A securities class action filed against ZoomInfo Technologies, Inc. and certain of its directors and officers on June 25, 2026, highlights what may be the next phase of AI-related securities litigation. Unlike many earlier AI-related lawsuits, which alleged that companies overstated their AI capabilities, the Zoom complaint alleges that the company accurately described its AI initiatives but failed to disclose that AI was simultaneously disrupting its legacy business model.

If this theory gains traction, it could represent another evolution in AI-related securities litigation: from alleged AI washing to alleged underdisclosure of AI-related business risks.

The Zoom SCA

The lawsuit, filed in the Western District of Washington on behalf of purchasers of Zoom securities between November 3, 2025, and May 11, 2026, asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act against ZoomInfo, its Chief Executive Officer Henry Schuck, and its Chief Financial Officer Graham O’Brien (Zoom SCA).

According to the complaint, throughout the class period defendants repeatedly emphasized that Zoom was evolving into an AI-powered go-to-market platform built around proprietary data assets, Copilot, GTM Studio, GTM Workspace, and other AI-enabled products. Executives allegedly represented that these products would provide significant long-term business benefits, including improved customer retention and revenue growth.

The complaint points to numerous public statements describing ZoomInfo as an AI leader whose proprietary data platform positioned the company to benefit from enterprise AI adoption.

Of note, the plaintiffs do not contend that these AI products failed to exist or that the company fabricated its AI initiatives. Instead, they allege that management omitted material information regarding the effect AI was having on Zoom’s legacy business. Specifically, the complaint alleges that customers increasingly were moving away from traditional seat-based subscription models toward consumption-based pricing and internally developed AI-driven sales tools. 

According to the complaint, these changes were contributing to weakening customer retention, slowing growth in the company’s legacy software business, and increasing competitive pressures; developments that allegedly rendered defendants’ optimistic statements materially misleading.

On May 12, 2026, Zoom reported first-quarter financial results, which lowered its full-year guidance, acknowledged slowing growth, and discussed customer migration toward consumption-based models.  According to the complaint, following the announcement, the company’s share price fell approximately 33%.

Discussion

From a D&O perspective, the significance of the Zoom complaint lies less in the alleged misstatements themselves than in what they suggest about the continuing evolution of AI-related securities litigation.

As readers of this blog know, the first generation of AI-related securities suits generally involved allegations of “AI washing,” which involved claims that companies overstated the sophistication or commercial significance of their AI capabilities. The Zoom complaint alleges something different. The plaintiffs do not contend that Zoom lacked AI products or fabricated its AI initiatives. Instead, they allege that the company failed to disclose that AI was simultaneously disrupting its existing subscription-based business.

In that respect, Zoom appears to fit into an emerging category of AI litigation focused less on whether AI exists and more on whether companies adequately disclosed AI’s impact on their underlying business model.

The Reddit securities lawsuit (Reddit SCA) reflects a similar theme. Rather than alleging that Reddit overstated its AI capabilities, the shareholder plaintiffs in the Reddit SCA on whether the company adequately disclosed how AI-related developments could affect its monetization strategy and long-term business model. Viewed together, the Reddit and Zoom cases suggest plaintiffs increasingly are focusing on AI-driven business transition risks rather than AI promotion alone.

Accordingly, as companies accelerate the integration of AI into core business functions, securities plaintiffs could begin to focus on whether management has adequately disclosed the attendant risks of AI adoption. For D&O underwriters, this trend underscores the growing importance of evaluating corporate AI-related disclosures, especially with respect to the anticipated impact to customer base and revenue, which may now be subject to heightened scrutiny.

The evolution of these cases carries important implications for boards and D&O insurers alike. As AI becomes embedded throughout business operations, oversight extends beyond technology deployment to understanding how AI may affect customer behavior, pricing models, revenue mix, competitive positioning, and financial forecasts. At the same time, underwriters increasingly may evaluate not only whether companies are investing in AI but also whether disclosure controls adequately address AI-related business risks.

Regardless of the outcome of the Zoom litigation, one thing is already clear: AI-related securities litigation continues to be a significant driver of securities class action filings. By our count, the Zoom SCA represents the fourteenth AI-related securities class action lawsuit filed in 2026, meaning that AI-related cases make up more than ten percent of all securities class action lawsuits filed this year.

