In prior posts on this site (for example here), I have expressed my concern that the current hot topic of ESG has a fundamental underlying flaw in that the term lacks definition and that this lack of precision has led to a great deal of sloppy thinking. A recent post on the Harvard Law School Forum on Corporate Governance provides a good examination of these ESG-related concerns. In an October 14, 2022 post (here), Douglas Chia of Soundboard Governance LLC, shows, using cybersecurity as an example, that one of the “biggest flaws” of ESG is “the subjective open-endedness of what counts as E, S, or G.” Continue Reading ESG’s “Biggest Risk”?

Sarah Abrams

As I have noted on this site, though companies face pressure from a number of constituencies to establish their ESG credentials, taking the ESG initiative can have a number of consequences, including, for at least some socially active companies, the possibility of litigation (as discussed, for example, here). In the following guest post, Sarah Abrams, the Head of Professional Liability Claims at Bowhead Specialty, takes a closer look at these issues potentially affecting socially active consequences and considers the potential consequences for D&O insurers. I would like to thank Sarah for allowing me to publish her 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 Sarah’s article.

 

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Perhaps stemming from the 2010 U.S. Supreme Court Citizens United v. FEC[i] decision finding corporations have a right to free speech (in that case political speech), more and more companies have come out publicly in favor of, or against a variety of social and political issues.  In the past two years, US companies have found themselves under pressure to take stands on racial equality, COVID-19 vaccinations, voting rights, the war in Ukraine, gun regulation and, in the wake of the Dobbs v. Jackson Women’s Health Organization decision, women’s reproductive rights.[ii]

 

Once a corporation, especially a publicly traded one, vocalizes its support or opposition, lawsuits are immediately filed.  Aside from follow-on litigation having the ability to impair management liability insurance, making a statement on a particular social or political policy often leads to shareholder litigation.   As opined by Utpal Dholakia P.h.D.[iii] in a “The Science Behind  Behavior” Psychology Today  post “when a [public company] decides to take a stance, it alienates a significant fraction of the company’s customers, employees, investors, and other constituents.[iv]

 

Certainly the profile of litigation filed just within the summer months of 2022 against Unilever[v], Wells Fargo[vi] and Starbucks[vii] supports Dr. Dholakia’s theory.  Each suit arose out of a public position on a particular social issue and, in the case of Wells Fargo and Starbucks, had shareholder plaintiffs on both sides of the diversity, equity and inclusion debate.  It is too early to determine whether this new round of litigation will go the route of the Board Diversity derivative litigation dismissals in 2021.[viii] Either way, costs incurred to defend litigation, particularly if separate counsel is required for executives, impair director and officer liability retentions and/or limits.

 

Despite the clear correlation between public position statements and lawsuits, companies have began to consider the prospective fall out as the “cost of doing business.”  Notably, however, that cost is one often put on insurers.  Certainly in underwriting, the history of a public company  taking a stance on social issues should be considered alongside a loss run history of shareholder lawsuits.  The specific platform itself seems to further inform the risk to subsequent litigation.

 

The Conference Board, a nonpartisan 501(c)(3) think tank published a recent survey of 300 US public, private and non profit corporation insights on how companies are responding to high profile social issues.[ix]  The largest percentage of companies reported taking a public stance on Racial Equality (61%), followed by LGBTQ+ rights (44%), Vaccination and other COVID-related issues (40%) and Gender Equality (39%).

 

There is a significantly large number of shareholder derivative and recent securities class action suits stemming from corporate positions on racial equality.  Especially in light of the “anti ESG” shareholder proposals, with the National Center for Public Policy Research (NCPPR) filing ten “civil rights and non-discrimination” proposals.[x]

 

On the other hand when a company like Dick’s Sporting Goods takes a position on gun safety and Dobbs, both issues ranking among the lowest in percentage for companies to take a stance on[xi], civil rights suits were filed[xii], but no shareholder derivative or securities class action have yet to follow.  Similarly, when chief executives of Atlanta-based Delta Air Lines and Coca-Cola forcefully condemned Georgia passing a restrictive voting bill[xiii] no adverse action was taken.[xiv]  There were, however, threats by Coca-Cola Co shareholders against the company’s board unless it ended policies to promote diversity among outside lawyers.[xv]

 

Just looking at survey responses from The Conference Board and recent lawsuits, there appears to be a correlation between the type of social issue that a company decides to take a position on and the number of follow-on lawsuits.  For example, when a larger number of companies take a public stance on racial equality, a larger number are sued by plaintiff shareholders alleging the company was either not doing enough or doing too much.

