By: Fred T. Podolsky, Executive Vice President, Alliant
D&O exposures come from claims “fads” like IPO Laddering or credit crisis claims or disclosure only settlements driven by the plaintiff’s bar, but these fads are usually short lived. Some liability trends, however, such as securities class actions and whistleblower claims, appear to be a continuing and growing source of liability and with no end in sight. Below is a sampling of current D&O liability triggers:
Shareholder Merger Objection Claims
All types of companies, in all industry sectors in the United States and across the globe, engage in substantial mergers and acquisitions activity. For public companies, this is an invitation for a lawsuit, and the invitation is almost always accepted by shareholders who object to the deal, sometimes on both sides of the transaction.
Jumpstart Our Business Startups Act (JOBS Act)
The JOBS Act was passed to make it easier for smaller businesses to access the capital markets through a streamlined IPO process. Emerging growth companies with less than $1 billion in sales are eligible for a JOBS Act filing and can take advantage of the reduced filing requirements, including relief from certain disclosure and accounting standards for a period of time.
SEC Enforcement Activity
While securities class actions continue to represent the highest financial risk exposure to public companies and their directors and officers, the threat of SEC enforcement activity is on the rise. The costs of resolving such enforcement actions can be substantial. According to a report entitled “SEC Enforcement Activity against Public Companies and Their Subsidiaries Midyear FY 2016,” one trend to watch is the increasing use by the SEC of administrative proceedings rather than civil proceedings to bring enforcement actions.
Sarbanes-Oxley Act of 2002 (SOX) and Claw-back Provisions
To ensure the accountability of the CEO and the CFO, and to align their financial interests with accurate reporting, the Act includes a payback, or claw-back, provision requiring that, in the event of a financial restatement due to misconduct of the issuer, the CEO and CFO would be required to repay any bonuses, incentives, and equity-based compensation and any profits from stock sales within the immediately prior 12 months.