In what the plaintiffs' lawyers claim to be the largest
derivative lawsuit settlement ever, the parties to the News Corp. shareholder
derivative litigation have agreed to settle the consolidated cases for $139
million. The company also agreed to tighten oversight of the company's
operations and to establish a whistleblower hotline, as well as other corporate
therapeutics. The cash portion of the settlement is to be funded entirely by
D&O insurance. The settlement is subject to court approval.
The parties' April 17, 2013 memorandum of understanding
regarding the settlement can be found here. The
plaintiffs' lawyers' April 22, 2013 press release in which, among other things,
the plaintiffs' lawyers state that the settlement is "the largest cash
derivative settlement on record" can be found here.
The lead plaintiffs' press release can be found here.
As reflected in the press releases as well as is stated in the many media
reports about the settlement (refer for example, here),
the entire cash portion of the $139 million settlement is to be funded by
The first of the lawsuits against the News Corp. board
was filed in Delaware Chancery Court in March 2011, asserting claims in
connection with the company's $675 million acquisition of Shine Group, Ltd., a
U.K.-based television production company owned by Elizabeth Murdoch, daughter
of News Corp. Chairman Rupert Murdoch. Elizabeth Murdoch allegedly made $250
million in the acquisition.. Later complaints expanded on claims relating to
the Shine Group acquisition and added extensive additional claims seeking
to hold the company's directors accountable for the scandal surrounding the
company's use and attempted cover-up of illegal reporting tactics of some
News Corp. journalists in the U.K. The various cases were later consolidated in
the Delaware Chancery Court.
In their Third Amended Consolidated Complaint (here),
the plaintiffs alleged that the company's board's oversight of the company's
affairs represented a "textbook example of failed corporate governance and
domination by a controlling shareholder." The complaint alleges that for years
"the Board has condoned Murdoch's habitual use of News Corp. to pursue his
quest for power, control and political gain and to enrich himself and his
family members, at the Company's and its public shareholders' expense." The
complaint alleges that the ongoing scandals have not only harmed the company's
reputation and cost it millions of defense costs and other expenses, but also
that the company's share price is artificially depressed because of the
negative association of the company with Murdoch.
The defendants filed a motion to dismiss the consolidated
amended complaint. The parties argued the motion to dismiss on September 19,
2012 (refer here).
While the dismissal motion was pending, the parties engaged in mediation that
ultimately resulted in settlement.
The plaintiffs' lawyers claim that this is the largest
cash shareholders' derivative settlement ever, and I am certainly in no
position to dispute that. I have been tracking derivative suit settlements for
years. There have been several shareholder derivative suit settlements that
were nearly as large as the News Corp. settlement but as far as I can tell none
that were quite as big:
These settlements are all dwarfed by the $2.876
billion judgment entered in June 2009 against Richard Scrushy in the
HealthSouth shareholders' derivative lawsuit in Jefferson County (Alabama)
Circuit Court, but that astronomical judgment represents its own
peculiar point of reference, like some odd parallel universe. It also was
of course a judgment following trial rather than a settlement.
Another peculiar point of reference is the $1.262 billion
judgment that Chancellor Leo Strine entered in October 2011 the Southern Peru
Copper Corporation Shareholder Derivative Litigation (about which refer here).
That case also represents its own form of litigation reality, and it too
represents a derivative suit judgment following trial, rather than a
Another derivative lawsuit resolution that is worth
considering in the context of the "largest ever" question is the December 2007
settlement of the UnitedHealth Group options backdating-related derivative
lawsuit. As discussed here,
the lawsuit settled for a total nominal value of approximately $900
million. However, while the press reports at the time described the settlement
as the largest derivative settlement ever, the value contributed to the
settlement consisted of the surrender by the individual defendants of
certain rights, interests and stock option awards, not cash value in that
Aside from the question of the News Corp. derivative suit
settlement's sheer size, there is also the fact that the settlement was funded
entirely by D&O insurance. Given the amount of the settlement, the
settlement costs undoubtedly were distributed across the several carriers that
participated in News Corp.'s D&O insurance program. This large settlement
not only represents a serious and unwelcome development for the specific
carriers involved but it also represents a potentially unwelcome event for the
D&O insurance industry in general, for what it might represent as far as
the severity potential of shareholders' derivative litigation.
