out from a rush of merger objection suits, which flowed out of
Delaware state courts into federal courts.
Why? In early January 2016, a Delaware state court issued the
Trulia decision [Trulia, Inc. Stockholder Litigation, C.A. No.
10020-CB (Del. Ch. Jan. 22, 2016)], which put a boot on Delaware state court friendliness to ‘disclosure only’ settlements. Trulia
has been described as representing the “court’s intent to . . . reject
settlements of stockholder class actions when the settlement con-
Following Trulia, the migration of securities class actions to the
possibly friendlier halls of federal courts was significant, but did
not wholly explain the storm of filings. Nor did it exactly assure
that federal courts would wave open the slamming door of Delaware state courts.
The epidemic of securities filings led to industry-wide examination of additional causes. Other contributing causes have been
debated, discussed and notionally agreed, providing insights regarding some prominent shifts underway. First, the plaintiffs’ bar
goes where the oxygen is. There is considerable agreement that
as financial crisis claims were resolving, pursuit of D&O claims
represented a new artery of income for firms. Douglas Greene, of
D&O Discourse, thinks smaller firms want a piece of the action,
and are whetted to pounce on companies making classic red-flag
announcements — such as auditor resignations.
Other theories include the continuation of IPO-related litigation, increased regulatory enthusiasm for SEC whistleblower tips
and enforcement actions, and emerging headline and tech losses
where they can be tethered to D&O responsibilities.
Watching the current
Water follows the path of environmental opportunity and so did
the D&O claims of 2017. However, what happened in 2017 won’t
stay in 2017. Brand new technology and headline events demon-
strate that these are the fluxes that will drive new D&O claims.
Key examples include cyber breaches, new technology and sex-
ual harassment issues.
Cyber breach may be the most prominent developing risk for
D&O carriers and their insureds. It is a risk in a state of rapid
change, making it profoundly more difficult for directors and
officers to identify, clarify and comply. Corporate cyber responsibility is even more challenging because it will be an evolving
standard for years to come.
Cyber and data breach issues have not yet been the D&O albatross that we expected, but 2018 may change that. Two key types
of claims could prove bothersome in cyber parlance: First-party
and third-party claims. A securities class action filed because of
a cyber breach constitutes a third-party case. Third-party cases
have not set strong hooks in the D&O world – yet. This is because
existing cyber breaches have not resulted in stock drops sufficiently significant to support a classic securities claim.
No one thinks that third-party cyber breach cases will go away;
it seems only a matter of time before a stock drop rings the bell
for a successful case. Juggling moving targets of state-imposed,
SEC-based and court-developed standards for cyber responsibility will potentially lay the groundwork for more successful claims
against directors and officers.
More distracting for D&O carriers and their insureds, are
first-party claims for breach damages to the corporation itself.
As cyber breaches have become daily news, some states, such as
New York, have already attempted to define D&O standards of
care for cyber security. These standards, however, are somewhat
less standard than they are brand new, and will likely change
over time. The mutability of early standards will make it difficult
for directors and officers to ensure their own compliance – thus
buffering themselves from D&O claims. The New York standards
pointedly require senior officers to approve cyber policies and
certify compliance with the regulations. The SEC is also chiming
in by warning public companies that it intends to investigate cyber practices with more interest.
In like fashion, headline news events, such as “The Weinstein
Effect,” are eddying into the D&O landscape. The Weinstein case
and related matters span across a constellation of industries and
present a universalizing doublet of a problem at once old and new.
The concept of sexual harassment exposure is a familiar liability
issue, but it has detonated with a mass of public announcements.
Early disclosures began a domino effect across many businesses.
A headline issue can cause a chain reaction that percolates into
discrete allegations of D&O misconduct.
The 20th Century Fox harassment settlement of 2017, was a
shareholders derivative case asserting that actions of management
caused financial harm to the company. The sexual harassment issue presents a unique supplemental exposure for D&O carriers
offering employment liability coverage as part of a D&O package.