Liability threats to boards today: all six are of growing concern in terms of the frequency of litigation, severity of litigation, or both.

• Author: Zacharias, Carol A.N.
• Position: RISK MATTERS

MAJOR DIRECTORS' and officers' liability events come in costly surges that are both unprecedented and unpredicted. Stock option backdating, initial public offering laddering, auction rate filings, Chinese reverse mergers, and the credit crisis have all led to waves of litigation against, executives in recent years. This article highlights six key areas of liability today.

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Mergers & Acquisitions: Transactional litigation continues to climb to a point where litigation is virtually guaranteed: 96% of all deals resulted in litigation in 2011, up from 53% in 2011, according to Cornerstone research. Moreover, each such transaction falls prey to an average of six suits, double the average of three in 2007. In addition, suits are filed in both state and federal courts, making the defense costly and complex. In fact, Cornerstone reports that as many as 15 to 29 lawsuits were filed over the largest deals in 2010 and 2011.

Federal Securities Fraud Class Actions: Federal securities class action filings decreased 6% in the first six months of 2012 compared with the last six months of 2011, reportedly due to a decline in Chinese reverse merger and merger and acquisition filings, per Cornerstone. However, removing these types of cases from the tabulation reveals that the number of traditional securities fraud class actions actually increased by 23% in the first half of 2012 over the last half of 2011. Even more troubling than this increase is the rise in median settlement values, from $3.7 million in 1996 to $8.7 million in 2011 (reported at www.NERA.com).

Executive Compensation: Recent years have seen the first recoupment of executive compensation on account of accounting restatements. Section 304 Of the Sarbanes-Oxley Act of 2002 (SOX) permits the SEC to claw back certain compensation in the event of an accounting restatement. Initially, the SEC sought compensation only where the executive was alleged to have individually engaged in the accounting misconduct. However, more recently the agency has proceeded even where executives committed no act of individual misconduct. SOX limited the right to recover to the SEC; to one year of certain compensation; and to seeking recovery against only CEOs and CFOs. In contrast, Section 954 of the Dodd-Frank Act provides that national securities exchanges must require listing companies to have a policy that the company itself will claw back certain compensation from any current or former...