When a public company confronts a crisis, whether stemming from regulatory scrutiny, operational setbacks, or some other unfortunate development, securities litigation exposure materializes rapidly. The moment that such a situation becomes public, and your stock drops, you are essentially already in litigation—law firms are searching for clients and drafting a complaint that will almost inevitably be filed. At the same time, the media publishes its own version of the story, and lawmakers may show interest, while investors and board members demand a response.
In these moments, companies require more than simply litigation advice: they need coordinated crisis response and litigation strategy. Securities litigators play an important role as part of these efforts.
A deliberate and strategic approach to securities litigation risk in the context of a crisis involves the following considerations:
1. Exercise Precision in Corporate Communications and Aim for Clarity
In the wake of a crisis, public companies often have internal and external pressure to issue a statement to calm markets and reassure stakeholders. However, premature or imprecise statements can create more confusion, undercut future legal defenses, or support allegations of further false/misleading statements or fraudulent intent in a securities class action complaint. Securities litigation counsel can be of assistance in evaluating what messaging might be appropriate in the situation.
Messaging should:
- Accurately reflect the facts known to the company at the time;
- Avoid responses that could be construed as admissions;
- Remain consistent with disclosures and regulatory filings;
- Abstain from making promises unsupported by facts or data (g., timelines on when a crisis may end).
You often can't control the crisis—but you can control the response. That starts with deliberate communication and coordinated legal strategy from minute one.
2. Manage Internal Communications
When a company is facing a crisis, managing internal response messaging to employees is also critical. What you say internally will be heavily scrutinized if a case goes to discovery. Internal messaging should be accurate and consistent with public disclosures, lest those messages later be used to establish a narrative inconsistent with defense themes or to construct allegations of scienter or intentional misconduct.
Just as the media mine for public comments by employees on social media or blogs, in securities litigation, plaintiffs' firms often attempt to investigate claims by reaching out to former employees to bolster their allegations. Reminders about communications and social media policies can be helpful given the likely outreach and interest in the wake of a crisis.
3. Consult With Insurance Brokers
Upon identifying potential litigation or regulatory exposure, companies should consult with their insurance brokers and determine what entity insurance is available in the situation. Securities litigation counsel can be helpful analyzing directors and officers ("D&O") liability insurance policies and coordinating with the carriers. Some insurance policies offer coverage for crisis communications consultants.
4. Carefully Consider Protecting Privilege Across All Interactions
Legal teams should actively consider how best to preserve the attorney-client privilege and work product protection across all engagements. In crisis scenarios, appropriate steps should be taken to protect privileged interactions with third parties such as experts, communications firms, consultants, and auditors. Consult with counsel early to assess proactively how best to protect privilege in third-party situations and be thoughtful about such communications. Similarly, when dealing with regulators, carefully strategize about the materials provided and discuss with litigation counsel. If teams are separate, coordination between litigation counsel and investigations or enforcement counsel can help in weighing the potential pros/cons of providing certain documents.
5. Anticipate Shareholder Derivative Litigation and Interest.
A crisis frequently attracts not only securities class action litigation but also shareholder derivative litigation. Shareholders may bring suit, send demand letters to the board, or ask for documents. Under most state corporate laws, such as the recently amended Section 220 of the Delaware General Corporation Law, shareholders are entitled to inspect certain corporate records and often do so before filing suit. While Section 220 was recently clarified in an amendment that narrows what companies are required to produce, shareholders may still request materials, including board minutes or committee minutes, and director and officer independence questionnaires. In addition to defending lawsuits, securities litigation counsel can prepare responses to derivative demand letters to the Board and to shareholder records demands. Management and in-house lawyers should be careful to identify any such demands immediately, as they often arrive via traditional snail mail to the chair of the board, c/o someone at the company, or simply addressed directly to the board chair at the company's headquarters or other published mailing address. These demands have very short deadlines for a response in many instances.
6. Prepare for Discovery at the Outset
Thoughtfully consider the timing and scope of document preservation with counsel, and proceed with the assumption that all relevant documents will ultimately likely be subject to discovery. This is particularly true today, where individuals communicate across messaging platforms, text messages, as well as email.
7. Coordinate a Unified Multi-Forum Strategy
In a crisis situation, you're not just fighting on one front. A crisis may trigger parallel actions across multiple jurisdictions and forums: regulatory interest, congressional testimony, state attorneys general inquiries, internal investigations, media inquiries, and litigation including against directors and officers. A fragmented or inconsistent strategy increases litigation exposure and can undermine credibility with courts, regulators, and the public.
To mitigate this risk, particularly where different law firms are involved, coordination and visibility across proceedings are key. Carefully coordinating legal arguments, discovery positions, and factual narratives can avoid collateral attacks. Securities litigation counsel play an important role in carefully evaluating whether disclosures made in one context (e.g., regulatory response) would conflict with defenses advanced in another (i.e., civil litigation), allowing companies to balance the pros/cons of action. Close collaboration among in-house legal teams, external counsel, outside consultants such as crisis communications firms or government relations consultants, and executive leadership leads to a unified and coherent strategy.
Conclusion: Take Control Early and Deliberately
Companies must respond to a crisis with clarity, discipline, and legal foresight. Where a crisis involves a significant stock drop, securities litigation is likely to occur. By engaging counsel early, carefully considering privilege, and aligning teams under a unified strategy, companies can assert control over a volatile situation. Securities litigators can proactively assist early in the crisis response by thoughtfully strategizing about the impact of the response on litigation, potentially limiting additional exposure.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
