Directors and Officers (D&O)
April 01, 2020
There are two commercial D&O client types: public and private. The D&O policies based on company structure are quite different in the approach and scope of coverage. The public company D&O policy is written primarily to protect the directors, officers and corporate entity against shareholder securities claims. The private company policy is best described as a comprehensive package policy that typically provides employment practices, fiduciary liability and fidelity coverage in addition to D&O liability.
The two policies share a bodily injury exclusion built into the base forms and the absence of an affirmative pandemic exclusion.
COVID-19 and the Public Company
If a public company fails to prepare for pandemic threat, or fails to adequately disclose critical financial information and/or offers “misleading statements” regarding COVID-19, and suffers financial loss, one can expect D&O litigation. To date, there are two separate securities class actions that have been filed directly as a result of COVID-19.
- On March 12, 2020, an Inovio Pharmaceuticals shareholder filed a securities class action lawsuit against the company and its CEO based upon the CEO’s misleading statements related to the company’s development of a COVID-19 vaccine.
- On March 12, 2020, a plaintiff shareholder filed a securities class action lawsuit against Norwegian Cruise Line Holdings, Ltd. alleging that the company was employing misleading sales tactics related to the outbreak.
Although we anticipate some securities class action activity as a result of COVID-19, it is difficult to conceive that plaintiffs’ attorneys will commence an action against one company whose stock price has dropped when the universe of publicly traded companies have also experienced a share price reduction. Nonetheless, the general consensus is there will be more shareholder lawsuit activity. In this same regard, publicly traded companies may also experience a wave of shareholder derivative lawsuits focused on a) alleged misleading statements about the financial condition of the company, or b) management’s failure to effectively manage the crisis. Early indications suggest that such legal actions are a strong possibility. Plaintiff law firms and shareholders are closely monitoring the way in which a company’s management team communicates its path forward during these unprecedented times. One theory of liability could be that a company’s directors and officers failed to exercise reasonable business judgment in forging a plan to thwart pandemics or failing to task management with executing strategies to address such uncertainty.
In addition to the traditional securities class actions, given issues surrounding cybersecurity vulnerabilities with a now predominantly remote workforce, directors and officers may be susceptible to claims of breaches of fiduciary duties arising out of their failure to adequately protect a company’s network (recall that cyber risk has become a D&O risk as well) thereby making the company fair game for a host of different types of cyberattacks. Further, while lawsuits are expected, regulatory bodies such as the Securities & Exchange Commission are closely watching to see if public companies are in compliance with disclosure guidelines and practicing transparency as to earnings projections, financial information and material changes, while communicating with shareholders to keep them continuously aware of the company’s financial and operational condition. This heightens the risk of investigations and enforcement actions by the SEC and other government agencies.
There are many questions that a public company board must now confront: What does the day after tomorrow look like? How do we restore shareholder value post COVID-19? What do we know now that we didn’t know then and how do we effectively manage forward? What are our contingency plans should there be another incident in the future?
COVID-19 and the Private Company
The impact of COVID-19 on Wall Street is clear, but perhaps more devastating is the impact it is having, and will have, on Main Street. There is a vast array of exposures a private company faces that have now been magnified by this global pandemic. Similar to a public company, private companies bear the same burden of action and inaction in this time of crisis. Boards of directors of private companies are vulnerable to shareholder derivative lawsuits and other claims by stakeholders for breaches of fiduciary duties resulting from their failure to act or failure to disclose vital information to their shareholders. Private companies are also concerned with cybersecurity and the risks accompanying failures in proper planning for remote working, which could lead to claims against senior leadership and the board of directors.
Boards of directors for private companies need to continuously evaluate whether their response plans for this pandemic risk are working, and if not, make changes based on the information available to date. Any and all contingency plans have to be assessed so that stakeholders and regulators cannot claim that all options were not considered. Communication with employees, investors and clients must be frequent and meaningful because the company’s dialogue with those financially invested groups will be scrutinized for accuracy and timeliness.
A company’s failure to communicate its financial condition, strategies and challenges resulting from COVID-19 may well lead to regulatory investigations and enforcement actions, including alleged violations of health and safety laws, consumer protection laws and employment law (discussed below). Further, private companies may experience an increase in commercial litigation or claims from customers, vendors/suppliers, and competitors. Although current commentary regarding claims and exposures for private companies is speculative, the current environment is such that these companies need to be sufficiently prepared for significant claims activity and/or litigation from the fall-out of the coronavirus.
Similar to public companies, boards of directors and C-suite leaders of private companies are also confronted with questions such as the length of time it will take for their business to get back to “normal." They may be asked to provide estimated future projections of the financial status of the company. Regardless of what is asked of them, private companies need to be prepared with reasonable responses and a plan for mitigating losses and controlling risk.