In the past, going back ten years or so, shareholders'
derivative suits typically did not present the possibility of significant cash
payouts for D&O insurers, at least in terms of settlements or judgments.
The cases did present the possibility of significant defense expense and also
of the possibility of having to pay the plaintiffs' attorneys' fees, but by and
large there was usually not a cash settlement component. As the significant
examples above show, that has clearly changed in more recent years.
This trend gained particular momentum with the options
backdating scandal. Many of the options backdating cases were filed as
derivative suits rather than as securities class action lawsuits (largely
because the options backdating disclosures did not always result in the kinds
of significant share price declines required to support a securities class
action lawsuit). Many of the options backdating cases settlements included a
cash component, and as illustrated by the Broadcom case mentioned above, some
of the options backdating derivative suit settlements included very substantial
The inclusion of a significant cash component has also
been a feature of the settlements of some of the merger objection suits that
have been filed as part of the current upsurge in M&A-related lawsuit that
have been filed in recent years, as illustrated by the El Paso settlement
This upsurge in the number of derivative suit settlements
that include a significant cash component can only be viewed with alarm by the
D&O insurance industry. For many years, D&O insurers have considered
that their significant severity exposure consisted of securities class action
lawsuits. The undeniable reality is that in at least some circumstances,
derivative suits increasingly represent a severity risk as well. And the
settlement amounts themselves represent only part of the D&O insurers' loss
costs. The D&O insurers also incur millions and possibly tens of million of
defense cost expense in these derivative suits. I can only imagine that in the
News Corp. derivative suit, for example, that the cumulative defense expense
was in the millions of dollars.
An even more concerning aspect of the rise of significant
cash settlements in derivative cases for D&O insurers is that these
settlement amounts represent so-called "A Side" losses. That is, the losses are
paid out under the portion or the D&O insurance policy that provide
insurance for nonindemnifiable loss. A derivative suit settlement obviously is
not indemnifiable, because if it were to be indemnified, the company's would
make the indemnity payment to itself. For the "traditional" D&O insurance
carriers, there is perhaps no particular pain associated with the fact
that the loss is paid under the "Side A" portion of the policy, as opposed the
other policy coverage (that is, the "Side B" or "Side C" coverage that are more
typically called into play). But these days many companies carry --in addition
to their traditional D&O insurance that includes all three coverages (that
is, they include Sides A, B and C coverage) -- additional layers of excess Side
This excess Side A insurance would not be available to provide
funding for, say, a securities class action lawsuit, at least if the corporate
defendant were solvent, because the settlement of a securities class action
lawsuit is an indemnifiable loss to which coverages B and C might apply but to
which coverage A does not apply. However, the Side A coverage does apply to a
shareholders' derivative lawsuit settlement because the settlement amount
represents a nonindemnifiable loss. So while a jumbo securities class
action settlement typically would not trigger coverage under an Excess Side A
policy, a jumbo derivative settlement would trigger the Excess Side A policies.
The question for the carriers providing this type of
excess Side A insurance is whether or not the premiums they are getting are
adequate to compensate them for the risks of the kinds of losses associated
with large cash shareholders derivative settlements. By and large, the carriers
providing this insurance consider that their most significant exposure is
related to claims in the insolvency context. But as this settlement and the
Broadcom settlement mentioned above demonstrate, it is also possible that the
Side A insurance can be implicated in a jumbo derivative settlement as well as
in a settlement in the insolvency context.
The increasing risk of this type of settlement represents
a significant challenge for all D&O insurers, but particularly for those
D&O insurers concentrating on providing Excess Side A insurance. Those
insurers will have to ask how they are to underwrite the risks associated with
these kinds of exposures, and how they are to make certain that their premiums
adequately compensate them for the risk.
Dan Fisher has an interesting April 22, 2012 article in Forbes
discussing the questions associated with the funding of this type of settlement
exclusively through D&O insurance.
Finally, as Alison Frankel points out in an April 22,
2013 post on her On the Case blog (here),
the News Corp. settlement includes what she describes as an "historic concession": in
the settlement, News Corp. agreed "to disclose its campaign and political
action committee contributions to shareholders and its lobbying and Super PAC
spending to the board." Frankel quotes sources to the effect that the News
Corp. case represents the first time that a derivative lawsuit has been used as
a vehicle to obtain enhanced disclosure of corporate political spending.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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