During times of upheaval, it’s hard to know the best course of action for a company. Uncertainty can inadvertently lead to missteps and unfulfilled predictions, often triggering shareholder claims. We’ve seen this in the recent in the past, during the #MeToo movement and COVID-19. Now, we may see it again with tariffs.
How Times of Disruption Trigger Litigation
The #MeToo movement is a good example of how social movements can trigger a wave of D&O lawsuits.
The #MeToo movement began in 2006, but it only gained traction in 2017, when actress Alyssa Milano shared her experiences and allegations against film producer Harvey Weinstein. As a result, sexual harassment received much more attention. Behaviors that might have previously been swept under the rug were suddenly under scrutiny.
This led to accusations, litigation, and regulatory action. The EEOC says it received an increase in sexual harassment charges in the two years following the #MeToo movement’s viral moment in October 2017. In fiscal year 2017, the EEOC received 6,696 sexual harassment charges. This increased to 7,609 in 2018 and 7,514 in 2019.
There were also D&O implications. Shareholders can accuse directors and officers of breaching their duty by engaging in sexual harassment, ignoring it, or making misleading statements about it. According to The D&O Diary, the #MeToo movement sparked a wave of D&O claims, including lawsuits against the boards of 21st Century Fox and Wynn Resorts.
Not All Events Are Foreseeable
Even though executives had no way of knowing that a viral movement would lead to increased scrutiny, they still knew that sexual harassment was both immoral and illegal.
Other types of disruption are harder to predict, the COVID-19 pandemic being a prime example. If you told people in 2019 that a coronavirus would soon cause widespread lockdowns, supply chain breakdowns, and business closures, they might not have believed you – even though that’s exactly what happened.
The pandemic had a disastrous impact on many businesses. According to the Federal Reserve, business closures surged in early 2020, resulting in 1.2 million lost jobs in the second quarter. However, the pandemic also created new opportunities – in the second half of 2020, business starts exceeded business closures.
Many companies had to pivot, which didn’t always go well. According to The D&O Diary, investors have filed a lawsuit against Methode Electronics, accusing executives of misrepresenting the company’s transition to a more specialized components business.
Companies that prospered due to COVID also faced risks. For example, The D&O Diary says investors have sued ZoomInfo Technologies, alleging that COVID temporarily inflated demand and that the company concealed the subsequent decline in demand.
All in all, it’s been a tumultuous period. According to Cornerstone Research, there were 17 COVID-related core federal filings in 2020, 17 in 2021, and 20 in 2022. Although the number of core federal filings dipped to 11 in 2023, it rose again to 15 in 2024, showing that this is still an issue.
Tariffs Could Be the Next Trigger
The COVID pandemic and the #MeToo movement are just two examples of disruptions that spurred D&O lawsuits. The emergence of generative AI, economic recessions, and other events have a long history of triggering new waves of D&O litigation. Tariffs could be the next issue.
Businesses have had a hard time keeping up with rapidly-changing tariff policies. According to CNN, back-and-forth tariff talks have been challenging for multiple industries, including manufacturing. For example, share prices for General Motors, Ford, and Stellantis fell after Trump moved forward with 25% tariffs on Canada and Mexico.
Since declines in share prices often trigger shareholder lawsuits, it’s not far-fetched to think that tariffs could have a domino effect that results in D&O litigation. Oversight and guidance begin at the executive level, and shareholders will scrutinize executive decisions if future performance does not live up to their expectations.
Executives will need to tread carefully and watch for further developments. ReedSmith has a tariff tracker that may be of interest to business leaders trying to keep up with developments to the situation.
This is also a good time to make sure your executives have robust D&O insurance with adequate tail coverage. Don’t wait until tariffs or another event trigger shareholder claims. Ask NSI Insurance Group for a complimentary coverage review. Learn more.
