Current trends in D&O liability and insurance in the United States Kevin M. LaCroix, Executive Vice President, RT Pro Exec and Author, The D&O Diary
Outline Key differences between US and Australian litigation systems. Critical D&O litigation and liability exposures in the US. Important securities litigation trends in the US. Developments in shareholders derivative litigation in the US. Trends in M&A related litigation. Important new developments on the horizon. Important D&O insurance issues and challenges for insurers and for policyholders. 2
Key differences between US and Australian litigation approaches Australia Loser pays model No contingency fees allowed Litigation funding established Developed Plaintiffs Bar United States American rule Each party bears its own costs Contingency fees allowed Litigation funding developing Active entrepreneurial Plaintiffs Bar Suits filed per 100,000 people = 1,542 Suits filed per 100,000 people = 5,806 Opt-out representative proceedings/ closed class Prohibits conduct that is misleading or deceptive or is likely to mislead or deceived Opt-out class actions Prohibits misleading statements made with scienter : intent to deceive, manipulate or defraud or with reckless disregard Trial by jury in civil cases 3
Key sources of US public company D&O liability exposures Regulatory and criminal liability exposures Securities Exchange Commission (SEC), Department of Justice State regulators and states Attorneys General Civil litigation exposures Securities class action litigation Shareholders derivative litigation Individual litigation Shareholders, competitors, vendors, customers, suppliers; and Employees. 4
Securities class action settlements (excluding >$1 bb, IPO laddering, merger objections suits) Year Average (million) Median (million) 2005 $27 m $8.3 m 2006 $26 m $8.0 m 2007 $30 m $8.1 m 2008 $32 m $8.0 m 2009 $42 m $8.5 m 2010 $40 m $11.0 m 2011 $31 m $7.5 m 2012 $36 m $12.3 m 2013 $56 m $9.1 m 2014 $34 m $6.5 m Source: NERA Economic Consulting 5
Securities class action lawsuit filings Year Number of Securities Class Actions 2006 120 2007 177 2008 223 2009 167 2010 176 2011 188 2012 152 2013 166 2014 170 1997-2013 Average 189 Source: Cornerstone Research 6
Number of companies listed in the US Source: Cornerstone Research Year Number of US listed companies 1997 8,190 1998 7,771 1999 7,419 >>>>> >>>> 2011 4,529 2012 4,411 2013 4,416 2014 4,578 7
Percentage of US-listed companies sued Year % of US listed companies sued 2005 3.0% 2006 2.1% 2007 2.9% 2008 3.2% 2009 2.5% 2010 3.1% 2011 3.6% 2012 3.1% 2013 3.4% 2014 3.6% 1997-2013 Average 2.90% Source: Cornerstone Research 8
Number of non-us companies sued in US securities suits Year Number of Non-US companies sued 2006 12 2007 28 2008 28 2009 21 2010 27 2011 62 2012 32 2013 30 2014 34 Average 1997-2013 22 Source: Cornerstone Research 9
Non-US companies: Percentage of US listings, percentage of US securities suits Year % of US listings % of US securities suits 2008 15.7% 12.6% 2009 15.7% 12.6% 2010 15.8% 15.3% 2011 16.4% 32.3% 2012 16.6% 21.0% 2013 16.3% 18.0% 2014 16.3% 20.0% 1996-2014 Average 11.0% Source: NERA Economic Consulting, Cornerstone Research 10
Australian-domiciled companies sued in US securities class actions Year Number of Australian companies sued 2009 0 2010 0 2011 0 2012 0 2013 0 2014 1 (CBD Energy Ltd.) 11
Shareholders derivative lawsuit settlements Year Case Amount (million) 2014 Activision Blizzard $275 m 2013 News Corp $139 m 2015 Freeport McMoRan $137.5 m 2005 Oracle $122 m 2009 Broadcom Corp. (options backdating) $118 m 2008 AIG $115 m 2012 El Paso Kinder Morgan (merger related) $110 m 2012 Source: The D&O Diary Bank of America (Merrill Lynch acquisition) $62.5 m 12
Merger objection litigation Year Deals Litigation % of deals with litigation 2005 183 72 39.3% 2006 232 99 42.7% >>>>>> >>>>>>>> >>>>>>> >>>>>> 2010 150 131 87.3% 2011 128 117 91.4% 2012 121 111 91.7% 2013 80 78 97.5% Source: M. Cain & S. Davidoff, Takeover Litigation in 2013
Cybersecurity: A D&O liability issue, too Target Corporation: Two Shareholders Derivative Lawsuits (D. Minn. 2014) Claims for Breach of Fiduciary Duty for Failure to Take Steps to Protect Company Wyndham Worldwide Corporation: Shareholders Derivative Lawsuit (D.N.J. 2014) Claims for Breach of Fiduciary Duty for Failure to Ensure that Company Had Adequate Safeguards Three Separate Breaches over three year period Company is subject of Federal Trade Commission action 14
