Individual Harassment Claim May Be Just the Beginning

Lurking behind the #MeToo threat is a bigger challenge for companies with investors: the shareholder-derivative lawsuit.

By Mark Tatum and Jennifer Varon

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:

  • Be on the Lookout for a Pattern of Harassment: Shareholder-derivative liability can be difficult to establish, as it requires proof that a director or officer failed to exercise reasonable care or perform his or her duties in good faith.  While a company should strive to prevent every incident of harassment, it is unlikely that a single incident would be sufficient to create shareholder-derivative liability. However, the more incidents that have occurred, the more likely a court is to determine a director or officer acted improperly in failing to take responsive action.  Being vigilant in tracking and responding to claims of harassment, particularly where a pattern emerges, is critical in preventing derivative liability.
  • Have Reporting Procedures in Place: A company’s directors and officers cannot track and respond to harassment claims if they are unaware of their existence.  Courts have determined that shareholder derivative liability is permissible when directors and officers fail to establish reasonable reporting systems.  Companies should ensure that they not only have clear reporting procedures, but also that their reporting procedures include updates to the board.
  • Act Quickly: The most important thing a board can do to prevent shareholder-derivative liability is to act quickly, and thoughtfully, once they are aware of harassment allegations. Both the Wynn Resort and the 21st Century Fox lawsuits included allegations that the directors and officers knew of the harassment for years, but failed to act. Hiring an outside firm with experience in these matters to conduct an independent investigation is a great first step. While companies certainly know their businesses, they may be less familiar with the ins and outs of employment and corporate law. Law firms with experience in both fields are able to determine the extent of the problem and recommend solutions. These investigations are helpful both to the prevention of future claims and also to the litigation posture of current or threatened claims.

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.