Navigating today’s complex risk environment can be a monumental task. Steve Shappell, Alliant Claims & Legal, spearheads Executive Liability Insights, a monthly review of news, legal developments and information on executive liability, cyber risk, employment practices liability, class action trends and more.
FEATURED ARTICLE
MCDONALD’S 2.0: COURT HOLDS THAT A BOARD OF DIRECTORS CANNOT BE LIABLE FOR A BREACH OF THE DUTY OF OVERSIGHT
In re McDonald’s Corporation Stockholder Derivative Litigation, No. 2021-0324-JTL (Del. Ch. Mar. 1, 2023)
This decision comes on the heels of a ruling by the Court of Chancery that officers, as well as directors, can face liability for Caremark claims (Breach of Duty of Oversight). In this follow-on opinion, the court turned its focus as to whether Shareholders adequately pled derivative claims against the Board of Directors and determined they had not.
In This Issue:
MCDONALD'S 2.0: COURT HOLDS THAT A BOARD OF DIRECTORS CANNOT BE LIABLE FOR A BREACH OF THE DUTY OF OVERSIGHT
In re McDonald’s Corporation Stockholder Derivative Litigation, No. 2021-0324-JTL (Del. Ch. Mar. 1, 2023)
This decision comes on the heels of a ruling by the Court of Chancery that officers, as well as directors, can face liability for Caremark claims (Breach of Duty of Oversight). In this follow-on opinion, the court turned its focus as to whether Shareholders adequately pled derivative claims against the Board of Directors and determined they had not.
Read More >>
ILLINOIS COURT ALLOWS RESCISSION CLAIM IN COVERAGE ACTION TO MOVE FORWARD
Call One Inc. v. Berkley Ins. Co., No. 21-cv-00466, 2023 U.S. Dist. LEXIS 21757 (N.D. Ill. Feb. 9, 2023)
In an insurance coverage dispute, an Illinois court found that an insurance carrier plausibly alleged a claim for rescission and allowed the action to move forward on that basis.
Read More >>
ERISA EXCESSIVE FEE CLASS ACTION CASE DISMISSED
Probst v. Eli Lily and Co., No. 1:22- cv-01106 (Dist. Ind. Feb. 3, 2023)
A pharmaceutical sales representative (the “Employee”) initiated a proposed class action case against her employer (the “Company”), its board of directors, and the Company’s employee benefit plan committee, alleging that the Company violated their fiduciary duties under the Employee Retirement Income Security Act (“ERISA”) by allowing the Company’s retirement plan (the “Plan”) to be subject to excessive record keeping fees.
Read More >>
FEDERAL COURT ALLOWS RECISSION AGAINST INSURANCE COMPANY
Certain Underwriters at Lloyd’s, London v. Anchor Insurance Holdings, Inc., No.: 8:21-cv-370-TPB-AEP, 2022 U.S. Dist. LEXIS 227925 (M.D. Fla. Dec. 19, 2022)
An insurance company requested a federal court to declare that it had no obligation to defend or indemnify the insured, also an insurance company, in lawsuits filed by several of its investors. Specifically, the suits sought rescission of multimillion-dollar investments.
Read More >>
A SPAC RUNOFF POLICY COVERS DEFENSE COSTS OF TARGET COMPANY'S FORMER DIRECTORS & OFFICERS
Clover Health Investments Corp. et al. v. Berkley Insurance Company et al., No. N22C-06-004 MMJ (Del. 2023)
Following its merger with a Special Purpose Acquisition Company (the “SPAC”), a Health Insurance Company sought coverage for a series of claims against its directors, including a securities class action and a shareholder derivative lawsuit.
Read More >>
NON-PROFIT ALLEGES OIL COMPANY HAS DUTY TO MANAGE CLIMATE CHANGE RISKS
A non-profit filed the world’s first derivative action alleging mismanagement of climate risks against a multi-national oil and gas company (the “Company”). The newly filed complaint in the High Court of England asserted that the Company and its Board of Directors (the “Board”) failed to adopt and implement an energy transition strategy in compliance with the Paris Agreement (the “Agreement”), in violation of the UK Companies Act.
Read More >>
FEDERAL APPELLATE COURT SUPPORTS COVERAGE IN A FUNDS TRANSFER FRAUD CASE
Valero Title Inc. v. RLI Ins. Co., No. 22-20155, 2023 U.S. App. LEXIS 2571 (5th Cir. Feb. 1, 2023)
An escrow agent (the “Company”) sued its insurance carrier (the “Carrier”) following a coverage denial that arose out of fraudulent payment instructions that the Company received to complete a loan transaction.
Read More >>
NO COVERAGE UNDER D&O RENEWAL POLICY FOR "RELATED" BANKRUPTCY TRUSTEE CLAIMS
PNI Litig. Trust v. Nat’l Union Fire Ins. Co. of Pittsburgh, No. 21-21146, 2023 U.S. Dist. LEXIS 25672 (S.D. Fla. Feb. 14, 2023)
Shareholders filed a class action complaint against a company and its directors and officers alleging various breaches of fiduciary duty claims as well as allegations of improper self-dealing by the CEO. In a subsequent filing, the shareholder filed a complaint that named individuals and added allegations of corporate waste.
