Lurking behind the #MeToo threat is a bigger challenge for companies with investors: the shareholder-derivative lawsuit.
In the wake of the #MeToo movement, companies are grappling with how best to respond to and prevent sexual harassment in the workplace. From TIME Magazine’s Person of the Year to the Golden Globes to Oprah, there is intense public scrutiny on how organizations handle these complex issues.
Many articles, have discussed and explained tips to help companies prevent both sexual harassment in the workplace and the direct litigation that follows. So will this one. But what companies may not be thinking about is the potential for sexual-harassment claims to lead to another type of secondary liability—shareholder-derivative lawsuits.
In a typical workplace sexual-harassment lawsuit, the plaintiff is a current or former employee who brings suit against the employer on the basis of the harassment he or she experienced. In contrast, shareholder-derivative lawsuits are brought by a company’s shareholders on behalf of the company against the company’s management or board of directors. These lawsuits are possible because a corporation’s directors and officers owe fiduciary duties to the company. Derivative lawsuits contend that directors or officers violated their duties to the company by taking actions contrary to the company’s best interests.
Just a few short months ago, 21st Century Fox agreed to one of the largest shareholder-derivative settlements in history when it agreed to pay $90 million to settle a claim alleging the company’s management permitted a culture of sexual and racial harassment within the organization. The lawsuit was filed in the wake of former Fox News anchor Gretchen Carlson’s direct lawsuit against Roger Ailes, the then CEO of Fox News.
Following that action, a tide of additional allegations of sexual and racial harassment within the organization emerged and led to Bill O’Reilly’s departure. Along with the monetary settlement payment, 21st Century Fox agreed to the creation of the Fox News Workplace Professionalism and Inclusion Council; an independent body of experts with the power to oversee and recommend policies, procedures, and reforms to rehabilitate the culture within the organization.
In addition to the 21st Century Fox shareholder-derivative lawsuit, within the past month at least five groups of shareholders have filed suit against Wynn Resorts after allegations of misconduct against founder Steve Wynn were unearthed. The lawsuits assert the company’s directors breached their duties to the organization when they ignored a sustained pattern of harassment and misconduct by Mr. Wynn, leading to financial and reputational harm to the company.
There are a number of steps a company can take to help protect itself against these types of shareholder-derivative lawsuits:
By following these steps, and consulting with experts, businesses may be able to prevent their organization from being the next target of a shareholder-derivative lawsuit.