 

Notably, 61% of the companies cited the issue’s relationship “to the company’s core values” as criterion for deciding whether to take a stand on issues raised by the Supreme Court’s decision.  Only 29% cite the relationship to the company’s business.  Given this statistic, it would seem prudent for public company director and officer underwriters to start asking what the company core values are and whether it plans to take a public stance in support of them.

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[i] https://transition.fec.gov/law/litigation/cu_sc08_opinion.pdf, U.S. Supreme Court No. 08-205

[ii] https://www.conference-board.org/

[iii] Utpal Dholakia Ph.D. | Psychology Today

[iv] Why (Most) Companies Should Avoid Taking Political Stances | Psychology Today

[v] City of St. Clair Shores Police and Fire Retirement System, et. al v. Unilever, et. al (USDNY 1:22-cv-05011); Securities Complaint alleging that Ben & Jerry’s board resolution to end sales considered to be Palestinian territories illegally occupied by Israel was politically sensitive and that Unilever delayed announcement of the resolution because Unilever was “aware of the negative consequences.”

[vi] Khorsow Ardalan, et. al v. Wells Fargo & Company, et. al (USDC ND Cal 3:22-cv-03811);  Securities Class Action alleging that Wells Fargo, as part if its efforts to diversify its work force, instituted a “Diverse Search Requirement,” also referred to as a diverse slate hiring policy which apparently was not effectuated; leading to fake interviews of diverse candidates and eventually paused.

[vii] National Center for Public Policy Research v. Howard Schultz, et. al (WA, Spokane County 22-2-02945-32); Shareholder complaint alleging that the Starbucks DEI policies “required Starbucks to discriminate based on race” and facilities “Starbucks’ active discrimination based on race in its employment decisions”; requires Starbucks to discriminate in its compensation of its officers based on the race of their workforce; and requires the company to discriminate in its contracting with its suppliers and media companies, based on the race of potential vendors’ ownership.”

[viii] See Oceguda v. Zuckerberg, USDC ND CA 20-cv-04444; Lee v. Fisher, et. al USDC ND CA 20-cv-06163-SK; Klein v. Ellison, et. al, USDC ND 3:20-cv-04439; City of Pontiac General Employees’ Retirement System v. Joyce, et. al, USDC DC 1:20-cv-02445; Lee, et. al v. Frost, et. al   USDC SDFL 21-20885; Toronto ESA v. NortonLifelock Incorporated, USDC ND CA 20-cv-05410; Kiger v. Mollenkopf, USDC DE 21-409; City of Pontiac General Employees’ Retirement System v. Bush, et. al, USDC ND CA 20-cv-06651.

[ix] https://www.conference-board.org/

[x] 2022 Proxy Season Review: Increased Shareholder Focus on Racial Justice | WilmerHale

[xi] Only 10% of The Conference Board companies had addressed the Dobbs v. Jackson Women’s Health Organization decision externally and 38% reporting they had addressed it internally with 31% stating that they would not plan on responding.

[xii] Tyler Watson, who claimed that Dick’s violated the state’s discrimination statutes after they refused to sell him a rifle because he was not at least 21 years old, has reportedly reached an agreement to end a pending lawsuit. The terms of the settlement have not been released but the man had sought $1 million in damages. Dick’s settles age discrimination suit over refused gun sale to man under 21 :: Guns.com. After the decision in Dobbs v. Jackson Women’s Health Organization, which overturned Roe v. Wade, Dick’s announced a special employment benefit of “up to $4,000” in travel reimbursement for an employee, spouse, or dependent enrolled in their medical plan, along with one support person, to obtain an abortion. America First Legal (AFL) immediately filed a civil-rights lawsuit arguing Dick’s policy discriminates against female employees who choose to give birth. Dick’s Sporting Goods hit with civil rights complaint over reimbursing workers for abortion travel – Washington Times

[xiii] MLB moves All-Star Game out of Atlanta over voting law controversy – ABC News (go.com)

[xiv] Dick’s Sporting Goods hit with civil rights complaint over reimbursing workers for abortion travel – Washington Times

[xv] IN BRIEF: Coca-Cola investors threaten suit over law firm diversity policy | Reuters

On October 11, 2022, I participated in a Tuesdays with Lloyd’s seminar with Michele Comtois of Marsh & Mclennan Agency and Johnathan Tritton of Acrisure London Wholesale, in which we discussed the current state of the D&O Insurance market in the U.S., including the implications of the current market changes for buyers, brokers, and underwriters. The 40-minute session was recorded and the Tuesdays with Lloyd’s team has graciously allowed me to share the video of the session with my readers on this site. The video is embedded below. I think you will find the panel’s discussion interesting. My thanks to Michele and JT for their participation and their comments and to the Tuesday with Lloyd’s team for inviting me to be a part of this event.