By comparison, there were fourteen AI-related securities suits during all of 2025, representing roughly seven percent of that year’s filings. At the current pace, AI-related litigation appears likely to become one of the defining contributors to the overall securities litigation landscape in 2026.

The third episode of The D&O Diary Podcast Series is now live. Building on our June 30, 2026, post discussing first-half federal court securities class action lawsuits, this episode explores the factors and  trends driving the number of current suit filings.

In this podcast, we discuss the overall increase in the total number of federal court securities suits during the first six months of 2026; the continued emergence of AI-related securities litigation; and the significant role that stock manipulation and promotion-related claims in the number of securities suits that have been filed so far this year. We also examine what these developments may mean for public companies, directors and officers, and D&O insurers in the months ahead.

Our thanks to everyone who has listened to, subscribed to, and supported The D&O Diary Podcast Series. We are grateful for the feedback and encouragement we have received since launching the podcast. We welcome your comments, particularly any suggestions you may have.

Please also see our note below about the AI survey.

Listen now on:

Spotify – https://open.spotify.com/episode/2xo5DLcQkSUDqS6yvXU5vB?si=qorN_IKeSdqFyIOSoAx8qA

or

Apple Podcasts – https://podcasts.apple.com/us/podcast/midyear-securities-litigation/id1896880954?i=1000776273037

Reminder: The D&O Diary and Allianz Commercial AI Survey

We also encourage readers who have not yet participated to complete our industry survey, conducted in collaboration with Allianz Commercial, on AI’s Impact on D&O Liability and Insurance. The survey takes just a few minutes to complete and will remain open through July 20, 2026. A link to the survey form can be found here.

Thank you to everyone who has already completed our survey. We have received an incredible response and greatly appreciate the time and insights that participants have shared.

Thank you for listening to and supporting The D&O Diary Podcast Series.

In the following guest post, Thomas Boley, an associate at the Wiley Rein LLP law firm, takes a closer look at the Up-C corporate structure, and considers the claims that can arise due to the issues the corporate structure can present, as well as the insurance coverage issues that these claims may involve. Our thanks to Thomas for allowing us to publish his article as a guest post on this site. Here is Thomas’s article.

********************

The Umbrella Partnership–C Corporation structure—better known as the “Up‑C”—has rapidly evolved from a niche tax‑efficient IPO structure to a mainstream vehicle used by pre-IPO insiders seeking liquidity while preserving partnership tax treatment.[i]  Over the past decade, dozens of high‑profile companies have gone public using an Up‑C, with more arriving each year as private equity funds seek exit opportunities in a strengthening IPO market.[ii]

But the same features that make Up‑Cs economically attractive may create structurally recurring dilution issues, particularly when insiders influence the use of tax distributions or the flow of liquidity between the private operating partnership and the public corporation.  As recent litigation demonstrates, these structural conflicts can produce fiduciary‑duty claims against the public company’s directors and officers.[iii]

For insurers and claims professionals, this emerging pattern poses a significant challenge.  Dilution‑based claims often involve shareholder class actions seeking relief directly for public stockholders.[iv]  This article explains the Up‑C structure, common dilution issues arising from it, and the merits and coverage-related issues insurers should expect as more of these cases reach the pleading and settlement stages.

The Up-C Structure

The Up‑C structure is designed to allow pre‑IPO owners of a partnership (typically an LLC taxed as a pass‑through entity) to take a company public without converting the business into a taxable corporation.  At IPO, the original owners retain units in the operating partnership (“OpCo”), while public investors purchase shares in a new C‑corporation (“PubCo”).  PubCo in turn holds an interest in OpCo equal to the number of its outstanding Class A shares, while pre-IPO owners continue to own units of the OpCo. 

