Wells Fargo Litigation Against Directors Will Continue. Is there Now a Hole in the Business Judgment Rule?

Corporate directors should carefully review the agreements with their companies and their insurance coverage. A recent California decision has significantly increased their exposure to shareholder litigation damages.

On October 4, Judge Jon S. Tigar of the U.S. District Court, Northern District of California issued a decision in In re Wells Fargo Shareholder Derivative Litigation that permitted derivative claims for breach of fiduciary duty and corporate waste, among others, to proceed against the Wells Fargo directors. The court found that the Complaint in the law suit sufficiently set forth claims that the directors had consciously disregarded management’s conduct in illegal cross-selling activities such that the directors violated their fiduciary obligations and caused corporate waste from government investigations, litigation and loss of business through reputation damage.

We had previously published an article about the erosion of the business judgment rule, which protects directors from liability for decisions made in the interests of the company while serving on the company’s board, with regard to its protection of directors in shareholder litigation stemming from data breaches. We noted a judicial trend toward permitting litigation where directors had consciously and deliberately, or recklessly, abdicated their responsibilities to investigate cyber issues and to supervise management regarding information safeguards required by law.  While the cases we cited all dismissed such derivative actions, we predicted it was a matter of time before a court found that a board had not met the criteria for oversight and fiduciary responsibility required by these cases.

That day has arrived, and the business judgment rule is no longer eroding but, instead, has a large hole in the center through which liability, and perhaps personal damages, can reach a corporate director, A board that does not pay adequate attention to clearly lax cybersecurity safeguards that result in a massive data breach of the sort experienced by Equifax and many other organizations may, based on this Wells Fargo decision, find itself in the crosshairs of a derivative action that is not dismissed on an early motion.

If you have questions about corporate director liability in light of this recent Wells Fargo decision, please contact Kenneth N. Rashbaum.