Wyndham worldwide: Derivative litigation Following FTC action, shareholder made litigation demand to Wyndham Board; Following investigation, Board declines to pursue lawsuit. Plaintiff filed derivative lawsuit: Wyndham s Board failed to take reasonable steps to assure customer information secure, allowing breach, resulting reputational harm, FTC action. October 20, 2014 (D.N.J.): Dismissal Granted: Defendants refusal to pursue lawsuit was a good-faith exercise of business judgment. 15
Cyber breach securities class action litigation Heartland Payment Systems, Inc. (D.N.J., March 2009) Defendants misrepresented or failed to disclose that the Company s safety and security measures designed to protect consumers financial records and data from security breaches were inadequate and ineffective Case Dismissed: December 7, 2009: Plaintiffs allegations about company s breach disclosure and general security held insufficient. 16
Cybersecurity and Board responsibility SEC Commissioner Luis Aguilar (June 10, 2014) 'Ensuring the adequacy of a company s cybersecurity measures needs to be a part of a board of director s risk oversight responsibilities.' 'Boards that choose to ignore or minimize the importance of cybersecurity oversight responsibility do so at their own peril.' 17
Current 'state of play' for D&O cybersecurity litigation Private Plaintiffs still seeking their best approach. Regulators active, interested in making examples. Disclosure-related issues could lead to both private and regulator action. 18
SEC Dodd-Frank whistleblower Bounty Awards Whistleblowers eligible for Bounty Awards Awarded to whistleblower who first provides original information leading to enforcement actions. For regulatory recoveries over $1 million. Eligible for 10 percent to 30 percent of recovery. Award made from Congressionally created Investor Protection Fund. 14 awards through the end of the 2014 fiscal year Sept. 9, 2014: Largest Ever Award (so far) -- $30 million 19
SEC Dodd-Frank Whistleblower Program (Source: SEC) Fiscal Year Number of reports 2011 334 2012 3,001 2013 3,238 2014 3,620 TOTAL 10,193 20
SEC whistleblower reports from outside the US Fiscal Year 2014: 448 reports (11.5% of total) Number of countries represented: 88 Countries with most reports: UK 70 India 69 Canada 58 China 32 Australia 29 Malaysia (12), Singapore (9), Thailand (6), Hong Kong (5), Indonesia (1), New Zealand (1), Taiwan (1). 21
Litigation reform bylaws Forum selection bylaws 2013: Chevron Case (Delaware Court of Chancery) Fee-shifting bylaws 2014: ATP Tours Case (Delaware Supreme Court) Measures Pending in Delaware General Assembly Oklahoma Legislation Specifying Fee-Shifting for Shareholders Derivative Suits Minimum stake-to-sue bylaws Mandatory arbitration/class action waiver bylaws 22
US D&O insurance marketplace Ample capacity Increasing competition, new entrants Most buyers can expect broad terms and conditions at attractive prices 23
What s HOT in US D&O insurance placements Limits selection challenges Investigative costs (pre-inquiry coverage; entity investigative costs) Separate M&A claim retention Interrelated wrongful Acts/Claims made date JOBS Act/Crowdfunding coverage Whistleblower Excess trigger 24
What s NOT hot in US D&O insurance placements Wage and hour claims coverage Developmental stage biotech companies Troubled commercial banks Bitcoins Electronic cigarettes Medical marijuana/marijuana distribution companies 25
Issues worth watching Climate Change May 2014: NGOs send letters to energy industry, D&O insurers 'the threat of future civil or criminal litigation could have major implications for D&O liability insurance coverage.' Environmental Derivative lawsuit against Duke Energy s Board Northstar Aerospace (Ontario): Board members held liable for bankrupt company s clean-up costs 26
Issues worth watching (continued) Social media Material nonpublic information? Incomplete disclosures? (140 Characters = Omission?) Litigation funding Important factor in Canada, Australia, UK Increasingly important in US 27
The D&O Diary blog 28
The D&O Diary blog http://www.dandodiary.com 29
Contact information Kevin M. LaCroix RT ProExec 2000 Auburn Drive, Suite 200 Beachwood, Ohio 44122 USA +1(216) 378-7817 kevin.lacroix@rtspecialty.com This presentation is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this presentation. 30