This structure offers several benefits to pre-IPO owners.  First, it preserves pass-through taxation, allowing pre-IPO owners to continue to receive pass-through treatment on OpCo income, avoiding corporate-level taxation.[v]  Second, pre-IPO owners often hold Class B or similar high-vote stock in the PubCo, enabling them to retain control.[vi]  Third, pre-IPO owners can exchange their OpCo units for PubCo Class A shares on a one-for-one basis, permitting pre-IPO investors to sell their interest on the public market.[vii]  And fourth, pre-IPO owners typically benefit from tax receivable agreements.  Under these agreements, the PubCo typically agrees to pay pre-IPO owners a percentage of the tax savings, often 85%.[viii]

Central to the Up-C’s framework is the core principle that one OpCo unit should be economically equivalent to one share of PubCo Class A stock.

[ix]

Common Dilution Issues

Up‑Cs are potentially prone to dilution conflicts because of their dual‑entity design and the number of decisions that affect economic parity between the OpCo units and PubCo shares.  The Up-C structure inherently divides investors into two groups: (a) public stockholders who hold Class A shares in the PubCo and (b) insiders who hold partnership interests in the OpCo and often high-vote stock in the PubCo.  As insiders may dominate the PubCo’s board, decisions affecting economic parity between insiders and public stockholders, no matter how well-founded, may nevertheless create plausible fiduciary-duty claims.  Examples include:

1. Trapped Cash Claims

Because the OpCo is taxed as a partnership, it must make pro rata tax distributions to all unitholders, including the PubCo, based on the highest marginal tax rate any unitholder might face.  As a result, the PubCo often receives more cash than necessary to cover its own taxes (as pre-IPO individuals often have higher tax rates than corporations).  That excess cash is sometimes retained by the PubCo, used to fund corporate operations, used to repurchase Class A shares or OpCo units, or held without being distributed.

If the PubCo retains substantial excess tax distributions without issuing dividends to Class A holders, then book value will increase, which may inflate the PubCo stock’s trading price.  This reflects cash that is effectively attributable to public stockholders, even though they cannot access it directly.  After insiders exchange OpCo units for PubCo shares and sell those shares, they may realize value derived from that trapped tax distribution after already receiving a benefit from their own tax distribution.  This is the “double‑dip” theory alleged in Shumacher v. Mariotti, et al., No. 2022-0051-PAF (Del. Ch.).[x]

2. Share Buyback Claims

Another dilution dynamic involves the PubCo’s using its cash to engage in a stock buyback.  In a buyback in the Up-C context, the PubCo must void an OpCo unit for every PubCo Class A share that it repurchases.  This is because each Class A share in the PubCo is tied to a corresponding number of units in the OpCo.  This necessarily increases the proportion of OpCo units held by insiders compared to the number held by the PubCo.  At the same time, the insiders’ control over the PubCo increases if the PubCo repurchases shares from public stockholders. 

This is the core theory alleged in Iron Workers Local No. 55 Pension Fund v. Viola, No. 2025-0058-JTL (Del. Ch.): public‑company cash allegedly funded repurchases that disproportionately benefited insiders.[xi]  Specifically, in this case, the plaintiff alleges that the repurchase program diverted over $500 million in value[xii] from public stockholders to insiders through the asymmetrical effect of insiders’ receiving both direct cash distributions and the valuation uplift from PubCo’s repurchase of Class A shares.

In June 2026, Vice Chancellor Laster denied the motion to dismiss in this case.[xiii]  Ruling from the bench, VC Laster opined that the repurchase mechanism creates an “elementary diversion of value from the public stockholders to the insiders.”[xiv]

3. Up-C Reorganizations

A third dilution‑based theory arises when an Up‑C restructures into a traditional C‑corporation (or otherwise reorganizes its capital structure) in a manner that increases insiders’ voting power without changing the nominal share count held by public stockholders.  In these transactions, insiders often exchange OpCo units for high‑vote PubCo shares or receive a greater percentage of super‑voting stock than they would have obtained through a pro rata exchange.  Although public stockholders may retain the same number of Class A shares, their collective voting power can be materially reduced.  Plaintiffs alleged this theory in Siegel v. Cantor Fitzgerald, No. 2024-0146-LWW (Del. Ch.).[xv]

D&O Insurance Implications of Up-C Dilution Litigation

These dilution theories carry distinct implications for D&O insurance because they challenge conventional assumptions about who was harmed, what constitutes loss, and how relief is structured.  Consequently, coverage questions arise that affect defense costs, allocation, and settlement posture.  Several of the most significant D&O issues are discussed below.

