Australia: Directors and officers of companies should be aware of cyber security risks

Last Updated: 2 April 2014
Article by David Hinder and Kemsley Brennan

In brief - Shareholders sue directors of Target following major data breach

Two shareholder actions have recently been filed in the US against the directors and officers of Target following a major data breach, alleging that they failed to ensure the company had adequate data security and that they made false and misleading statements and failed to take adequate steps to protect the company in the wake of the breach.

Two shareholder derivative actions brought against Target's senior managers and directors

Shareholder derivative actions are lawsuits brought by shareholders in a company, on behalf of the company. They are often brought when a company decides not to pursue a claim it is entitled to. Two shareholder derivative actions have been filed in the USA against the senior managers and directors of Target in respect of a recent data breach.

We believe these are the first shareholder derivative actions brought against directors and officers which allege inadequate security and a subsequent failure to manage a data breach appropriately.

Directors and officers should anticipate cyber attacks

Directors and officers should note that:

  • The incidence of cyber security breaches continues to increase.
  • Directors and officers should inform themselves of their company's exposure to cyber risks and ensure that appropriate policies, IT infrastructure and incident management strategies are in place.
  • They should expect that a cyber security risk will affect their company one day.

Sophisticated malware captures credit card and personal information from point-of-sale terminals

In late 2013 Target, one of the world's largest retailers, was the victim of a sophisticated cyber attack. It appears that hackers infiltrated Target's network using credentials stolen from a contractor; the contractor had credentials allowing it to access Target's online invoicing system.

The hackers were able to map Target's network and install sophisticated malicious software (malware) on point-of-sale terminals in Target stores across the USA. The malware captured credit card information and customer personal information. This was encrypted and then transmitted to the hackers.

Company alerted to data breach by US Department of Justice

Target was first alerted to the attack by the US Justice Department (DOJ) on 12 December 2013. It immediately began an internal investigation and met with the DOJ on 13 December.

Forensic investigators were retained on 14 December; the majority of the malware was removed the next day. Target then began liaising with payment processors and payment card networks with a view to making a public statement.

Details of 40 million credit cards and up to 70 million customer records stolen

On 18 December 2013, a widely-read security blog announced Target's investigation into the as-yet unpublicised breach. The next day Target announced that hackers had stolen the details of 40 million credit cards used in Target stores between 27 November 2013 and 15 December 2013. Target initially noted that PIN numbers had not been compromised; it later admitted that encrypted PIN numbers had been copied.

On 10 January 2014 Target admitted that up to 70 million customer records containing personal data (such as names, addresses, phone numbers and email addresses) had been copied.

Target offers customers free credit monitoring and identity theft protection

Target has assured customers whose credit card information was stolen that they will not be responsible for fraudulent charges. It has offered all customers free credit monitoring and identity theft protection for one year.

Stolen credit card information sold online

Fraud analysts have ascertained that the credit card information stolen in the Target data breach has been sold online via websites known as cardshops. A malicious purchaser would typically intend to use the card details to purchase goods before the card could be cancelled.

At present there is no information available on whether the customer records containing personal information have been used to commit identity theft. In our view the risks to consumers of identity theft are far more severe than the risks posed by credit card fraud.

Significant and growing costs for Target as a result of data breach

As we stated above, two shareholder derivative suits have named the board as defendants in respect of the data breach. Further difficulties facing Target at this point as a result of the data breach include:

  • regulatory investigations and associated enforcement activity
  • civil litigation costs in respect of other class actions
  • the costs of forensic IT investigators, consultants, public relations and legal advisers
  • the costs of providing credit monitoring and identity theft protection to consumers
  • the cost of upgrading infrastructure and other remediation expenses

In a statement released on 26 February 2014, Target declined to estimate the future costs of the breach, but noted that it had incurred expenses of $61 million in respect of the breach.

Target currently expects to receive insurance payments of $44 million. The $61 million figure incorporates an estimate of the cost of negotiating a settlement in some of the payment card network claims made against Target.

Shareholder derivative actions allege that directors and officers failed in their duties

Both of the shareholder derivative actions were filed in the US District Court in Minnesota, on 21 January and 29 January 2014. The pleadings allege that the directors and officers failed to discharge their duty to Target by:

  • failing to ensure that Target had adequate cyber security measures in place
  • making false and misleading statements in the wake of the data breach
  • failing to take adequate steps to protect Target in the wake of the data breach

It is presently too early to say whether these shareholder derivative actions have any chance of succeeding.

What should company directors do in light of growing cyber security risks?

It is likely that 2014 will see further data breaches as significant as those seen in 2013. In our view, the following observations are relevant to all organisations.

Cyber risks are intensifying and their costs are significant

The recent experience with Target should indicate to all that in addition to the primary risk of a cyber attack itself, there are substantial secondary risks such as litigation brought by affected third parties. Directors should:

  • inform themselves of their company's exposure to cyber risks
  • ensure that the company has implemented appropriate security measures and risk mitigation strategies

Appropriate cyber security insurance is an important measure for managing the fiscal risk associated with data breaches.

Create a data breach management plan before a data breach occurs

The shareholder derivative suits both allege that Target failed to manage the data breach appropriately. This highlights the importance of the response to any data breach.

The extent to which such criticism is reasonable and warranted remains to be seen. It is likely that it will only be possible to assess this fairly once the forensic IT investigations have concluded.

Liaise with data breach service providers and insurers before a breach

Most businesses are unlikely to have sufficient in-house personnel and resources to handle a data breach appropriately. It could be necessary to retain specialists in forensic IT, public relations and specialist lawyers.

If a cyber security policy has been purchased, the insurer may direct the use of preferred service providers. It is therefore advisable to discuss which service providers are acceptable to the insurer and the insured prior to a breach, so that if a breach occurs, specialists can be brought in promptly to assist.

Insurers may wish to review the data breach management plan during the underwriting process.

Importance of using "depth in defence" in IT security

The increasing sophistication of hackers requires a new approach to IT security. Previously, some organisations may have adopted a "perimeter" model of defence, which focuses on preventing unauthorised access to the secured systems.

Systems built with the idea of "depth in defence" in mind have multiple features which provide security, so that a hacker who penetrates the perimeter does not enjoy unrestricted access to all network-accessible resources and information.

Target a victim of state-of-the-art malware designed to avoid detection

The Target data breach involved sophisticated malware which had been customised specifically for the attack upon Target's network. The malware was designed to circumvent firewalls, evade anti-virus and other intrusion detection programs and to cover its tracks.

This data breach should remind directors and officers that they cannot afford to rely upon their current IT security systems, however up to date they may be. While it is important for corporations to continue to update and invest in state-of-the-art IT security systems, they are not a panacea.

In a cyber attack the targeted organisation will generally find itself on the back foot. Directors and officers need to ensure that the corporation maintains a cyber attack management plan which facilitates the prompt mitigation of an attack's consequences.

Kemsley Brennan David Hinder
Directors and officers
CBP Lawyers

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

David Hinder
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions