D&O Insurance to Fund Entire "Largest Ever" $139 Million News Corp. Derivative Suit Settlement

Transcription

1 Page 1 of 5 The D & O Diary Posted at 4:02 AM on April 23, 2013 by Kevin LaCroix D&O Insurance to Fund Entire "Largest Ever" $139 Million News Corp Derivative Suit Settlement In what the plaintiffs lawyers claim to be the largest derivative lawsuit settlement ever, the parties to the News Corp shareholder derivative litigation have agreed to settle the consolidated cases for $139 million The company also agreed to tighten oversight of the company s operations and to establish a whistleblower hotline, as well as other corporate therapeutics The cash portion of the settlement is to be funded entirely by D&O insurance The settlement is subject to court approval The parties April 17, 2013 memorandum of understanding regarding the settlement can be found here The plaintiffs lawyers April 22, 2013 press release in which, among other things, the plaintiffs lawyers state that the settlement is the largest cash derivative settlement on record can be found here The lead plaintiffs press release can be found here As reflected in the press releases as well as is stated in the many media reports about the settlement (refer for example, here), the entire cash portion of the $139 million settlement is to be funded by D&O insurance The first of the lawsuits against the News Corp board was filed in Delaware Chancery Court in March 2011, asserting claims in connection with the company s $675 million acquisition of Shine Group, Ltd, a UK-based television production company owned by Elizabeth Murdoch, daughter of News Corp Chairman Rupert Murdoch Elizabeth Murdoch allegedly made $250 million in the acquisition Later complaints expanded on claims relating to the Shine Group acquisition and added extensive additional claims seeking to hold the company s directors accountable for the scandal surrounding the company s use and attempted cover-up of illegal reporting tactics of some News Corp journalists in the UK The various cases were later consolidated in the Delaware Chancery Court In their Third Amended Consolidated Complaint (here), the plaintiffs alleged that the company s board s oversight of the company s affairs represented a textbook example of failed corporate governance and domination by a controlling shareholder The complaint alleges that for years the Board has condoned Murdoch s habitual use of News Corp to pursue his quest for power, control and political gain and to enrich himself and his family members, at the Company s and its public shareholders expense The complaint alleges that the ongoing scandals have not only harmed the company s reputation and cost it millions of defense costs and other expenses, but also that the company s share price is artificially depressed because of the negative association of the company with Murdoch

2 Page 2 of 5 The defendants filed a motion to dismiss the consolidated amended complaint The parties argued the motion to dismiss on September 19, 2012 (refer here) While the dismissal motion was pending, the parties engaged in mediation that ultimately resulted in settlement The plaintiffs lawyers claim that this is the largest cash shareholders derivative settlement ever, and I am certainly in no position to dispute that I have been tracking derivative suit settlements for years There have been several shareholder derivative suit settlements that were nearly as large as the News Corp settlement but as far as I can tell none that were quite as big: The El Paso/Kinder Morgan merger-related derivative suit settled in September 2012 for $110 million (refer here) In 2005, the Oracle derivative suit settled based on the payment by Oracle CEO Larry Ellison of a total of $122 million (refer here and here) In September 2009, the parties to the Broadcom Corp options backdating-related shareholders derivative suit agreed to settle the case, as to most but not all of the defendants, for the D&O insurers agreement to pay $118 million (as discussed here) In September 2008, the parties to the 2002 AIG shareholders derivative lawsuit agreed to settle the case for a payment of $115 million (of which $855 million was to paid by D&O insurance) in what was touted at the time as the largest Delaware Chancery Court derivative lawsuit settlement (about which refer here) These settlements are all dwarfed by the $2876 billion judgment entered in June 2009 against Richard Scrushy in the HealthSouth shareholders' derivative lawsuit in Jefferson County (Alabama) Circuit Court, but that astronomical judgment represents its own peculiar point of reference, like some odd parallel universe It also was of course a judgment following trial rather than a settlement Another peculiar point of reference is the $1262 billion judgment that Chancellor Leo Strine entered in October 2011 the Southern Peru Copper Corporation Shareholder Derivative Litigation (about which refer here) That case also represents its own form of litigation reality, and it too represents a derivative suit judgment following trial, rather than a settlement Another derivative lawsuit resolution that is worth considering in the context of the largest ever question is the December 2007 settlement of the UnitedHealth Group options backdating-related derivative lawsuit As discussed here, the lawsuit settled for a total nominal value of approximately $900 million However, while the press reports at the time described the settlement as the largest derivative settlement ever, the value contributed to the settlement consisted of the surrender by the individual defendants of certain rights, interests and stock option awards, not cash value in that amount

3 Page 3 of 5 Aside from the question of the News Corp derivative suit settlement s sheer size, there is also the fact that the settlement was funded entirely by D&O insurance Given the amount of the settlement, the settlement costs undoubtedly were distributed across the several carriers that participated in News Corp s D&O insurance program This large settlement not only represents a serious and unwelcome development for the specific carriers involved but it also represents a potentially unwelcome event for the D&O insurance industry in general, for what it might represent as far as the severity potential of shareholders derivative litigation In the past, going back ten years or so, shareholders derivative suits typically did not present the possibility of significant cash payouts for D&O insurers, at least in terms of settlements or judgments The cases did present the possibility of significant defense expense and also of the possibility of having to pay the plaintiffs attorneys fees, but by and large there was usually not a cash settlement component As the significant examples above show, that has clearly changed in more recent years This trend gained particular momentum with the options backdating scandal Many of the options backdating cases were filed as derivative suits rather than as securities class action lawsuits (largely because the options backdating disclosures did not always result in the kinds of significant share price declines required to support a securities class action lawsuit) Many of the options backdating cases settlements included a cash component, and as illustrated by the Broadcom case mentioned above, some of the options backdating derivative suit settlements included very substantial cash components The inclusion of a significant cash component has also been a feature of the settlements of some of the merger objection suits that have been filed as part of the current upsurge in M&A-related lawsuit that have been filed in recent years, as illustrated by the El Paso settlement mentioned above This upsurge in the number of derivative suit settlements that include a significant cash component can only be viewed with alarm by the D&O insurance industry For many years, D&O insurers have considered that their significant severity exposure consisted of securities class action lawsuits The undeniable reality is that in at least some circumstances, derivative suits increasingly represent a severity risk as well And the settlement amounts themselves represent only part of the D&O insurers loss costs The D&O insurers also incur millions and possibly tens of million of defense cost expense in these derivative suits I can only imagine that in the News Corp derivative suit, for example, that the cumulative defense expense was in the millions of dollars An even more concerning aspect of the rise of significant cash settlements in derivative cases for D&O insurers is that these settlement amounts represent so-called A Side losses That is, the losses are paid out under the portion or the D&O insurance policy that provide insurance for nonindemnifiable loss A derivative suit settlement obviously is not indemnifiable, because if it were to be indemnified, the company s would make the indemnity payment to itself For the traditional D&O insurance carriers, there is perhaps no particular pain associated with the fact that the loss is paid under the Side A portion of the policy, as opposed the other policy coverage (that is, the Side B or Side C coverage that are more typically called into play) But these days many companies carry --in addition to their traditional D&O insurance that includes all three coverages (that is, they include Sides A, B and C coverage) -- additional layers of excess Side A insurance This excess Side A insurance would not be available to provide funding for, say, a securities class action lawsuit, at least if the corporate defendant were solvent, because the settlement of a securities class action lawsuit is an indemnifiable loss to which coverages B and C might apply but to which coverage A does not

