As readers of this blog know, the various board diversity lawsuits that the plaintiffs’ lawyers filed in late 2020 and early 2021 have uniformly fared poorly in the courts. In the latest dismissal motion ruling in one of these suits, the court in the board diversity suit filed against the directors of Cisco Systems has granted the defendants’ motion to dismiss, albeit without prejudice. The court’s ruling in the Cisco Systems board diversity suit is noteworthy because the court addressed the merits of the plaintiff’s Section 14(a) claims. A copy of the court’s March 1, 2022 dismissal order can be found here.
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SPACs’ Structural Conflicts, Shareholder Litigation, and Judicial Review
The “economic structure” of SPACs creates an ‘inherent conflict” between the SPAC sponsor and the SPAC’s public shareholders, according to a new paper from two leading law professors. The conflict arises from the SPAC sponsor’s financial interest in completing a merger even if the merger is not value-creating, which may conflict with the shareholders’ interest in redeeming their shares if they believe that the proposed merger is disadvantageous. Because of the potential conflict, it is critical that the SPAC’s board independently reviews the proposed merger and inform shareholders about the merger with appropriate candor. However, if the board members’ compensation aligns their interests with those of the sponsor, the sponsor’s conflict could extend to the directors themselves – a circumstance the paper’s authors call the “epitome of bad governance.”
The solution, the authors suggest, is for the SPAC to structure the board members’ compensation in a way that aligns the directors’ financial interests with those of the shareholders. Moreover, the authors contend, courts reviewing shareholders’ allegations that a SPAC’s board members breached their fiduciary duties should consider the potential for conflict inherent in the SPAC’s structure and accordingly review the underlying circumstances using the “entire fairness” standard. These considerations are relevant to cases now pending in the Delaware courts, which have the potential to be “groundbreaking.” Stanford Law Professor Michael Klausner and NYU Law Professor Michael Ohlrogge’s November 19, 2021 paper entitled “SPAC Governance: In Need of Judicial Review” can be found here.
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Data Breach-Related Derivative Suit Filed Against T-Mobile USA Board
The filing of data breach and other cybersecurity incident-related shareholder derivative lawsuits against corporate boards is nothing new; plaintiffs’ lawyers have been filing these kinds of claims now for several years. However, in recent months, the plaintiffs’ lawyers have shown an increasing inclination to file these claims based on allegations of breach of the duty of oversight. The latest example of this type of claim is the shareholder derivative suit filed this week against the board of T-Mobile USA. Although the plaintiff’s complaint does not expressly use the words “breach of the duty of oversight” or refer to “Caremark duties,” the complaint does refer to the board’s alleged “failure to monitor” and to the board’s alleged failure “to heed red flags” – the very kind of allegations that are at the heart of breach of the duty of oversight claims. A copy of the plaintiff’s complaint in the November 29, 2021 lawsuit can be found here.
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Cybersecurity-Related Breach of the Duty of Oversight Claim Filed Against SolarWinds Board
In the latest example of claimants seeking to assert the newly revitalized type of claim for breach of the duty of oversight against corporate boards, plaintiff shareholders have filed a derivative lawsuit in Delaware Chancery Court against certain past and current directors of technology company SolarWinds, based on the massive cybersecurity incident involving the company’s software and systems discovered in December 2020. As discussed below, there are several interesting features of this lawsuit in light of recent developments involving claims for alleged breaches of the duty of oversight. A copy of the heavily redacted publicly available version of the plaintiffs’ complaint against the SolarWinds board can be found here.
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Dismissal Motion Granted in Oracle Board Diversity Lawsuit
Regular readers will recall that last year and earlier this year, plaintiffs’ lawyers filed a series of shareholder derivative lawsuits against the directors of several companies alleging that the lack of diversity on the companies’ boards breached the directors’ fiduciary duties. In the latest ruling to address preliminary motions in these various cases, the court in the board diversity lawsuit filed against directors and officers of Oracle has granted the defendants’ motion to dismiss. As discussed in greater detail below, the plaintiffs’ track record on the board diversity lawsuits is not good so far; the ruling in the Oracle suit represents the third successive dismissal granted in these suits.
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The Duty of Oversight and the Need for Regular Board Review of Corporate Risk
An important recent litigation phenomenon that I have been monitoring on this site is the recent revival of the duty of oversight as a legal theory on which plaintiffs can try to assert claims against corporate boards. Delaware’s court have recently sustained several of these kinds of claims – often referred to as “Caremark” claims in reference to the 1986 Delaware Court of Chancery decision that first recognized the legal theory behind these claims – and indeed on recent federal court decision sustained a breach of the duty of oversight claim under Ohio law. In light of these developments, boards will need to anticipate the possibility that these kinds of claims can arise, which possibility in turn raises the question of what boards can do to protect themselves from these kinds of claims.
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Guest Post: UK Sarbanes Oxley?
In a March 2021 paper entitled “Restoring trust in audit and corporate governance” (here), the UK government set out a number of proposed reforms in order to try to increase trust in corporate governance, including, among other things, proposed new company reporting requirements. In the following guest post, Andrew Milne discusses the potential implications for UK directors from the reform proposals under consideration. Andrew is a Senior Associate at the CMS law firm, and a co-author of the UK Chapter in Directors’ Liability and Indemnification. I would like to thank Andrew 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 Andrew’s article.
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PLUS Webinar on New Risks of Claims Against Directors
On Wednesday, March 31, 2021, I will be participating in a PLUS webinar entitled “New Risks of Claims Against Directors from COVID-19, Cyber Attacks, and The Growing Support for ESG and Diversity and Inclusion.” The webinar will be hosted by Greg Markel of the Seyfarth Shaw law firm. The panel will include Paul Lavelle, of
Is SPAC-Related Legal Action About to Heat Up?
Anyone reading the business pages know that SPAC IPO activity continues to surge; indeed, we have not yet even officially completed 2021’s first quarter, yet the number of SPAC IPOs completed and the amount of funding raised have both already exceeded the totals for the full year 2020. As I have already noted in prior posts on this site, all of this SPAC activity has already attracted some legal action. At the end of the last week, there were further signs that the legal activity could be about to pick up. As discussed below, news reports circulated late last week that the SEC has sent informal inquiries to Wall Street banks concerning SPACs, and, as also discussed below, a plaintiff shareholder has initiated a class action lawsuit against the directors and officers of a SPAC, among others, in Delaware Chancery Court presenting some alternative liability theories.
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OPKO Health Hit with Board Diversity Lawsuit
Regular readers will recall that last summer and fall there was a series of lawsuits filed against the directors of several publicly traded companies that had no African Americans on their boards. For a time, it seemed as if this litigation outbreak had subsided, as no further lawsuits were filed after the end of September. However, the impression that this phenomenon had played itself out was dispelled in February, when a plaintiff shareholder filed yet another board diversity lawsuit against the directors of Micron Technology. Now, in the latest sign that the board diversity litigation movement may have even further to run, on March 5, 2020, a plaintiff shareholder filed yet another board diversity lawsuit, this time against Florida-based healthcare company, OPKO Health, Inc. The lawsuit against OPKO Health’s board can be found here.
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