1. Direct or Derivative

In Up‑C dilution cases, plaintiffs frequently characterize the alleged harm as direct, asserting that public Class A stockholders—not the corporation—suffered the economic injury.[xvi]  Courts have reached mixed results on this characterization, and the issue is often litigated as a threshold matter.[xvii]  Even where defendants ultimately succeed in re‑characterizing the claims as derivative, the costs incurred to brief and adjudicate the issue at the outset can be substantial.

The direct‑versus‑derivative distinction also materially affects defense-cost exposure and litigation leverage.  When claims proceed as direct actions, they bypass demand requirements, are not subject to termination by a special litigation committee, and often avoid early application of business‑judgment‑rule deference.  As a practical matter, this procedural posture can make it more difficult for defendants to secure dismissal at the pleading stage, thereby prolonging litigation and increasing defense‑cost burn before the merits are ever addressed.

2. Capacity Issues

The Up‑C structure regularly places insiders in dual roles: as equity holders of OpCo and as controllers or fiduciaries of PubCo.  Because benefits may flow to insiders in both capacities, Up‑C dilution litigation frequently raises insured‑capacity issues when officers or directors are named as defendants.  Insurers may contend that certain alleged conduct—such as decisions tied to OpCo ownership—was undertaken in a non‑insured capacity, giving rise to allocation disputes between covered and non‑covered loss.

These capacity distinctions also bear directly on the standard of review applied to the underlying fiduciary‑duty claims.  Where plaintiffs plausibly allege that insiders used their PubCo control to advance interests tied to their OpCo ownership, courts may be less willing to apply business‑judgment‑rule deference and more inclined to review the challenged conduct under the entire‑fairness doctrine. 

Entire‑fairness review materially increases litigation risk and settlement pressure, often resulting in larger resolutions than would have occurred under business‑judgment review.  From a coverage standpoint, this dynamic is significant: actions taken by insiders in an arguably non‑insured capacity may nonetheless influence the applicable standard of review and the ultimate settlement value, setting the stage for aggressive allocation disputes as insurers seek to parse covered fiduciary conduct from non‑covered ownership‑level activity.

3. Settlement Characterization Risk

Up‑C dilution cases present heightened settlement‑characterization risk because the relief sought—and often obtained—may take the form of equity‑based corrective measures, rather than traditional cash payments.  Plaintiffs in these matters often frame the alleged harm, not as pecuniary loss suffered by the corporation, but as differential treatment between public stockholders and OpCo unitholders that distorted economic or voting parity.  As a result, settlements may be structured to “fix” the asserted imbalance instead of compensating for out‑of‑pocket damages.  Where a settlement reallocates equity interests without a clear depletion of corporate assets, disputes may arise over whether the insured entity has incurred a covered “Loss” at all.

This characterization issue is particularly acute in Up‑C litigation because the alleged injury is often relational—that is, rooted in relative ownership percentages, voting power, or access to liquidity—making it more difficult to anchor settlement value to a traditional damages model.  As a result, a settlement’s characterization of the dispute may be subject to engineering designed to create or expand coverage, giving rise to consent‑to‑settle complications, particularly where allocation issues already exist.

4. Repeat-Player Risk

For insurers, Up‑C dilution litigation presents a repeat‑player risk rather than a one‑off exposure. The same structural features—tax distributions, exchange rights, and control‑preserving governance—remain in place indefinitely.  The design features of Up-C corporations necessarily lend themselves to dilution-based claims and ratable-benefit claims based on inherently different treatment of OpCo unitholders and PubCo public stockholders.

As Up-C litigation can center around issues regarding structural and inherent features of the corporate structure, issues concerning fortuity and prior acts exclusions may also play a role in evaluating coverage.

Practical Guidance for Insurers and Claims Professionals

As Up‑C dilution litigation continues to expand, insurers and claims professionals should expect resulting litigation to become a recurring feature of the D&O landscape and take steps to anticipate the unique risks they present.  Underwriters should carefully examine whether a prospective insured uses an Up‑C structure.  Because Up‑C litigation often turns on allegations that insiders failed to maintain economic parity between public shareholders and pre-IPO insiders, insurers may wish to consider endorsements or clarifications addressing parity‑related demand and harms, which may prove to be unavoidable consequences of the Up-C structure or take other measures to address the inherent risk posed by this corporate structure.