4 Page 4 of 5 apply However, the Side A coverage does apply to a shareholders derivative lawsuit settlement because the settlement amount represents a nonindemnifiable loss So while a jumbo securities class action settlement typically would not trigger coverage under an Excess Side A policy, a jumbo derivative settlement would trigger the Excess Side A policies The question for the carriers providing this type of excess Side A insurance is whether or not the premiums they are getting are adequate to compensate them for the risks of the kinds of losses associated with large cash shareholders derivative settlements By and large, the carriers providing this insurance consider that their most significant exposure is related to claims in the insolvency context But as this settlement and the Broadcom settlement mentioned above demonstrate, it is also possible that the Side A insurance can be implicated in a jumbo derivative settlement as well as in a settlement in the insolvency context The increasing risk of this type of settlement represents a significant challenge for all D&O insurers, but particularly for those D&O insurers concentrating on providing Excess Side A insurance Those insurers will have to ask how they are to underwrite the risks associated with these kinds of exposures, and how they are to make certain that their premiums adequately compensate them for the risk Dan Fisher has an interesting April 22, 2012 article in Forbes (here) discussing the questions associated with the funding of this type of settlement exclusively through D&O insurance Finally, as Alison Frankel points out in an April 22, 2013 post on her On the Case blog (here), the News Corp settlement includes what she describes as an historic concession : in the settlement, News Corp agreed to disclose its campaign and political action committee contributions to shareholders and its lobbying and Super PAC spending to the board Frankel quotes sources to the effect that the News Corp case represents the first time that a derivative lawsuit has been used as a vehicle to obtain enhanced disclosure of corporate political spending Trackbacks (0) Comments (5) Donna Ferrara, Esq - April 24, :16 AM Not to be a nit picker, but I keep reading about how derivative settlements are "non-indemnifiable" Granted, the Delaware statute is a little hard to read, with all those words printed so close together, but Section 145 (b) iseems to say that even if a person has been adjudicated liable in a derivative action, he or she may still ne indemnified if "the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper" In other words, if the settlement is approved by the court,the person can be indemnified In the case of directors, Section 102 is even more generous, allowing them to be protected from almost all financial liability for breach of the duty of care

5 Page 5 of 5 Joe Monteleone - April 24, :22 AM I must respectfully disagree with my friend Donna Section 145 (b) only applies to "expenses", and not to judgment or settlement amounts Section 145 (a) is the controlling provision, which provides that "[a] corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) " Section 102 is interesting, and I assume that Donna is contemplating specifically Section 102 (b) (7) As she notes, it applies to directors only I will defer to Delaware practitioners or others more knowledgeable than I in this area, but I would think that somehow Section 145 (a) trumps this If not, Donna raises an issue that may need to be further explored Donna Ferrara, Esq - April 24, :57 AM Joe, that is one way to look at it, but 145(b) which addresses derivative actions, refers to expenses (including attorneys fees) relating to defense "and settlement", not just attorneys fees, and not just defense It leaves out judgments, raising a whole other issue in that instance Delaware case law hasn't much on the subject, the last time I looked As for 145(a) or (b) trumping 102, I think the legislative intent was the opposite (I may be wrong) I believe Section 102 was enacted after the Revlon case made directors nervous about the state of Delaware law My point is that it's too easy to simply say, "Oh that's 'non-indemnificable'", when there is at least a colorable argument that it is not It would be good to hear from the deans of the Delaware corporate bar on this After all, we're just humble insurance lawyers Donna Ferrara, Esq - April 25, :44 AM For those of you who remember 2004, Xerox indemnified six officers and directors in a derivative action, despite the protests of the SEC Here is the link to the 8K I doubt this is the only time, just the most publicized Guest - May 6, :28 PM Donna, based on your link and a quick google search, it looks like Xerox indemnified its D&Os for settlement payments for an SEC action, not a derivative action I don't know of any examples of companies actually paying a derivative settlement It seems fairly plain under 145(b) that companies are not permitted to pay settlement or judgment amounts in derivative actions (especially when you compare the language of 145(b) to 145(a)) Kevin M LaCroix 2000 Auburn Drive, Suite 200, Beachwood, OH 44122, Phone: (216)