Read More >>
VALIDATING BILLION OVERISSUED SHARES FOLLOWING DE-SPAC MERGER WAS EQUITABLE, SAID DELAWARE COURT
In Re Lordstown Motors Corp., C.A. No. 2023-0083-LWW (Del. Ch., Feb. 21, 2023)
A Delaware court validated more than a billion publicly traded shares of blank-check companies or SPACs.
Read More >>
SHOULD EMPLOYERS PAY OVERTIME COMPENSATION TO EMPLOYEES EARNING SIX FIGURES SALARIES? WHY NOT, SAYS THE SUPREME COURT
Helix Energy Sols. Grp., Inc. v. Hewitt, No. 21-984, 2023 U.S. LEXIS 944 (Feb. 22, 2023)
A worker earning $200,000 annually was entitled to overtime compensation under the Fair Labor Standard Act (the “FLSA”), according to the Supreme Court of the United States (the “SCOTUS”).
Read More >>
COURT RULES THAT AN INSOLVENCY EXCLUSION PROVIDES A COMPLETE BAR TO COVERAGE
Quality Health Plans of New York Inc. v. Ironshore Specialty Ins. Co., No. CV 20-3563, 2023 LEXIS 32453 (E.D. NY Feb. 27, 2023)
In a matter involving a dispute over healthcare services rendered, a New York court sided with an insurance company (the “Carrier”) and barred coverage for a Company (the “Insured”) under an Insolvency Exclusion.
Read More >>
CYBER CORNER
Click to read the following cases:
- COURT RULES CONSUMERS SHOULDN’T HAVE TO TURN OFF THEIR PHONES TO MAINTAIN PRIVACY
- COURT GRANTS INSURER THE RIGHT TO RECOUP DEFENSE COSTS ABSENT EXPRESS POLICY PROVISION
- WAR EXCLUSION ON THE DOCKET IN NOTPETYA CYBER ATTACK CLAIM
- INVASION OF PRIVACY CLAIMS REQUIRE SPECIFICITY
- FEDERAL COURT TOSSES SHAREHOLDER COMPLAINT AGAINST CYBERSECURITY FIRM
- NEW YORKERS, BEWARE OF DATING CYBER-STALKERS
- ILLINOIS SUPREME COURT RULES THAT A CAUSE OF ACTION UNDER BIBPA ACCRUES EVERY TIME BIOMETRIC INFORMATION IS COLLECTED OR DISCLOSED
Read More >>
EMPLOYMENT CORNER
Click to read the following cases:
- CALIFORNIA INSURANCE CODE BARS COVERAGE FOR RETALIATION CASE
- CALIFORNIA LAW REQUIRING MANDATORY EMPLOYMENT ARBITRATION AGREEMENTS DEEMED UNENFORCEABLE
- EPL CARVE-BACK IN INSURED V. INSURED EXCLUSION PRESERVES COVERAGE FOR ADR PROCEEDINGS
- IMPLICIT CONTROL OF PROPERTY BY EMPLOYEE IS AN UNLAWFUL TAKING UNDER CRIME POLICY
Read More >>
SEC CORNER
Click to read the following cases:
- NEW REGULATIONS SET FORTH BY THE SEC DIVISION OF EXAMINATION
- SEC PROPOSES AMENDMENTS TO CUSTODY RULES
- MARCH 2023 NOTEWORTHY ENFORCEMENT ACTIONS FILED
- MARCH 2023 NOTEWORTHY SETTLEMENTS AND JUDGMENTS
Read More >>
SHAREHOLDER CORNER
Click to read the following cases:
- MARCH 2023 SECURITIES CLASS ACTION FILINGS
Read More >>
MCDONALD’S 2.0: COURT HOLDS THAT A BOARD OF DIRECTORS CANNOT BE LIABLE FOR A BREACH OF THE DUTY OF OVERSIGHT
In re McDonald’s Corporation Stockholder Derivative Litigation, No. 2021-0324-JTL (Del. Ch. Mar. 1, 2023)
This decision comes on the heels of a ruling by the Court of Chancery that officers, as well as directors, can face liability for Caremark claims (Breach of Duty of Oversight). In this follow-on opinion, the court turned its focus as to whether Shareholders adequately pled derivative claims against the Board of Directors and determined they had not. As a result, all claims against the Directors were dismissed and the litigation may continue with respect to a lone Officer.
Shareholders identified a series of events, including a wave of EEOC filings, a ten-city employee strike and a senate sponsored investigation into company-wide allegations of sexual harassment and misconduct. The Shareholders alleged that a pattern of red flags put the directors on notice of a threat to the Company. The complaint went on to allege that for years, the Company’s directors ignored these red flags to the detriment of the Company and its value.
The court noted that to prevail on a duty of oversight claim, Shareholders must sufficiently allege facts to support an inference that the directors knew about such red flags and yet consciously ignored the problem. The court stated that the facts pled must contain more than statements that the directors’ “response was weak, inadequate, or even grossly negligent.” In the subject case, Shareholders pled facts to support an inference that the Directors knew about a sexual harassment problem at the Company and further, that the “Global Chief of People,” himself, engaged in sexual misconduct on more than one occasion.