[i] PwC, Considering an IPO? Here’s why an Up-C might be advantageous, Observations from the front lines, https://www.pwc.com/us/en/services/consulting/deals/library/up-c-structure.html (last visited June 9, 2026).

[ii] Treston Morrow et al., Up-C Structured IPOs, IPO Preparation (Aug. 11, 2022), https://www.ipohub.org/article/up-c-structured-ipos.

[iii] See Complaint at 33, Shumacher v. Mariotti et. al, No. 2022-0051-PAF (Del. Ch. June 2, 2022), Dkt. No 35; Complaint ¶ 16, Iron Workers Local No. 55 Pension Fund v. Viola et. al., No. 2025-0058-JTL (Del. Ch. Sep. 15, 2025), Dkt. No. 28.

[iv] Id.

[v] Debevoise & Plimpton, The Up-C Goes to Court: Managing the Emerging Risks of an Advantageous Tax Structure, Insights & Publications (May 2023),https://www.debevoise.com/insights/publications/2023/05/the-up-c-goes-to-court.

[vi] Id.

[vii] Id.

[viii] Id.

[ix] Id.

[x] Verified Am. Class Action Complaint, Schumacher v. Mariotti, et al., No. 2022-0051-PAF (Del. Ch. Jun. 2, 2022).

[xi] Complaint, Iron Workers Local No. 55 Pension Fund v. Viola et. al., No. 2025-0058-JTL (Del. Ch. Sep. 15, 2025), Dkt. No. 28.

[xii] Id.

[xiii] Jarek Rutz, Virtu Insider Buyback Suit Survives Dismissal Bid, Law360, Jun. 2, 2026, https://www.law360.com/articles/2484380/virtu-insider-buyback-suit-survives-dismissal-bid 

[xiv] Id.

[xv] Opinion, Siegel v. Cantor Fitzgerald, L.P. et al., No. 2024-0146-LWW (Del. Ch. Apr. 10, 2025), Dkt. No. 53.

[xvi] See, e.g., Compl., Iron Workers, No. 2025-0058-JTL (Del. Ch. Sep. 15, 2025), Dkt. No. 28.

[xvii] Compare Shumacher and Siegel.  See also Iron Workers Tr. at 69–70 (suggesting that theoretically shareholder buyback claims should be direct under Tooley, but due to Brookfield’s bright line approach, assuming that it’s derivative).

For more than two decades, The D&O Diary has chronicled successive waves of securities litigation involving foreign companies with shares listed on U.S. exchanges. The Chinese reverse merger cases of the early 2010s centered on alleged accounting fraud. More recently, a new cluster of lawsuits has emerged involving low-float stocks, artificial intelligence announcements, SPACs, and alleged market manipulation. 

A lawsuit filed in the Southern District of Texas on June 23, 2026, brings many of these themes together and may signal an emerging variant of cross-border securities fraud. The complaint combines four themes that have increasingly appeared in D&O litigation: sanctions, cryptocurrency, low-float trading, and cross-border market manipulation.

The Lawsuit

Kingbird allegedly held a short position in shares of Inno Holdings, a Texas corporation whose common stock trades on Nasdaq under the symbol “INHD.” Over the course of a year, the defendants, linked to Cambodia’s Prince Group, a U.S.-sanctioned transnational criminal organization, purportedly took control of Inno Holdings through offshore deals. They allegedly replaced the board and management, relocated major operations abroad, and transformed the business into the center of a market manipulation scheme.

The complaint alleges that, after acquiring control of the company, the defendants concentrated ownership of the publicly tradable float through offshore Regulation S offerings, undisclosed PIPE investors, and affiliated entities located in Hong Kong, the British Virgin Islands, and Cambodia. Kingbird further alleges that cryptocurrency transfers funded portions of the acquisition and that opaque offshore ownership structures concealed the identities of the persons ultimately controlling the issuer and its publicly traded shares.

