The arrival of a securities class action lawsuit can be and often is a watershed moment in the life a public company. In the following guest post, Edgar A. Neely IV and Scott N. Sherman provide a basic briefing for directors concerned about securities litigation. Edgar and Scott are both partners at the Nelson Mullins law firm. I would like to thank Edgar and Scott for allowing me to publish their article on this site. Here is the authors’ article.
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As we kick off the new year, the risk of shareholder litigation remains a significant reality for public companies and their boards. For example, a Cornerstone Research report in September 2025 showed that merger and acquisition-related litigation in Delaware has increased based both on volume and average settlement value. (See the Cornerstone press release here). Recent years have also seen an increase in the value of derivative settlements, with at least 12 derivative settlements over $100M since 2020. This trend serves as a stark reminder that shareholder litigation can present financial exposure not just for a company but also personally for its directors.
Understanding important concepts about shareholder litigation can help companies and their directors mitigate risk and assess potential strategies. With that in mind, the five key considerations below provide important and actionable context for directors to know when it comes to shareholder litigation, from protections like insurance and exculpation to considerations on strategy and risk mitigation.
- It’s important to assess and understand D&O insurance and other protections
Directors and officers (“D&O”) insurance is critically important to protect board members from personal financial exposure in shareholder litigation. Board members should thus understand D&O insurance and engage with management in selecting an appropriate policy.
A primary consideration is the appropriate amount of coverage, which requires assessing the circumstances and risk profile of the company. It’s also important to understand the different “sides” of D&O insurance and how much coverage is available for “Side A.” At a high level, D&O insurance in typically broken into three sides: “Side A” covers individual directors and officers, “Side B” provides reimbursement to the company after it indemnifies individual directors and officers, and “Side C” covers the company for its securities litigation risk. Assessing the coverage amount for Side A, whether there is “difference in conditions” (DIC) coverage, and the terms of any conduct exclusions are each critical in the policy selection process.
The company can also offer protections through its articles of incorporation and bylaws. A company’s articles of incorporation can exculpate directors from personal liability for duty of care claims. Its articles of incorporation and bylaws can also include provisions for indemnification and fee advancement for directors and officers. But, importantly, the extent of these protections is often limited by state law to exclude circumstances like bad faith or intentional misconduct.
It’s important for the board to understand these protections on the front end and, should litigation arise, consult with counsel to review and secure the available rights and protections from personal exposure.
2. State of incorporation matters
The decision of where to incorporate (or reincorporate) and developments in the “DExit” movement continue to be hot topics in corporate governance, as discussed in our firm’s Corporate Governance Insights series (including installments in March, June, and July, and November 2025).
The laws of a company’s state of incorporation generally govern matters concerning the relationship between the company, its directors, and its shareholders. As a result, key issues directly related to shareholder litigation can be meaningfully different depending on the state of incorporation.
For example, shareholders often make a books and records request (called a “Section 220 demand” in Delaware) to gather information from the company before pursuing legal action. State law on the requirements for shareholders to obtain the information and the scope of information they may be entitled to varies from state-to-state, directly impacting the company’s options in assessing a response to the request. Similarly, how a shareholder may bring a derivative action differs depending on the laws of the state of incorporation. And beyond procedural issues, substantive legal rules can vary among states.
Retaining knowledgeable counsel on the applicable state’s rules and standards is vital to understanding the key issues and assessing available strategies related to shareholder claims.
3. The type of shareholder action matters
Two common types of shareholder actions are (1) securities class actions, and (2) derivative actions. Securities class actions are brought by shareholders to recover for their alleged losses. These actions typically involve claims against the company itself and its chief executives under federal securities laws—often based on certain public statements alleged to be fraudulent. By contrast, derivative actions are brought by the shareholder “on behalf of the company” against the company’s officers or directors for alleged harm suffered by the company. They typically involve claims for breach of fiduciary duty, unjust enrichment, and corporate waste against the company’s officers and directors.
Each type of action has its own unique considerations. For example, because derivative actions are brought by shareholders on behalf of the company, they may be subject to dismissal if the shareholder fails to meet certain base-line requirements to proceed on the company’s behalf. Derivative actions can also be dismissed if an independent board or special committee determines the action is not in the best interests of the company based on a reasonable and good faith investigation. This process requires several key considerations, including each board member’s independence, whether it’s necessary to form a committee for the investigation, the scope of the committee’s decision-making authority, and obtaining independent counsel for the committee. For additional detail on derivative investigations and the role of related committees, see our firm’s publication here.