Despite these apparent “bad facts,” the court concluded that Shareholders failed to state a claim for a breach of the duty of oversight against the Directors. The court highlighted that the Directors sought to combat the toxic culture by creating a Strategy Committee which hired outside consultants, revised Company policies, implemented new training programs, and provided additional support to establish a renewed commitment to a safe and respectful workplace. Thus, the court reasoned that it was impossible to draw a pleading-stage inference that the directors acted in bad faith and held that the present allegations do not support a reasonably conceivable claim against the director defendants for breach of the duty of oversight.
ILLINOIS COURT ALLOWS RESCISSION CLAIM IN COVERAGE ACTION TO MOVE FORWARD
Call One Inc. v. Berkley Ins. Co., No. 21-cv-00466, 2023 U.S. Dist. LEXIS 21757 (N.D. Ill. Feb. 9, 2023)
In an insurance coverage dispute, an Illinois court found that an insurance carrier plausibly alleged a claim for rescission and allowed the action to move forward on that basis.
A telecommunications company (the “Company”) had a long history of failing to collect certain taxes owed by its customers, including during the negotiation and purchase of its professional liability insurance. After the professional liability policy was bound, an employee notified the managing director of sales and other senior leadership of the tax-collection issues. Subsequently, the members of the Company’s senior leadership discovered the failure to collect certain taxes when they retained an accounting firm to review the company’s records in furtherance of a sale. Years later, after a decade of continuous failures to collect taxes, the Illinois Attorney General (“OAG”) served a subpoena on the Company requesting documents relating to its collection and payment of Illinois taxes.
The Company sought coverage for the matter, and the carrier confirmed coverage for defense costs. However, after learning of a pending lawsuit for violations of the Illinois False Claims Act, the carrier denied coverage. The Company entered into a settlement agreement with OAG and filed a suit against the carrier for breach of contract and bad faith denial of coverage. In response, the carrier sought to rescind coverage based on misrepresentations in the Company’s policy applications throughout years.
Illinois statute permits rescission based upon a misrepresentation or false warranty if: (1) the statements submitted in the applications were false; and (2) such statements were either made with an actual intent to deceive or materially affected the acceptance of the risk or hazard assumed by the insurer.
The Company argued that the alleged misrepresentations in prior renewal applications could not defeat all subsequent insurance contracts when no misrepresentations were made for the subsequent insurance. The court agreed with the Company that the policy could not be rescinded based upon alleged misrepresentations in prior insurance applications. However, the court also found that information contained in the earlier applications may be considered as evidence of whether a misrepresentation by omission was made. Accordingly, the court held that the carrier plausibly alleged a claim for recission based on material misrepresentation in light of the Company’s ongoing concealment and violations of Illinois law. The court stated that it would have been plausible for the carrier to have non-renewed the policy had it known the truth of the circumstances and accurately assessed its exposure to liability. Thus, the court allowed the carrier’s rescission claim to move forward.
ERISA EXCESSIVE FEE CLASS ACTION CASE DISMISSED
Probst v. Eli Lily and Co., No. 1:22- cv-01106 (Dist. Ind. Feb. 3, 2023)
A pharmaceutical sales representative (the “Employee”) initiated a proposed class action case against her employer (the “Company”), its board of directors, and the Company’s employee benefit plan committee, alleging that the Company violated their fiduciary duties under the Employee Retirement Income Security Act (“ERISA”) by allowing the Company’s retirement plan (the “Plan”) to be subject to excessive record keeping fees. Especially, the Employee alleged claims alleging breach of the duty of prudence related to bundled fees, as well as failure to adequately monitor other fiduciaries.
The Employee argued that she sufficiently pled a claim for breach of the duty of prudence because she alleged facts adequate to “raise an inference of a deficient decision-making process for recordkeeping services by utilizing a sound basis for comparison,” i.e., by providing a list of fees paid by comparator plans. Furthermore, the Employee claimed that because the comparator plans were receiving services for less, that alone was sufficient to support her breach of the duty of prudence claim.
In response, the Company argued that the Employee made a series of allegations about the types of services that recordkeepers typically provide, without identifying the specific services that either the Plan or the comparator plans actually received. The Company further alleged that the Employee "[c]herry-picked comparisons” which did not allow an inference of imprudence. Finally, the Company argued that the complaint contained nothing more than conclusory statements about 401(k) plans in general and provided no basis for an inference that the Plan paid excessive fees.
The court noted that ERISA requires plan fiduciaries to "act prudently when managing an employee benefit plan." In agreeing with the Company, the court rejected that the Employee’s allegation stating the Company did not conduct competitive bidding on a regular basis was sufficient to state a claim for breach of the duty of prudence. The court noted that the allegations did nothing to identify what specific types of services comparator plans received. Lastly, the court pointed out that the complaint failed to consider the size, types of assets, or types of services provided to the comparator plans. Finding that the allegations were conclusory, the court held that the complaint did not state a plausible claim for breach of the duty of prudence and dismissed the Employee’s complaint.
FEDERAL COURT ALLOWS RECISSION AGAINST INSURANCE COMPANY
Certain Underwriters at Lloyd’s, London v. Anchor Insurance Holdings, Inc., No.: 8:21-cv-370-TPB-AEP, 2022 U.S. Dist. LEXIS 227925 (M.D. Fla. Dec. 19, 2022)
An insurance company requested a federal court to declare that it had no obligation to defend or indemnify the insured, also an insurance company, in lawsuits filed by several of its investors. Specifically, the suits sought rescission of multimillion-dollar investments. The insurer also sought to rescind the policy, arguing that the insured misrepresented material facts in its application by failing to disclose the underlying claims.