According to Kingbird, these transactions culminated in an extraordinary trading episode on June 8, 2026. The complaint alleges that INHD’s share price increased from approximately $1.11 to more than $39 during a single trading session while reported trading volume exceeded 278 million shares despite fewer than five million shares outstanding and an allegedly much smaller freely tradable float. Nasdaq subsequently imposed a Trading Halt Code T12, which remained in effect when the complaint was filed.

The complaint asserts violations of Sections 9(a), 10(b), and 18 of the Securities Exchange Act, as well as various state law causes of action.

Discussion

From a D&O perspective, the complaint brought by Kingbird is noteworthy because it combines several litigation themes which we have followed independently.

Sanctions and Access to U.S. Capital Markets

The D&O Diary has previously noted that sanctions and enforcement actions can create disclosure and liability risks for directors and officers. As sanctions restrict access to traditional financial channels, bad actors may increasingly seek alternative routes into the global financial system through offshore entities, cryptocurrency, and publicly traded companies.

Kingbird alleges in its complaint that a Nasdaq listing itself became part of the alleged scheme by providing legitimacy and access to liquid markets. For D&O underwriters, this convergence means that geopolitical and sanctions risk may increasingly present not only compliance challenges but also potential securities litigation exposure.

Cryptocurrency

According to the complaint, the defendants allegedly used USDT cryptocurrency transfers to fund the acquisition and move money among offshore entities.

Cryptocurrency is not unlawful or inherently suspicious.  Regulators have increasingly focused on its use in sanctions evasion and cross-border criminal activity. The Kingbird complaint alleges that cryptocurrency helped conceal a covert acquisition and facilitate market manipulation.

From a D&O perspective, these allegations highlight how opaque, crypto-funded acquisitions can become the basis for securities litigation.

Low-Float Litigation Risk

Over the past six months, the D&O Diary has highlighted how low-float companies are becoming prime targets for securities litigation. Recent lawsuits allege that unusually small public floats allowed relatively modest trading activity to generate dramatic stock price movements.

The complaint against Inno Holdings alleges that control of the public float enabled manipulation of both trading activity and securities lending. For D&O underwriters of smaller public companies, low public float is increasingly emerging as a standalone litigation risk factor.

Is This the New Chinese Fraud?

The complaint brought by Kingbird may also invite comparison to the wave of litigation involving Chinese reverse merger companies more than a decade ago. In both contexts, plaintiffs alleged that foreign actors accessed U.S. public markets through offshore companies with opaque operations and governance structures.

There is, however, a key distinction. The earlier Chinese cases generally involved operating companies accused of misstating revenues or assets. By contrast, the Kingbird complaint alleges that the public company functioned as part of a broader criminal enterprise. Instead, the complaint alleges that the Nasdaq listing itself became part of a broader criminal scheme involving cryptocurrency and market manipulation.

The allegations have yet to be tested.  But if similar fact patterns continue to emerge, this case may signal an evolution in foreign issuer litigation, not just a continuation of earlier trends.

Conclusion

Whether Kingbird ultimately proves its allegations remains to be seen. Nevertheless, the complaint is noteworthy because it combines several litigation themes that previously have appeared separately—sanctions, cryptocurrency, low-float trading, and foreign-issuer litigation.

More importantly, it illustrates how sophisticated criminal enterprises may seek to exploit the credibility and liquidity associated with U.S. exchange listings. If similar allegations emerge in future cases, this lawsuit may prove less significant for what it says about corporate governance than for what it suggests about the increasingly sophisticated methods by which bad actors may attempt to manipulate U.S. securities markets. That possibility is one that regulators, exchanges, investors, and D&O underwriters alike will undoubtedly be watching closely.

The private credit industry’s litigation wave continues to evolve. A newly filed lawsuit against Blue Owl Technology Credit Advisors LLC targets a core feature of modern private credit structures: whether an investment adviser can be held liable for collecting advisory fees on payment-in-kind (“PIK”) income that may never be realized in cash.

A copy of the complaint can be found here.

As D&O Diary readers will recall, the first wave of private credit litigation largely involved securities claims arising from valuation disputes, redemption pressures, and liquidity concerns. However, the allegations in this latest lawsuit are different. Rather than challenging disclosures or asset values alone, the plaintiffs seek to challenge the compensation structure itself, alleging that Blue Owl received excessive fees based on unrealized PIK income and manager-determined valuations. If this theory gains traction, it could represent a significant expansion of litigation risk for private credit managers and their boards.