Securities class actions also involve distinct issues and strategy points. The company may seek early dismissal based on the stringent requirements a shareholder must meet to properly allege federal securities fraud. Defeating class certification presents another critical point in the case and requires detailed analysis of the class allegations and key legal arguments. Key issues in the analysis include the shareholder’s standing (i.e., ability to represent and bring the alleged class claims) and challenging the “fraud-on-the-market” theory (i.e., that the alleged misrepresentations inflated the company’s stock price).
Overall, both types of actions present complex legal and procedural issues, making it crucial to engage legal counsel early on to assess and develop an appropriate response. And as noted above, early consultation with counsel is also important to understand and secure the available rights and protections against personal exposure, such as D&O coverage.
4. Parallel shareholder actions are common and require careful assessment
Securities class actions often involve an accompanying (or parallel) derivative action based on similar or related allegations. According to Cornerstone Research, nearly half (47%) of the securities class action settlements between 2019 to 2024 involved parallel derivative actions. (The Cornerstone Research report can be found here.)
Because decisions and activity in one action can impact the other, it’s important to avoid handling parallel actions in a vacuum. For example, derivative actions often seek indemnification for the amounts paid by the company in the parallel securities action. Liability for that claim will thus hinge on the outcome of the securities action. Dismissal of the securities action may also weaken or remove the basis for a parallel derivative action brought on the same allegations. And if both actions proceed simultaneously, the company is put in the awkward position of defending the allegations against it in the securities action while the derivative plaintiff (on behalf of the company) is actively seeking to prove similar allegations.
For these and other reasons, it often makes sense to stay the derivative action until the related securities action is resolved or until key developments occur, such as a ruling on a motion to dismiss. Staying parallel derivative actions can serve to avoid inefficiencies, conflicting rulings, and potential prejudice to the company and its litigation interests. But whether and to what extent a stay is appropriate will depend on the facts and circumstances.
Effectively managing parallel actions therefore requires careful assessment and coordination with legal counsel.
5. Staying informed and documenting board considerations is key
There are several ways directors can mitigate the risk of shareholder litigation. Among them, a board’s ability to stay informed and document its decision-making process has proven to be crucial. These practices are important not only for reducing litigation risk overall through board engagement and oversight, but also for limiting personal financial exposure for directors.
For example, most jurisdictions recognize the business judgment rule, which generally protects directors and officers from liability for decisions made on an informed and good faith basis, and in the honest belief that the action taken was in the best interests of the company. Taking measures to ensure the board is adequately informed thus provides a strong foundation for the protections of the business judgment rule.
Recent court decisions have also shown the importance of documenting the board’s receipt and consideration of important information. This is particularly true with respect to “mission-critical” and compliance-related issues for companies. A written, non-privileged record of the board’s discussion of such key issues (often via board or committee minutes) can provide a powerful defense to fiduciary duty claims against the board.
As the securities litigation and corporate governance landscape continues to evolve, it’s important for boards to consult with legal counsel on strategies for risk mitigation.
These materials have been prepared for informational purposes only and are not legal advice. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Internet subscribers and online readers should not act upon this information without seeking professional counsel.
Edgar A. Neely IV is a partner at Nelson Mullins Riley & Scarborough LLP, where he focuses his practice on securities litigation and complex business disputes. He represents companies, their directors and officers, and special litigation committees in securities and shareholder litigation matters. Edgar also represents companies and individuals in investigations and proceedings brought by the SEC and other government and regulatory agencies. He may be reached at edgar.neely@nelsonmullins.com.
Scott N. Sherman is a partner at Nelson Mullins Riley & Scarborough LLP, where he practices in complex business litigation and securities litigation and serves as co-chair of the firm’s Securities and Corporate Governance Litigation Group. He represents public companies, directors, and officers in securities class actions and derivative lawsuits and represents special litigation committees as well as companies and individuals involved in SEC and FINA enforcement proceedings. He may be reached at scott.sherman@nelsonmullins.com.
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