While applying for the policy, the insured completed an application which required a declaration that there were no pending claims against the insured, any director, or officer, and that none were aware of any act, error, or omission that could give rise to a claim or lawsuit. Furthermore, the application included a warranty stating that the information provided was complete, true, and correct and that any misrepresentation, omission, concealment, or incorrect statement of material fact would be grounds for recission. In reliance on the insured’s representations, the insurance company issued the policy. After the policy became effective, the insured notified the insurance company of the claims, and the insurer denied coverage, arguing that prior to the inception of the policy, the insured as well as certain board members had actual knowledge of potential claims against it by the investors.
Under the applicable Florida state law, misrepresentation in an insurance application can result in rescission if: (a) the misrepresentation, omission, concealment, or statement is material; or (b) if the true facts had been known to the insurer, the insurer in good faith would not have issued the policy. Although the insured argued that any potential claim was against the investment entities and not the insured, the court found that no reasonable person could find this to be true since the corporate structures of the investment entities included extensive personal involvement of certain board members as well as the insured.
Furthermore, the court found that the insurance application still required such claims to be disclosed, even if the insured believed that they lacked merit. Lastly, the court stated that had the insurance company been aware of the investors numerous recission demands prior to the issuance of the policy, it would have been able determine whether to reject the insured’s application for coverage.
The Takeaway
These two-rescission actions reinforce that rescission by an insurer is alive and well and Insureds should pay close attention when completing policy applications which contain questions regarding pending claims as well as warranty statements. It is important to thoroughly review same with a knowledgeable insurance broker when completing policy applications and warranties.
A SPAC RUN-OFF POLICY COVERS DEFENSE COSTS OF TARGET COMPANY’S FORMER DIRECTORS & OFFICERS
Clover Health Investments Corp. et al. v. Berkley Insurance Company et al., No. N22C-06-004 MMJ (Del. 2023)
Following its merger with a Special Purpose Acquisition Company (the “SPAC”), a Health Insurance Company sought coverage for a series of claims against its directors, including a securities class action and a shareholder derivative lawsuit. At the time of the merger, the SPAC maintained a Directors & Officers Liability Insurance run-off policy. Additionally, the Health Insurance Company purchased a separate Directors & Officers Liability Insurance policy for the go-forward company. Both policies were notified of the claims.
The run-off policy denied coverage to the directors who were not directors of the SPAC prior to the merger but were directors of the Health Insurance Company and sought to dismiss the Health Insurance Company’s coverage claim against them. The court concluded that the directors of the merged entity were entitled to coverage under the run-off policy as the policy defines “Insured Persons” as “[a]ny one or more natural persons who were, now are or shall become duly elected or appointed directors…of the Company or their functional equivalent.” The court noted that future directors of the merged entity operated in a functionally equivalent role as the directors of the SPAC pre-merger and therefore met the definition of an Insured Person under the run-off policy. Furthermore, these same directors assisted with the SPAC’s filings in connection with the merger, allegedly having committed the wrongdoing while in positions of control as future directors of the merged entity.
The Takeaway
Given that this is a case of first impression in Delaware, it remains to be seen if the broad reading of the policy terminology by the judge, in this case, will be followed. Alliant will monitor this matter and will report on future developments.
NON-PROFIT ALLEGES OIL COMPANY HAS DUTY TO MANAGE CLIMATE CHANGE RISKS
A non-profit filed the world’s first derivative action alleging mismanagement of climate risks against a multi-national oil and gas company (the “Company”). The newly filed complaint in the High Court of England asserted that the Company and its Board of Directors (the “Board”) failed to adopt and implement an energy transition strategy in compliance with the Paris Agreement (the “Agreement”), in violation of the UK Companies Act.
The Agreement was an international treaty that legally bound signees to hold the increase of the global temperate below 2⁰C and use efforts to limit the temperature increase to 1.5⁰C above pre-industrial levels. As the oil industry was shifting from fossil fuels to a low carbon economy, many investors feared that the Company’s overinvestment in fossil fuels would lead to increased liability exposure of the Company despite its record-breaking year in profit earnings.
The non-profit believed this litigation was in the best interest of the globe, as it had the ability to shed light on the importance of preparing for a carbon constrained world and a drastic shift away from fossil fuels. Industry investors hoped this action would trigger change that fosters the climate change goals by incentivizing companies to develop strategies that align with the Agreement. Investors remain focused on creation of obtainable short and medium-term goals necessary to stay on track with the goals set out by the Agreement. The Company and the Board insisted that its transition strategy was consistent with the Agreement of limiting a temperature increase to 1.5⁰C. Despite the Company’s stance, many industry competitors have determined that the Company’s strategy was not consistent with the terms of the Agreement, as it did not include short and medium-term goals aimed at decreasing emissions. Based on the findings, the Company’s net emissions were predicted to fall only by 5% by the close of the decade which continues to violate the industry standard prescribed by a Dutch Court to implement a reduction-rate of a 45% net reduction in emissions.
The industry’s concern remains that the Company and the Board still do not have a strategy consistent with the risks associated with climate change and the Agreement. Additionally, the non-profit as well as many investors believe that the Company had a fiduciary duty to manage climate risks, especially those surrounding the effects that the Company’s actions had on climate change. The non-profit requested the court to order the Board to create such a strategy that would align with the Agreement.