Background: What Is PIK Interest?

Because payment-in-kind (“PIK”) income is central to the allegations in this case, it is useful to briefly review how PIK structures work and how the term is used in the private credit context.

Historically, a “payment-in-kind” referred to the satisfaction of an obligation through goods, services, inventory, property, or other non-cash consideration rather than cash. A debtor might, for example, transfer an asset or inventory to satisfy an obligation rather than making a cash payment.

In modern leveraged finance and private credit markets, however, the term generally refers to a financing feature that allows a borrower to defer cash interest payments. Instead of paying interest in cash, the unpaid interest is added to the outstanding principal balance of the loan, causing the amount owed to increase over time.

For example, a borrower with a $100 million loan carrying a 10% PIK interest rate may add the $10 million annual interest obligation to the principal balance rather than paying it currently in cash. At the end of the year, the loan balance would increase to $110 million, and future interest would accrue on the higher amount.

PIK structures are frequently used by highly leveraged borrowers or companies experiencing liquidity constraints because they reduce near-term cash obligations. For lenders, PIK interest can increase overall returns if the borrower ultimately repays the accumulated balance. However, because lenders recognize income before receiving cash, the economic value of that income depends on the borrower’s future ability to repay or refinance the obligation. For that reason, investors often view increasing levels of PIK income as a potential indicator of borrower stress or deteriorating credit quality.

The Lawsuit

Shareholders of Blue Owl Technology Finance Corp. (“OTF”), a publicly traded business development company sponsored and managed by Blue Owl Capital, filed suit in the Southern District of New York against Blue Owl Technology Credit Advisors LLC, OTF’s investment adviser and administrator.

The complaint asserts claims under Section 36(b) of the Investment Company Act of 1940, which imposes a fiduciary duty on investment advisers with respect to the compensation they receive from registered investment companies. The plaintiffs allege that Blue Owl breached that duty by receiving advisory compensation that allegedly was so disproportionate to the services provided that it could not have resulted from arm’s-length bargaining.

Like the earlier Section 36(b) lawsuit involving another Blue Owl-sponsored BDC, the complaint alleges that Blue Owl’s dual role as valuation designee and fee recipient created an inherent conflict. According to the complaint, Blue Owl determines the fair value of OTF’s illiquid Level 3 assets while simultaneously receiving management fees and incentive fees tied to those valuations. The plaintiffs allege that this structure incentivized higher valuations and increased advisory compensation.

The complaint also raises familiar allegations regarding discounts between reported NAV and market trading prices, valuation questions involving software-sector loans, and concerns regarding the valuation of assets held across affiliated Blue Owl vehicles.

What distinguishes this lawsuit from earlier private credit litigation, however, is its focus on PIK income.

According to the complaint, approximately $43 million of OTF’s first-quarter 2026 net investment income consisted of PIK interest and dividends, representing roughly 25% of reported net investment income. Plaintiffs allege that Blue Owl earned management fees and incentive fees on that accrued income despite the fact that OTF had not actually received cash payments from borrowers. The complaint further alleges that the advisory agreement does not contain a meaningful clawback mechanism requiring the adviser to return fees if the PIK income ultimately proves uncollectible.

The plaintiffs assert that Blue Owl effectively received current cash compensation based on income that may never ultimately be realized, while shareholders remained exposed to the risk that borrowers would be unable to repay or refinance the underlying obligations. According to the complaint, each dollar of accrued PIK income allegedly increased asset values, management fees, incentive fees, and potentially capital gains calculations before any corresponding cash was received.

The lawsuit seeks recovery of allegedly excessive advisory compensation under Section 36(b).

Discussion

The significance of this lawsuit lies not in the PIK allegations themselves, but in what the plaintiffs are attempting to do with them.

Historically, excessive fee litigation has been concentrated in the mutual fund industry. Section 36(b) claims typically involve allegations that an investment adviser charged fees so disproportionately large that they could not have been the product of arm’s-length bargaining. Courts evaluating these claims generally focus on factors such as the nature and quality of services provided, adviser profitability, economies of scale, comparative fee structures, and the independence and effectiveness of board oversight.

