While the staggering settlements in securities class action suits have grabbed the headlines in recent years, D&O underwriters are keeping a close watch on a similar but less prominent variety of legal action: the shareholder derivative suit. More than 140 such suits related to the stock option backdating scandal have been filed in U.S. courts to date.
Shareholder derivative lawsuits are actions brought by the shareholders of a company on behalf of the company itself against a third party, usually the corporation's directors and officers. The plaintiffs may allege, for example, breaches of fiduciary duty, negligence, mismanagement or self-dealing. Most derivative suits aim at bringing about corporate governance changes, but monetary damages may be awarded. Any such recovery is paid to the company itself, and so may benefit shareholders indirectly.
Monetary settlements are not common, but they're on the rise, according to David Bradford, executive vice president of Advisen Ltd. "Not a lot of them settle for large amounts, but increasingly more suits are settling for substantial awards," he reports. Bill Lerach, partner with Lerach Coughlin Stoia Geller Rudman Robbins LLP, has seen the same trend. "In derivative actions, the amounts recovered have increased, though they have not increased to the same eyepopping levels that the class actions have," he notes.
Lerach's firm has filed a large proportion of the stockoptions- related derivative suits currently working their way through the courts. He sees a wide scope for governance changes arising from these cases, for example "by having additional enhanced internal controls for stock option and …