This case challenges the notions of global understanding of what corporate compliance entails. It also challenges the scope of fiduciary duties and general obligations that corporations and their executives owe. Provided the novelty of the issue, this matter may impact how insurance carriers incorporate the risk of exposure that non-compliance with international treatises and climate-change goals entails.
Given the novelty of this case, Alliant will continue to monitor and report on significant developments and/or copycat litigation.
FEDERAL APPELLATE COURT SUPPORTS COVERAGE IN A FUNDS TRANSFER FRAUD CASE
Valero Title Inc. v. RLI Ins. Co., No. 22-20155, 2023 U.S. App. LEXIS 2571 (5th Cir. Feb. 1, 2023)
An escrow agent (the “Company”) sued its insurance carrier (the “Carrier”) following a coverage denial that arose out of fraudulent payment instructions that the Company received to complete a loan transaction.
The Company’s employee (the “Employee”) believed she was communicating with a lender via e-mail, when in fact it was a bad actor. Per e-mail instructions from the bad actor posing as the lender, the Employee wired a large sum of money to a fraudulent account. Upon learning of the loss, the Company submitted the matter to their crime-carrier for reimbursement.
The crime policy contained a funds transfer fraud endorsement which provided that “[the Carrier] will pay for loss of funds resulting directly from a fraudulent instruction directing financial institution to transfer, pay or deliver funds from [the Insured’s] transfer account.” The policy contained two Clauses that defined the term of “fraudulent instruction.” Clause A stated that fraudulent instruction was a “written instruction . . . issued by [the Insured], which was forged or altered by someone other than [the Insured] without [the Insured’s] knowledge or consent . . ..” Clause B stated that a fraudulent instruction was an instruction “. . . which purport[ed] to have been issued by [the Insured] but was in fact fraudulently issued without [the Insured’s] knowledge or consent.”
The court focused its analysis on Clause A of the definition. The Carrier argued that because the fraudulent instructions were eventually authorized by the Company, they did not fall under the Clause A definition of the fraudulent instruction. The Carrier further argued that coverage would have been warranted in two scenarios: (1) if the Company had forwarded the same e-mail forged by the fraudster to its bank, or (2) if the bank’s employee forged the instruction after it has been correctly issued by the Company. The court did not see a practical difference between the hypotheticals and the fraudulent transfer at issue. The court also pointed to coverage issues that contradicted the policy language even within these hypotheticals. As a result, the court ruled in favor of the Company in holding that when the Company issued the instruction to its bank, it was a fraudulent instruction that was “forged or altered by someone other than [the Company] without [the Company’s] knowledge or consent,” such that coverage was owed under the fraudulent instruction coverage definition.
The Takeaway
This is a favorable decision from the policyholder's standpoint and may support broader coverage for insureds when faced with these types of crime claims. As we have seen in many instances involving crime coverage and losses due to spoofed email communications, the “devil is in the details” with regard to the coverage language. The carriers often look to the specific cause of the loss, as opposed to considering the specific policy language in the policy. The distinctions between fraudulent instruction, computer fraud and funds transfer fraud coverages can be confusing to policyholders and can lead to adverse coverage positions from the carriers if not navigated carefully.
NO COVERAGE UNDER D&O RENEWAL POLICY FOR “RELATED” BANKRUPTCY TRUSTEE CLAIMS
PNI Litig. Trust v. Nat’l Union Fire Ins. Co. of Pittsburgh, No. 21-21146, 2023 U.S. Dist. LEXIS 25672 (S.D. Fla. Feb. 14, 2023)
Shareholders filed a class action complaint against a company and its directors and officers alleging various breaches of fiduciary duty claims as well as allegations of improper self-dealing by the CEO. In a subsequent filing, the shareholder filed a complaint that named individuals and added allegations of corporate waste. The subsequent filing remained centered around allegations that the CEO and others used the company for personal financial gains at the expense of the company its shareholders.
The directors and officers sought coverage under two separate insurance policies: the original program as well as the renewal program. The insurers accepted coverage under the original program and advanced defense costs; however, the insurer denied coverage under the renewal policies, arguing that the series of complaints were all one related claim that dated back to the earliest filed class action.
During the course of the litigation and coverage discussions with the renewal carriers, the company filed for bankruptcy and formed a litigation trust (the “Trust”). The Trust was assigned rights to pursue the derivative claims against the directors and officers and secure any available insurance proceeds to satisfy the claims. The insurer maintained their position that the allegations made in the subsequent action related back to the initial shareholder class action and denied coverage under the renewal program. Thereafter, coverage litigation ensued.
The primary issue before the court was whether the Trust’s derivative claims against the directors were related to the class action claims made in the shareholder lawsuit. In the event that the derivative claims were deemed related and therefore made in the earlier policy period, they would not have been covered under the later policy. The Trust argued the two actions were not related because the allegations against the directors were made years after the shareholder claims and at one point morphed from direct shareholder claims into derivative claims, a completely independent cause of action. The court, however, disagreed with the Trust and found that the Trust oversimplified a highly-fact specific inquiry and failed to focus on the logical or casual connection present in the two actions. The court thoroughly reviewed the facts and determined that the Trust’s claims were related to the original shareholder claim as they were mere variations, repetitions, and in some instances direct continuations of the same underlying course of conduct in the initial shareholder complaint.
