There has been no broad-based effect on the D&O market from either a capacity or rates perspective, nor on the claims perspective from Halliburton Co. v. Erica P. John Fund, according to Brenda Shelly, managing director, Marsh FINPRO.
In June the U.S. Supreme Court issued a ruling that will make it marginally more difficult for individuals to get certification for class-action lawsuits that allege securities fraud. Thanks to the ruling, defendants can now show earlier in the legal process there was no fraud related to the stock price.
Kevin LaCroix, executive vice president of RT ProExec, suggested the case – “in which both sides claim victory” – could have an impact on insurance costs because there could be more talks of early settlement.
Shelly and LaCroix, as well as Paul Rodriguez, senior vice president of corporate solutions at Swiss Re Financial Services Corp., were the panelists for a July 24 Advisen webinar.
Moderated by Jim Blinn, executive vice president and principal at Advisen, the webinar focused on D&O trends and how they could be impacted by the ruling in the Halliburton case, bylaw revisions, SEC guidance on cyber disclosures, and tax inversion.
There is a coverage development related to the study component of the Halliburton ruling. Both AIG and Zurich have released event-study endorsements, meaning that clients of these insurers can engage an expert witness to provide an event study without having these costs be applicable to any retention that might still remain at the class-certification stage. Other insurers may be looking at similar moves.
While the Halliburton case was an attempt at reform through a test case, reform is being undertaken in other ways as well. In contrast to test cases and legislative action, bylaw revision is a relatively unused method of litigation reform. The three areas that are getting attention vis a vis bylaw revision are: legal-fee shifting; exclusive forum, and mandated arbitration clauses with class action. “Because this is a new approach, it’s hard to predict,” said LaCroix.
Nevertheless, he expressed some optimism around the forum-selection bylaw activity. He pointed out that “it’s targeted toward the litigation abuse that is the curse of multijurisdiction legislation that was most evident in the M&A context.”
Companies being forced to litigate on multiple fronts would often result in settlements of what were largely seen as nuisance suits with suspect motivation. LaCroix pointed out that forum selection has been validated by the courts in Delaware and has gotten widespread acceptance in other jurisdictions.
“As a result of that judicial acceptance we’ve seen a number of companies adopt their version of forum selection bylaws,” said LaCroix.
The exclusive forum bylaw is the one that has been the most helpful to and has caught the attention of underwriters, according to Rodriguez. “We have a level of comfort with Delaware that adds to our really liking to see this continue to be upheld,” he said.
The exclusive-forum bylaw is also attracting a lot of interest on the client side, according to Shelly.
It’s a different matter with the other two bylaws. “I think most clients are waiting to see if a fee-shifting bylaw will even be legal,” Shelly said.
Fee shifting is simple in concept: an unsuccessful shareholder claimant has to pay its adversary’s legal fees. But it also flies in the face of what is known as “the American rule” – that each party pays its costs.
“‘Radical’ is not too strong a word for such a shift,” said LaCroix. “It could be transformative of the way shareholder litigation goes forward in our shareholder environment.”
While it has received some support including by way of the Delaware courts, it also has its opponents. Because decisions on the issue are likely to be withheld until 2015, few companies are acting to adopt such bylaws.
The final bylaw — mandated arbitration on class action – is not a topic of “consistent discussion among clients now,” According to Shelly. She pointed out that there is considerable support in U.S. Supreme Court cases for mandated arbitration, “the SEC and the court may be at odds on this right now.” The SEC has pushed back on companies that have tried to incorporate mandatory arbitration into their bylaws. “We’re unlikely to see mandatory arbitration apply to securities lawsuits,” said LaCroix. “Still, it’s one of those things that there are enough people pushing for that we may see action on it.”
Despite the varying degrees of uncertainty around the three bylaws, Rodriguez noted that all three have the potential to reduce costs. “As underwriters we will look at these bylaws more than we will others,” he said.
If the bylaws have the potential to reduce costs, there is a real threat of additional costs coming from cyber-related breaches. While litigation has been minimal compared to the number of instances of cyber breach, that could soon end. “It may be the rare trend you see emerging,” said Rodriguez. The panelists observed that in cases of cyber breach, there are any number of aggrieved parties, lawsuits of various kinds – not just D&O-related ones – and reputational damage, with the Target and Wyndham cases being cited. They agreed that it is the topic most on the minds of the industry as a whole – not just underwriters.
Blinn asked the panelists if the fact that the SEC has opened up several investigations on the cyber front means more litigation costs. Shelly said that with the decline of credit-crises cases and any other hot-button issue on which to focus everyone’s attention, “there could be an advent of exposure that replaces this from an enforcement perspective.” She also stated that the SEC has said that its guidance does not define a company’s obligations. Further, because the SEC hasn’t decided specifically what to ask for, “there is a lot for companies to look at” with regard to cyber breaches. “Clients will work to meet the guidelines, but it could mean more work from a civic litigation perspective.”
LaCroix predicted that the SEC will likely make an example of some company vis a vis cyber exposure: “There are indications they think companies are not taking cyber exposure seriously enough.” The breach itself is not the only issue; there is also attention being paid to the circumstances around the disclosure of the breach to both their customers and to the investing public.
The final issue the panelists discussed was tax inversion – where U.S. companies merge with a non-U.S. company and changes its domicile and tax profile. While tax inversion is a relatively well-established practice, it has been getting considerable attention lately both because of a flurry of recent activity, particularly in the pharmaceutical industry, and because both Congress and the White House have taken up the issue. LaCroix said voters can expect it to be an issue in the upcoming mid-term elections.
From a D&O claim perspective, Shelly pointed out that there is the possibility of companies being sued for pursuing the strategy, just as there is for companies being sued for not pursuing it. “It’s an area that needs to be monitored both from legislation and an activity perspective,” she said. There hasn’t yet been a trend around claims – she instead described a “cluster of activity” – but she noted that because there is a trend around the inversion activity itself, lawsuits could follow.
“My sense is that even potential legislation around curbing it could encourage more [tax inversion activity] in the meantime.” And should legislation pass, companies could find themselves facing lawsuits if they missed out on the window to pursue the tax advantages. “When there’s a transaction there is an opportunity for an objection,” she observed. And possibly there is opportunity for objection even if there is no transaction.
Patricia O’Connell writes for the Advisen Risk Network. She has more than 15 years of experience writing about a variety of business subjects, including strategy, the C-Suite, and management. She is the former news editor at Businessweek.com, where she oversaw coverage for the daily web site.
