How to protect a publicly listed company from costly D&O litigation

How to protect a publicly listed company from costly D&O litigation | Insurance Business America

Professional Risks

How to protect a publicly listed company from costly D&O litigation

Risk prevention is key as settlements become more expensive

Professional Risks

By
David Saric

According to data analysis by Woodruff Sawyer, securities class action lawsuit filings are increasing alongside cost settlements.

“We’re coming off a period where cases took longer to settle, and the reason that each individual case may have taken longer to settle can be quite idiosyncratic,” said Priya Huskins (pictured), Woodruff Sawyer’s senior vice president of management liability.

“What we know is that the duration of a case is highly correlated to the severity of the case, so it’s not a surprise that they’re settling for larger dollars.”

In order to avoid costly settlements, having robust risk management and prevention insight can significantly lessen the financial impact of any potential litigation scenario.

During a conversation with Insurance Business, Huskins revealed what questions and concerns should be top of mind for an insurance professional dealing with C-suite level clientele and why newer publicly listed businesses are more prone to being sued than mature companies.

Understanding corporate governance

One of the most effective ways to sidestep litigation or reduce its costliness is having a firm understanding of corporate governance.

“The first thing I would ask a corporation is if it has adopted things like state choice of forum, and federal choice of forum provisions. What I’m referring to either in the certificate of incorporation or the bylaws, that helps makes litigation that arrives more efficient,” Huskins said.

When the Securities and Exchange Commission (SEC), the governing body that regulates all US public companies, issues new regulations for compliance, those who are slower to adopt these provisions create an opportunity for shareholders and others to sue.

“These create new exposures and vulnerabilities,” Huskins said.

For those corporations who do not take immediate or preparatory steps to comply with the SEC, lawsuits can appear in federal and state courts, effectively doubling the exposure to litigation for the same issue.

“To avoid expensive duplicative litigation, a company will want to adopt federal choice of forum provisions,” Huskins said.

“Those provisions will cause the registration statement litigation to only be in federal court, not also in one or more of the 50 state courts.”

Having appropriate controls and procedures

Updating corporate bylaws and the certificate of incorporation is the first step in strengthening a company against possible lawsuits.

The rest, as Huskins noted, is about having appropriate controls and procedures.

“If you do happen to engage in naked short selling, it can create an opportunity for a plaintiff to say that your sale was timed when the market was high,” Huskins said. “If stock drops afterwards, they can argue that the officer was helping with a fraud to keep the stock price up.”

To avoid this scenario, it is important to implement the SEC’s updated rules on 10b5-1 trading plans that were just released.

Lastly, Huskins advised that a company review its disclosure committee.

“Public companies are constantly having information come at them or are creating information themselves,” she said.

Thus, it is essential that these committees are staffed with a group of people who are getting the right information brought to them so they can make informed choices about what is shared with the public.

Growing pains

While litigation can happen to companies of any maturity, trends showcase that newer IPOs have an increased frequency of being sued, according to Woodruff Sawyer’s report.

“A company is most likely to be sued in the first three years of its public company life compared to any other time,” she said.

Section 11 liability, which is directly related to an IPO registration statement that contains a materially false statement or material omission, is easier for a plaintiff to prove.

“When you have a new public company, if a company trades below its IPO price, then that creates an opportunity for plaintiffs to say you lied in your registration statement,” Huskins said.

This can be related to new public companies having a less mature management team or coming out of a period of rapid growth.  

“The less seasoned the team, the more unpredictable the business,” Huskins said.

Thus, having strong D&O protection is a surefire way to safeguard a company for the vulnerabilities that arise with an IPO.

“There’s always a potential for fire, so it’s a good idea to have insurance in case the fire hits,” Huskins said.

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