment would fall under scrutiny by the Committee on Foreign Investment in the United States (CFIUS).[v][vi]

CFIUS has the authority to review transactions that could result in foreign control of a US business, which includes certain investments in US companies by foreign investors, including SWFs. CFIUS operates pursuant to section 721 of the Defense Production Act of 1950, and, through Executive Order, allows for the agency to review transactions for national security risks. New CFIUS rules published February 13, 2020 under the Foreign Investment Risk Review Modernization Act (“FIRRMA”) overhauled how CFIUS will review inbound investments into the U.S.[vii]  On September 15, 2022 President Biden issued Executive Order 14083 underscoring critical role of CFIUS in responding to foreign investment.[viii]

The 2022 Executive Order by President Biden provides formal Presidential direction on the risks to consider when reviewing a covered transaction. The five specific sets of factors include (1) effect on resilience of critical U.S. supply chains (2) effect on U.S. technological leadership in areas affecting U.S. national security (AI, biotech, climate adaption), (3) industry investment trends that may have impact on U.S. national security, (4) Cybersecurity risks that threaten to impair national security and (5) risks to U.S. persons’ sensitive data.[ix]

The FIRRMA rules must be considered by PE funds with SWF investors, as certain non-controlling minority investments will be subject CFIUS scrutiny including those involving advanced technologies, critical infrastructure, or significant personal data of U.S. residents.  PE fund insurers should be asking whether a fund’s non-U.S. limited partner interests may be subject to CFIUS review, and whether a non-U.S. fund entity may still be deemed a U.S. person falling outside of CFIUS’s reach.[x]  

Coverage under PE D&O insurance for CFIUS regulatory exposure is certainly a legal defense cost underwriting risk, particularly responding to CFIUS document and interview requests of foreign nationals.  In addition, other PE firm investments may come under federal or investor scrutiny after data production and any settlement.  Along with this D&O exposure comes the added professional liability exposure to PE GP investors.

According to PitchBook data, Singapore wealth fund GIC completed 148 such deals last year—the same number as French state bank Bpifrance. [xi] Other active LPs include Abu Dhabi’s sovereign wealth managers Mubadala Investment Company and Abu Dhabi Investment Authority.[xii]  Given the number of deals that SWFs are closing with PE firms, the financial impact to non-SWF LPs should also be considered.

Notably, a November 2022 FinReg paper review concluded with a large sample of international data showing that sovereign wealth funds (SWFs) earn lower returns and are slower to fully liquidate their positions relative to other types of institutional investors.[xiii] The involvement of SWFs as a limited partner is associated with a lower Internal Rate of Return (IRR) and Total Value Paid-In (TVPI) relative to the capital invested.[xiv]

Data presented in an October 2022 paper by business school professors Douglas  Cumming and Pedro Monteiro indicates that SWFs are longer-term investors when compared to their counterparts, including pension funds, endowments, insurance companies, and banks.[xv]  The investment horizon of the alternative asset fund may be longer when SWFs are involved if there is a political and strategic benefit to delay investment.

This is in contrast to the institutional, usually US based PE limited partners who generally prefer a shorter investment horizon as they may have liquidity constraints. Because, SWFs are longer-term investors when compared to their counterparts, including pension funds, endowments, insurance companies, and banks[xvi], PE firms disclosure to LPs tied to deals with SWFs should be done to level set return expectations.

PE firm underwriters of blended policies including E&O coverage for investment should be aware of both the lower return and slower liquidation timeline that may stem from SWF direct and co-investment.  While the outside investment in current market conditions may be attractive, consideration of future E&O liabilities must be considered by financial lines underwriters. LPs seeking the increased and shorter returns may Monday morning quarterback firm GP decisions to include SWFs.   

Financial lines underwriters armed with this recent trend should ask about SWF investment in client PE firms. Of critical importance if SWFs are coinvesting or direct investing, will be partner law firms with CFIUS experience to assist in minimizing regulatory exposure.  In addition, disclosure to non-SWFs LPs to level set return expectations may decrease E&O risk.

[i] Private Equity Management Fees and Regulations (investopedia.com)

[ii] The 20 most active LPs in direct PE investments | PitchBook

[iii] The 20 most active LPs in direct PE investments | PitchBook

[iv] Co-investments allow SWFs to back individual PE deals alongside a deal and direct investing allows SWFs to target a specific fund asset for acquisition often independent of the traditional PE general-limited partner (GP)(LP) relationship.

[v] CFIUS is a US government interagency committee that reviews certain transactions involving foreign investment in the United States to determine their effect on national security.

[vi] The Committee on Foreign Investment in the United States (CFIUS) | U.S. Department of the Treasury

[vii] Summary-of-FIRRMA.pdf (treasury.gov)

[viii] The Committee on Foreign Investment in the United States (CFIUS) | U.S. Department of the Treasury

[ix] FACT SHEET: President Biden Signs Executive Order to Ensure Robust Reviews of Evolving National Security Risks by the Committee on Foreign Investment in the United States | The White House

[x] New Rules for CFIUS: How Investment Funds Can React and Take Advantage | Paul Hastings LLP

[xi] The 20 most active LPs in direct PE investments | PitchBook

[xii] Id.

[xiii] Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds – The FinReg Blog (duke.edu)

[xiv] Id

[xv] Cumming, Douglas J. and Monteiro, Pedro, Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds (October 24, 2022). Available at SSRN: https://ssrn.com/abstract=4258254 or http://dx.doi.org/10.2139/ssrn.4258254

[xvi] Sovereign Wealth Fund Investment in Venture Capital, Private Equity, and Real Asset Funds – The FinReg Blog (duke.edu)