VALIDATING BILLION OVERISSUED SHARES FOLLOWING DE-SPAC MERGER WAS EQUITABLE, SAID DELAWARE COURT
In Re Lordstown Motors Corp., C.A. No. 2023-0083-LWW (Del. Ch., Feb. 21, 2023)
A Delaware court validated more than a billion publicly traded shares of blank-check companies or SPACs.
In relation to de-SPAC mergers, dozens of companies increased the number of authorized Class A shares by amending their certificates of incorporation. The companies believed that such shares were part of common stock and did not require a separate Class A vote. That belief was called into question by a stockholder suit where a company’s shareholders challenged the vote to increase shares for a de-SPAC merger because the increase diluted their Class A shares. These shareholders successfully argued that the Class A shares were a separate class of stock based on the language of the company’s certificate of incorporation, and thus required a separate Class A vote. Years after the relevant stockholder votes, post-de-SPAC companies found themselves doubting which shares were valid and fearing the possibility of stock delisting. The consequences shook the confidence of investors in SPAC companies but luckily an equitable solution was found in Section 205 of Delaware Corporation Law, which provided courts with the authority to validate corporate acts and putative stock.
Many companies, including one in the underlying litigation (the “Company”) filed Section 205 petitions after receiving demands from three of its stockholders. The petition asked the court to validate and declare effectively over a hundred million shares because the Company had already relied on the validity of these shares.
The court recognized that the company failed to obtain the approval of a majority of the Class A to issue these shares and thereby overissued shares. However, the court exercised its authority under Section 205 and validated the shares. The court explained that the statute conferred substantial discretion on the court for such situations to enable judges with the ability to provide an “adaptable, practical framework,” to remedy the corporate wrongdoings without causing “. . . disproportionately disruptive consequences.” In exercising its discretion, the court considered that the Company and Board acted in good faith and had a good history of compliance with corporate acts. Moreover, the court balanced the potential harms that would occur if it validated the shares or not, and the latter scenario entailed more substantial harmful consequences. Invalidating shares could have resulted in a major disruption of the Company’s operation. Finally, the court concluded that validation would be “just and equitable,” and validated the shares.
In a practical fashion, this decision led to the harm of fewer parties at the expense of a small number of dissatisfied shareholders. The court restored the investors’ confidence in SPACs and prevented harm to corporations. However, this decision also reiterated the importance of business maintaining compliance through best corporate practices by incorporating the corporation’s good faith and history of compliance in its decision-making. Moving forward, corporations would be unlikely to issue Class A shares without obtaining the majority votes of such class because now the courts have clarified that such vote was due.
SHOULD EMPLOYERS PAY OVERTIME COMPENSATION TO EMPLOYEES EARNING SIX FIGURES SALARIES? WHY NOT, SAYS THE SUPREME COURT
Helix Energy Sols. Grp., Inc. v. Hewitt, No. 21-984, 2023 U.S. LEXIS 944 (Feb. 22, 2023)
A worker earning $200,000 annually was entitled to overtime compensation under the Fair Labor Standard Act (the “FLSA”), according to the Supreme Court of the United States (the “SCOTUS”).
An employee filed an action to recover overtime pay against their employer, an oil company (the “Company.”) Typically, the employee worked twelve hours a day, seven days a week, which amounts to approximately 84 hours of work per week. The employee had a fixed daily rate of compensation which was relatively high and continued to increase throughout the employee’s employment. The Company issued the employee’s paycheck every two weeks, which included the employee’s compensation (daily rate multiplied by the number of days worked in a week during a given pay period). The employee argued that because his salary depended on the number of days he worked within a pay period, he was not receiving a base salary. Therefore, the employee argued that he was entitled to overtime compensation.
Through the FLSA, Congress has provided covered employees with the guarantee of overtime pay for working more than forty (40) hours a week. The FLSA was designed to compensate employees for working long hours, while incentivizing employers to expand work distributions. According to the FLSA, an employee was not covered, and not entitled to overtime compensation if the employee was a bona fide executive. The matter at issue in this case was whether the employee was a bona fide executive. The determination of whether an employee is a bona fide executive is dependent on whether the employee was a lower or higher income employee. Lower-income employees, anyone making less than $100,000 a year (including bonuses) should be deemed a bona fide executive if (a) they earn at least $455 per week and (b) manage the enterprise, direct other employees, and execute hiring and firing powers. A higher-income employee, on the other hand, only needs to show that they earn at least $455 per week on a salary basis (receiving a full salary for any week, where the employee performs any work without regard to the number of days worked) and that they perform at least one of the mentioned executive or managerial duties. In other words, the requirement of demonstrating managerial responsibilities becomes relaxed for high-earning individuals.
The Company argued that because the employee’s check was issued every two weeks and contained pay exceeding the minimum of $455 a week, the employee should have been considered a bona fide executive. According to the court, employees receive a weekly basis salary when they receive compensation for a period of a week, or longer, without regard to the number of days worked within a given week. When compensation depends on the number of days worked within a given period of time, the employees receiving such compensation are deemed to be daily-rate, rather base-salary employees. The court explained that such daily basis did not guarantee that the employee would receive each week an amount of $455. Therefore, the employee was not exempt from the FLSA and eligible for overtime pay.
