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Persistent derivative suits 'add up': Advisen


NEW YORK--Derivative action lawsuits against corporate boards of directors likely would not result in large monetary awards, but over time would amount to substantial liability insurance claims and personal losses for directors and officers, insurance industry analyst Advisen Ltd. predicts in a brief.

While a new wave of "shareholder activism" has resulted in a dramatic increase in derivative actions that typically focus more on imposing changes in corporate governance than on obtaining huge damages awards, defense costs can be hefty in those cases, and relatively mild damages awards will "add up," Advisen editor-in-chief David Bradford noted in the brief.

Many derivative action suits center on the defendants' roles in backdating stock options to give corporate executives huge returns when they exercise those options, Mr. Bradford noted.

With 144 companies already facing derivative action lawsuits over their backdating practices--and nearly 200 companies overall currently involved in some kind of probe over their practices--covered defense fees will be significant, and the issue will create distractions for directors and officers, according to Mr. Bradford.

The problem will be no less costly or disruptive even if many of the lawsuits are dismissed, as historical trends suggest they might be, Mr. Bradford wrote in the brief.

"These suits could be a gathering storm for corporate boards and their insurers and require new strategies in mitigating risk," Mr. Bradford said. "Instead of single cataclysmic events like Enron or MCI shaking the market to its core, these suits could present a slow drip that may gnaw at the D&O market persistently over time and present another governance headache to corporate boards."

Meanwhile, a few but growing number of derivative action lawsuits have been settled for huge amounts, Mr. Bradford noted. The two largest cases, which were resolved last year, resulted in $200 million of damages against Time Warner and $100 million against HealthSouth Corp. But in both cases, the settlements included awards for other types of claims, he noted.

Plaintiffs' attorneys also are seeking governance changes at British Petroleum in court action in Alaska, Mr. Bradford noted. That case "could lead to the Americanization of the boardroom of this British business institution, opening the door for similar suits."