Books and Records demands – are they claims under a D&O policy?

By Steve Levine, Esq., Senior Vice President, Alliant

Stockholders of Delaware corporations have a qualified right to inspect certain nonpublic corporate books and records pursuant to Section 220 of the Delaware General Corporation Law. As a prerequisite, the stockholder must first demonstrate a “proper purpose” that is reasonably related to the person’s interests as a stockholder.  Delaware courts have recognized several categories of “proper purpose” including: 1) investigating corporate wrongdoing in advance of filing derivative litigation; 2) to inform the company electorate of corporate wrongdoing or to mount a proxy fight; 3) to seek an audience with the board; or 4) to prepare a stockholder resolution for a company’s next annual meeting (i.e. seek corporate reforms).  Secondarily, in order to enforce an inspection under Section 220, the stockholder must demonstrate the scope of the books and records to be inspected is no broader that what is necessary and essential to accomplish the stated, proper purpose.  Procedurally, the stockholder first submits a written demand and if the company refuses to permit the inspection or does not reply to the demand within 5 business days, the stockholder may commence litigation in the Delaware Court of Chancery.

Section 220 matters have evolved over time, both in terms of the scope of materials covered as well as the necessity for such actions to be commenced in the first place. With respect to scope, Delaware Courts have broadened the type of documents they will permit a stockholder to review.  Recently, Delaware Chancery Court expanded shareholder rights to cover all electronically stored information as well as paper documents.  This wrinkle resulted from the observation that business is now conducted in a predominantly electronic arena, with over 90% of business documents stored electronically.  As a result, stockholders can now access personal emails if officers and directors utilize personal email accounts to conduct corporate business and thus, any corporate business conducted over personal email is fair game with respect to stockholder inspection.  Individuals are reluctant to have such person email information shared.

In recent years, Delaware court rulings and other commentary urged stockholders to use Section 220 to conduct investigations into corporate mismanagement prior to filing derivative litigation. This procedural step has been used successfully by stockholders to meet the heightened pleading requirements of filing such derivative complaints.  When 220 books and records demands are made with the purpose being “investigation of corporate wrongdoing”, there are often factual allegations contained within the initial books and records demand or the subsequent Section 220 complaint that reveal the particular mismanagement and/or wrongful conduct the stockholders are seemingly attempting to bring to light.

This aspect changes the applicability of D&O insurance coverage. This newer trend (alleging the mismanagement or wrongful conduct) generally results in defense costs coverage being available to the company as they respond to the 220 demand or defend the Section 220 proceeding.  In the past, more generic or boilerplate Section 220 demands and complaints did not necessarily contain such specific allegations of wrongdoing and thus, insurance carriers often found that a “Claim” had not yet been made under the D&O policy because the materials submitted to the carrier did not contain Wrongful Act allegations.

Once a Section 220 proceeding advances beyond the information gathering phase and into the derivative litigation phase, Insured Persons are defending a suit for, among other things, monetary damages. The type of relief sought by shareholders in the derivative complaint raises other coverage issues.  D&O coverage may include indemnity payments, or Side A payments, by the carrier in addition to defense costs.

ERISA Fee Litigation: Evolving Liability Landscape

By Susanne Murray, Executive Vice President, Alliant

The Employee Retirement Income Security Act of 1974 (ERISA) sets minimum standards for US Employers in connection with most employee benefit plans. In the past several years, there have been a growing number of claims brought under ERISA against plans, sponsor organizations and their fiduciaries, alleging breach of fiduciary duty, breach of prudence and breach of loyalty, causing loss to plan participants. These claims have primarily focused on the amount of fees being charged in connection with the investment options and in connection with service providers.

ERISA is intended to protect assets of participants that are placed into benefit plans. The lengthy statute imposes obligations on the companies as sponsor organizations and on the plans themselves. These obligations include the following:

  • Plans must provide plan participants with information about the plan including information about plan features and plan funding. Information must be furnished regularly and automatically;
  • Plans must have minimum standards for participation, vesting, benefit accrual and funding;
  • Plan fiduciaries must comply with specific principles of conduct and are held accountable for failure to meet these standards, including being held responsible for restoring losses to the plan;
  • Participants have the right to sue for benefits due to breaches of fiduciary duty; and
  • Plans must guarantee payment of certain benefits if a defined plan is terminated, through a federally funded corporation known as the Pension Benefit Guaranty Corporation.