 

 

 

Nessim Mezrahi
Stephen Sigrist

As I have noted in prior posts on this site (here, for example) D&O insurers confront a number of underwriting challenges in the current financial environment, including a host of macroeconomic factors that are complicated affairs for their policyholders and that could even lead to claims. In the following guest post, Nessim Mezrahi and Stephen Sigrist take a look at the challenging factors the D&O insurers are facing and consider the implications. Mezrahi is co-founder and CEO and Sigrist is Vice President of Data Science at SAR LLC. A copy of this article previously was published on Law360. I would like to thank the authors for allowing me to publish their article on my 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 the authors’ article. Continue Reading Guest Post: D&O Insurer Challenges Amid Market, Economic Turbulence

The payment technology firm Block, Inc. (formerly known as Square) has been hit with a securities class action lawsuit related to the company’s announcement earlier this year that a former employee had improperly accessed and downloaded company customer data. The new lawsuit is the latest example of the ways in which data security incidents can translate into D&O claims. The complaint, filed on October 11, 2022, can be found here. Continue Reading Payments Company Hit With Data Breach-Related Securities Suit

Bryan Coffey
Peter Gillon

The Delaware General Assembly has amended the Delaware General Corporation Law Section 102(b)(7), effective August 1, 2022, to permit the exculpation of corporate officers. In the following guest post, Bryan Coffey and Peter Gillon of the Pillsbury Winthrop Shaw Pittman LLP law firm examine the new statutory provision and consider the provision’s D&O insurance implications. The authors’ article previously was published on Law360 and is republished here with permission. I would like to thank Bryan and Peter for allowing me to publish their 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 Bryan and Peter’s article. Continue Reading Guest Post: What Del. Officer Exculpation Law Means For D&O Insurance

In the latest lawsuit to emerge in the aftermath of the recent SPAC frenzy, a plaintiff shareholder has filed a securities class action suit against Opendoor Technologies, a residential real estate digital platform, which merged into a publicly traded SPAC in December 2020. The SPAC involved was one of the many financial vehicles launched by the so-called “King of SPACS,” Chamath Palihapitiya, while the SPAC craze was picking up steam. A copy of the October 7, 2022 complaint can be found here. Continue Reading SPAC-Merged Real Estate Platform Hit with Securities Suit

A recurring issue concerning directors’ duties is the question whether or not directors have duties to their company’s creditors when the company is in the “zone of insolvency.” In an interesting recent decision, the U.K. Supreme Court addressed the duty of directors to creditors when their company becomes insolvent or when it approaches or is at risk of insolvency. In a case in which it decided that the directors for the company before the Court were not liable, the Court ruled that the creditor duty may arise not only when the company is insolvent but when it is “bordering on insolvency,” though the creditor duty does not become paramount until insolvency is “inevitable.” The Court’s October 5, 2022 decision in BTI 204 LLC v. Sequana SA can be found here. The Press Summary of the Court’s Judgement can be found here. Continue Reading U.K. Supreme Court Addresses Directors’ Duties for Companies “Bordering on Insolvency”

In an interesting and unusual development, the victims’ trust that was created as part of the Pacific Gas & Electric (PG&E) bankruptcy has reached an agreement to settle the trust’s assigned claims against PG&E’s directors and officers for $117 million. According to the parties’ settlement agreement, the settlement is to be funded entirely with proceeds from PG&E’s D&O insurance program. As discussed below, there are a number of interesting aspects and implications to this settlement A copy of the Fire Victim’s Trust’s September 29, 2022 press release about the settlement can be found here. A copy of the parties’ settlement agreement can be found here. Continue Reading Wildfire Victims Reach $117 Million Settlement with PG&E Executives for Assigned Liability Claims

After several quarters in a hard market, the D&O insurance marketplace is now in transition, with important implications for buyers, brokers, and underwriters. On October 11, 2022, I will be participating in a Tuesdays with Lloyd’s seminar with Michelle Comtois of Marsh and Johnathan Tritton of Acrisure London Wholesale. The free 45-minute webinar begins at 11 am EDT. For more information and to register, please refer here. I hope everyone will attend and I look forward to speaking to all of you then.