Reed Smith Client Alerts

Unlike past outbreaks of the SARS and H1N1 viruses, the COVID-19 virus is spawning securities and other shareholder litigation. At least two shareholder actions have been filed in federal courts in Florida and Pennsylvania,1 and it is likely more will follow, not only because of the devastating economic impact across industries but also as companies struggle to comply with government directives and test compliance edicts as well. Companies and their boards also may be exposed to claims by individual employees or face class action claims by employees.

Authors: Carolyn H. Rosenberg J. Andrew Moss Emily E. Garrison Herbert F. Kozlov

Directors' and officers' liability (D&O) insurance should continue to offer protection if insureds are vigilant, just as D&O insurers have covered other event-driven litigation – reluctantly or not. Thus far, some of the major D&O insurance carriers are suggesting that claims under D&O policies should be "manageable."2 Care also should be taken in the insurance renewal process, especially with respect to required disclosures of pending incidents.

To start, the context. The two COVID-19-related shareholder actions filed to date have alleged essentially typical claims for securities fraud under section 10(b) and Rule 10b-5 promulgated thereunder and section 20(a) of the Securities Exchange Act of 1934. The allegations are focused of course on COVID-19.

The complaint in Norwegian Cruise Lines alleges that the company made materially false and misleading statements in its SEC filings concerning the impact of COVID-19 on its cruise business and the procedures in place to protect the health, safety, security, and well-being of its crews and guests.

The complaint in Inovio asserts that the company's CEO made false public announcements on television and to the president that the company had developed a COVID-19 vaccine and intended to start human clinical trials by summer. Once it became known that the CEO’s statements were false, the complaint alleges that the company's stock price declined 71 percent from its class-period high.

The U.S. Securities and Exchange Commission (SEC) has issued guidance as well. On March 4, 2020, the SEC issued an order providing conditional regulatory relief for certain reporting obligations for publicly traded companies, including allowing an additional 45 days to file disclosure reports that would otherwise be due between March 1 and April 30, 2020.3 In an accompanying press release, SEC Chairman Jay Clayton stated that the manner in which regulated companies plan for and respond to COVID-19 may constitute a material investment decision that must be reported in SEC filings:

We also remind all companies to provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments. How companies plan and respond to the events as they unfold can be material to an investment decision, and I urge companies to work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable in light of the circumstances in meeting the applicable requirements. Companies providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding coronavirus, can take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements.4