In regard to the responsibilities of Plan Fiduciaries, the Department of Labor’s Employee Benefits Security Administration has summarized these responsibilities as follows:

  • Acting solely in the interest of plan participants and their beneficiaries;
  • Carrying out their duties with skill, prudence and diligence;
  • Following plan documents (unless inconsistent with ERISA);
  • Diversifying plan investments;
  • Paying only reasonable expenses of administrating the plan and investing its assets; and
  • Avoiding conflicts of interest.

ERISA litigation has historically been infrequent, mainly because participants themselves have paid little attention to their plans. Plaintiff law firms have also paid little attention to ERISA and claims that might be asserted under the statute. That lack of attention began to change in connection with large public companies, particularly those with employer stock in plans, and those with more than $1 Billion in plan assets.

Over the last 10 years, an increasing number of claims have been made against plans, sponsor organizations, fiduciaries and plan administrators for charging excessive fees to plan participants. Litigation has generally focused on 401(k) plans and more recently 403(b) plans sponsored by non-profits such as educational institutions and hospitals. Claims have also primarily focused on larger plans with more than $1 Billion in plan assets, though the focus has gradually moved downward to increasingly smaller plans.

These excessive fee claims generally allege that plan fiduciaries breached their duties of prudence and loyalty in selecting plan investment options and plan service providers, specifically in connection with the fees charged by the different investment options and by the service providers. These fees being charged are paid out of the participant’s plan assets, thus reducing their assets by an amount deemed unreasonable and imprudent. Allegations are that the fiduciaries failed to offer the lowest cost investment options, failed to consider less expensive alternatives, failed to negotiate competitive (cheaper) service provider fees, and at times, had revenue sharing arrangements with service providers that benefited the sponsor organization rather than being passed along to plan participants. More recently, cases have been brought against investment advisors and service providers, alleging that they too are fiduciaries and therefore have all of the obligations of fiduciaries set forth in ERISA. Both the Ninth Circuit in a claim involving Transamerica Life Insurance Company, and the Second Circuit in a claim against John Hancock, have found that service providers are not fiduciaries and therefore have no obligation with respect to negotiation of its fee compensation. They are simply part of the competitive process and can propose to charge whatever fee they want – plan trustees are responsible for accepting or rejecting such service costs.

In 2015, the United States Supreme Court in the case entitled Tibble v. Edison International, 135 S. Ct. 1823 (2015) noted that fiduciaries under ERISA have a continuing duty, separate and apart from the duty to exercise prudence in selecting investments at the outset, to monitor and remove imprudent investments. This case supported the allegations of failure to monitor investments and change such investment options as necessary.

In one of the most recent cases to be settled, Todd Ramsay et al v. Philips North America LLC, the case included both a monetary settlement of $17 Million and also a non-monetary component specifically requiring the use of an independent consultant to review investment options and make recommendations, and agreeing to conduct “requests for proposal” with service providers. This allows for a competitive process to support the services being rendered at the most cost effective price.

At this point, many of the largest sponsor organizations and plans have put into place protocols to routinely monitor, review, evaluate and change such options and providers as may be warranted.  There are a number of claims still in the pipeline, so a number still to be resolved by settlement or otherwise, but it is expected that the volume of new claims against larger organizations and plans will taper off.

Overall, plaintiff’s counsel note that these claims have greatly benefited plan participants by seeing a decrease in investment options and service provider fees and an improvement in fiduciary practices. This does not mean that ERISA excessive fee litigation is over. Plaintiff firms are now focusing on smaller asset size plans and fiduciaries with the expectation that many of those will have the same excessive fee issues and the same failure to monitor issues. Plaintiffs are also taking a close look at the potential fiduciary obligations of investment advisors and service providers. While the frequency of these claims may be leveling off, plaintiffs are certainly not done. ERISA excessive fee litigation continues to exist.