COVID-19 Creates New Risks Of Shareholder Litigation And Regulatory Actions

Client Alert

May 2020

By: Stephen L. Ram

The impact of COVID-19 continues to evolve, yet we already have seen securities class actions and regulatory activity regarding the pandemic. As with previous economic downturns, we are likely to see a continuing rise in the number of securities class actions, stockholder derivative suits, and regulatory activity over company representations concerning the outbreak on a business’s performance, the adequacy of risk disclosures of COVID-19 on the business, compliance with government required or recommended protocols, or the company’s own policies, or mitigation efforts concerning the virus.  As companies grapple with challenging decisions for their businesses, this remains a crucial time to remain vigilant and committed to fulsome public reporting addressing the current impacts of COVID-19. 

Key Takeaways

  • Public reporting. New guidance from the Securities and Exchange Commission (“SEC”) counsels public companies to disclose the impact of COVID-19 on their current business status and financial condition, and the risks and impact of COVID-19 on future operations and finances. 
  • Corporate Governance. In this extraordinary time as in any other time, companies should remain steadfast and embrace the best practices in corporate decision making. Board members should proactively engage with management about challenges posed by the pandemic and receive frequent reports and updates as those challenges evolve. 
  • Flexibility. Companies need to be flexible and adapt to new regulations, news, and threats affecting the business as they adopt to cope with COVID-19. Federal, state, and local orders and recommendations affecting businesses have been rapidly changing and evolving; the pace will only increase as governments begin to relax shelter in place restrictions with new guidance on safe workplaces. Companies need to remain current on those orders and recommendations, and consider any adjustments to existing policies and practices to ensure compliance. For example, cybersecurity threats for remote work are increasing, particularly, as more employees, customers, and partners use video conferencing. 
  • A complete picture. To fully understand risks and obligations in event of regulatory action or lawsuits, companies may wish to review indemnity and advancement obligations, and insurance policies, including D&O policies, for coverage pertaining to possible COVID-19 related claims.

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