Interestingly, one of the dissenting Justices argued that because the employee at issue earned nearly a four-figures check per day, he was guaranteed almost a thousand dollars on any day he worked. Accordingly, the dissenting Justice argued that the conclusion of the majority that the employee was not guaranteed at least $455 was contradictory.
COURT RULES THAT AN INSOLVENCY EXCLUSION PROVIDES A COMPLETE BAR TO COVERAGE
Quality Health Plans of New York Inc. v. Ironshore Specialty Ins. Co., No. CV 20-3563, 2023 LEXIS 32453 (E.D. NY Feb. 27, 2023)
In a matter involving a dispute over healthcare services rendered, a New York court sided with an insurance company (the “Carrier”) and barred coverage for a Company (the “Insured”) under an Insolvency Exclusion.
The matter concerned two actions. In the first action, the Insured was named in a lawsuit alleging it failed to pay its medical provider (the “Provider”) for care and treatment rendered to members of the Insured. After a year from the first action passed and no monetary recovery took place, the Provider commenced a second action. The Insured sought coverage from the Carrier to provide a defense for the Insured in the second action and reimburse all expenses. At the time, the Insured had Directors and Officers Liability (“D&O”) insurance from the Carrier with whom the Insured renewed for two consecutive policy periods. Both policies provided coverage “only when a claim is ‘first made’ during the coverage term of a policy.” Similarly, both policies shared the definition of related claims which, whenever triggered, rendered any claim related to an earlier claim to have been first made at the time the earlier claim was made.
The court first focused on whether the two actions were related within the meaning of the later policy period. The court engaged in a side-by-side review of the underlying claims and determined that the two actions arose out of the allegation that the Insured failed to pay the Provider for health care services rendered to the Insured’s members. The Provider argued that the two actions asserted different legal theories, and thus could not be deemed related. While different legal theories were used, the court, stated that this does not alter its conclusion because the alleged legal theories do not determine relatedness. Instead, relatedness was measured by the claims arising out of a single or related set of wrongful acts. Therefore, the court determined that the two actions were related and no coverage was available under the later policy.
The court continued in its analysis and determined that the coverage sought was nonetheless barred under the Insolvency Exclusion. The Insolvency Exclusion stated that “no coverage will be available under this Policy of Loss, including Defense Expenses, from any Claim based upon, arising out of . . . or in any way involving any actual or alleged [] insolvency.” The Carrier argued that in the second action, the Provider alleged that the Insured was insolvent for a period of 5 years. In response, the Provider argued that the Insured was not put into the New York State liquidation until after the second action had commenced. The court noted that accepting this argument would require the court to apply an exceedingly narrow interpretation to a clearly broad exclusion, which the court was unable to do. Thus, the court stated that the Insured’s insolvency was the entire basis and reason the second action was filed and there was no doubt that the second action arose out of the Insured’s financial inability to pay its debts.
Cyber Corner
COURT RULES CONSUMERS SHOULDN’T HAVE TO TURN OFF THEIR PHONES TO MAINTAIN PRIVACY
Smartphones have given people a virtual window to the world. As it turns out, this window works both ways, as these small devices also have the capability of disclosing their owner’s whereabouts, such as visits to abortion clinics.
COURT GRANTS INSURER THE RIGHT TO RECOUP DEFENSE COSTS ABSENT EXPRESS POLICY PROVISION
Great Am. Fidelity Ins. Co. v. Stout Risius Ross, Inc., 2022 WL 16571316 (E.D. Mich. Nov. 1, 2022)
A Michigan court held that an “implied-in-fact” contract requires the insureds to reimburse defense costs to the insurer if it is determined that the insurer had no duty to defend a matter at issue. According to the court, that is true even in situations when the policy at issue is silent on recoupment of defense costs.
WAR EXCLUSION ON THE DOCKET IN NOTPETYA CYBER ATTACK CLAIM
Merck & Co. Inc. et al v. Ace American Insurance Co. et al., No. A-001879-21-T02 (N.J. App. 2023)
A New Jersey appeals court heard oral arguments in a coverage dispute arising out of the 2017 NotPetya cyberattack that consisted of a strain of malware which cybersecurity experts have attributed to the Russian government.
INVASION OF PRIVACY CLAIMS REQUIRE SPECIFICITY
Westron et al v. Zoom Video Commc’ns, Inc., No. 22-cv-03147-YGR (N.D. Cal. Feb. 15, 2023)
A California judge dismissed a claim by consumers against a cloud conferencing company (the “Company”), which had alleged, among other things, invasion of privacy. The Company was accused of collecting consumers’ personal data and sharing it with Google, Facebook, and other platforms without the consent of the consumers.
FEDERAL COURT TOSSES SHAREHOLDER COMPLAINT AGAINST CYBERSECURITY FIRM
Firemen’s Ret. Sys. of St. Louis v. Telos Corp., et al., No. 1:22-cv-00135 (E.D. Va. Feb. 1, 2023)
A federal judge dismissed an investor lawsuit against a cybersecurity company (the “Company”). The investors had alleged that corporate executives misled shareholders about the firm’s prospects of winning government contracts, and the timing of any such new business opportunities.
NEW YORKERS, BEWARE OF DATING CYBER-STALKERS
The Office of the Attorney General of the State of New York (the “Office”) initiated an investigation under the Executive Law and General Business Law of the Spyware Company which offered a mobile phone monitoring service program (the “App”).
ILLINOIS SUPREME COURT RULES THAT A CAUSE OF ACTION UNDER BIBPA ACCRUES EVERY TIME BIOMETRIC INFORMATION IS COLLECTED OR DISCLOSED
Cothron v. White Castle Sys., 2023 IL 128004, 2023 Ill. LEXIS 146 (Supreme Court of Illinois, February 17, 2023)
In a 4-3 decision, the Illinois Supreme Court determined that a cause of action under the Biometric Information Privacy Act (“BIPA”) accrues every time biometric data is collected or disclosed.
CALIFORNIA INSURANCE CODE BARS COVERAGE FOR RETALIATION CASE
County of Sacramento v. Everest National Insurance Co., No. 22-15250 (9th Cir. 2023)
Four police officers sued a California county (the “County”) and its sheriff’s department, alleging that the officers were retaliated against after they complained about workplace harassment and discrimination. The County tendered the complaint to its Employment Practices Liability Insurance carrier, who defended the case under a reservation of rights.
CALIFORNIA LAW REQUIRING MANDATORY EMPLOYMENT ARBITRATION AGREEMENTS DEEMED UNENFORCEABLE
Chamber of Com. of the United States v. Bonta, No. 20-15291, 2023 WL 2013326 (9th Cir. Feb. 15, 2023)
This dispute arose after California enacted a law (Assembly Bill 51, or “AB 51”) which prohibited an employer to require a current or prospective employee to consent to arbitration of claims as a condition of employment.
EPL CARVE-BACK IN INSURED V. INSURED EXCLUSION PRESERVES COVERAGE FOR ADR PROCEEDINGS
In re Seabury Fxone LLC v. U.S. Specialty Ins. Co., No. 21-cv-837 (ER), 2023 U.S. Dist. LEXIS 31255 (S.D.N.Y. Feb. 24, 2023)
A New York federal judge ruled in favor of an investment firm that sought reimbursement of defense costs it incurred in an arbitration proceeding with its former CEO.
IMPLICIT CONTROL OF PROPERTY BY EMPLOYEE IS AN UNLAWFUL TAKING UNDER CRIME POLICY
National Union Fire Insurance Company of Pittsburgh v. Cargill, Inc. No. 21-3141 (8th Cir. 2023)
While working at a grain facility negotiating sales contracts on behalf of her employer an employee engaged in an embezzlement scheme. As part of the scheme, the employee misrepresented the price she could sell grain, entered false sales contracts into the accounting system, manipulated other records to reflect such sales and then sold the grain at prices below those in the employer’s records.
SEC Corner
NEW REGULATIONS SET FORTH BY THE SEC DIVISION OF EXAMINATION
The SEC Division of Examination (the “Division”) announced its priorities for the 2023 fiscal year. The early announcement by the Division is an indication that the SEC and the Division are returning to normal pre-pandemic examinations. The Division highlighted its intent to focus on areas of perceived risk, such as conflicts of interests, portfolio management, highly leveraged funds, cybersecurity issues as well as risks accompanied by emerging technologies.
SEC PROPOSES AMENDMENTS TO CUSTODY RULES
The Securities and Exchange Commission (the “SEC”) proposed amendments to the Custody Rule under the Advisers Act which governs the custody of client securities and funds by federally registered investment advisers. The proposal seeks to expand the types of assets and activities that are covered under the Custody Rule.
MARCH 2023 NOTEWORTHY ENFORCEMENT ACTIONS FILED
|
Director/Officer |
Role |
Company |
|
Christopher S. Kirchner |
Co-Founder, CEO |
Slync, Inc. |
|
Michael Molen |
CEO |
Enviro Impact Resources, Inc. |
|
Director/Officer |
Role |
Company |
|
Christopher S. Kirchner |
Co-Founder, CEO |
Slync, Inc. |
|
Michael Molen |
CEO |
Enviro Impact Resources, Inc. |
MARCH 2023 NOTEWORTHY SETTLEMENTS AND JUDGMENTS
|
Amount |
Director/Officer |
Role |
Company |
|
$ 337,490.33 |
John C. Wilson II |
CEO |
Aether Innovative Technology, Inc. |
|
Amount |
Director/Officer |
Role |
Company |
|
$ 337,490.33 |
John C. Wilson II |
CEO |
Aether Innovative Technology, Inc. |
Source: U.S. Securities and Exchange Commission
Financial
Source: Stanford Law School Securities Class Action Clearinghouse
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Abbe Darr, Esq.
Claims Attorney
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David Finz, Esq.
Claims Attorney
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Isabel Arustamyan
Claims Advocate
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Jacqueline Vinar, Esq.
Claims Attorney
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Jaimi Berliner, Esq.
Claims Attorney
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Katherine Puthota
Senior Claims Advocate
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Malia Shappell, Esq.
Claims Attorney
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Michael Radak, Esq.
Claims Attorney
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Robert Aratingi
Senior Claims Advocate
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Robert Hershkowitz, Esq.
Claims Attorney
robert.hershkowitz@alliant.com
Steve Levine, Esq.
Claims Attorney
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