This lawsuit seeks to apply those traditional excessive-fee principles to the private credit industry.

The plaintiffs are not merely alleging that Blue Owl’s valuations were incorrect. Nor are they simply alleging that shareholders suffered losses. Rather, they allege that the adviser’s compensation structure itself created incentives that allegedly diverged from shareholder interests. Specifically, the complaint alleges that Blue Owl benefited financially from higher valuations and the recognition of PIK income, while shareholders bore the risk that those valuations could later decline and that accrued income might never be realized in cash.

That distinction matters. This most recent complaint against a Blue Owl entity attempts to convert what might otherwise be viewed as ordinary investment and valuation judgments into allegations that the adviser was improperly compensated because of structural conflicts embedded within the fee arrangement.

For private credit managers, the concern is that this theory is highly portable. Many private credit funds invest in illiquid assets. Many rely on internal valuation processes. Many recognize PIK income. And many utilize management fee and incentive fee structures tied to asset values and investment income. If plaintiffs are successful in framing these common industry practices as evidence of conflicted decision-making, similar claims could emerge across the private credit sector, particularly during periods of credit stress.

Like other recent litigation aimed at private credit firms, this case highlights the potential impact on E&O and D&O underwriters.

From an E&O perspective, the complaint challenges the adviser’s professional services, including valuation determinations, portfolio management activities, income recognition practices, and fee calculations. To the extent the lawsuit seeks recovery based on alleged misconduct in the rendering of investment advisory services, there may be E&O underwriter exposure.

The D&O implications are more indirect but could be significant. The complaint allegations repeatedly focus on governance, oversight, and the approval of the advisory arrangement. Excessive fee cases frequently examine the conduct of directors responsible for reviewing advisory agreements and monitoring conflicts of interest. If valuation issues, credit losses, or liquidity concerns were to worsen, plaintiffs could seek to pursue follow-on claims alleging that directors failed adequately to oversee the adviser or failed to address known conflicts associated with the compensation structure.

The case also raises potential coverage questions regarding the insurability of any recovery. Because the lawsuit seeks the return of allegedly excessive advisory compensation, insurers may contend that any amounts representing improperly obtained fees constitute restitution, disgorgement, or the return of ill-gotten gains rather than covered loss.

Finally, the timing of the lawsuit is particularly noteworthy. On the same day the complaint was filed, The Wall Street Journal reported that investors sought approximately $12 billion of withdrawals from private credit vehicles during the second quarter, highlighting growing concerns regarding valuations, liquidity, and portfolio quality across portions of the market. In that environment, plaintiffs’ lawyers are likely to scrutinize not only portfolio performance but also the compensation structures that benefit from reported valuations and income.

Whether OTF shareholders ultimately prevail on the excessive fee theory remains to be seen. However, the case is noteworthy because it seeks to recast core private credit practices, including manager-driven valuations, PIK income recognition, and related fee arrangements, as evidence of fiduciary conflicts and excessive compensation. As investor scrutiny intensifies and market conditions become more challenging, managers’ ability to defend these practices could emerge as a defining issue for the sector.

The D&O Diary, in collaboration with Allianz Commercial, has prepared a survey, to allow us to better understand the views of D&O insurance industry participants about AI. The survey form is available here. The survey will remain open through July 20, 2026.

We hope that you will participate in the survey, which only takes a few minutes to complete. Your insights will allow us to develop a better understanding of the emerging risks, opportunities, and challenges that AI may present for the D&O insurance industry.

The results of the survey will be shared on the D&O Diary and Allianz Commercial’s website. Our thanks in advance to all who take the time to complete the survey.

Please contact us directly if you have any questions.

One of the much-discussed concerns in the insurance industry about artificial intelligence (AI) is the risk of “silent AI” – that is, the seepage of AI-related matters into various insurance coverages that were not intended (at least not consciously) to provide coverage for these kinds of exposures. A new shareholder derivative lawsuit filed against the board of Microsoft provides an illustration of these kinds of concerns in operation. The new derivative suit is a follow-on to prior underlying litigation in which copyright holders allege Microsoft used the holders’ copyright materials to develop its AI products. The new derivative lawsuit alleges that Microsoft’s directors violated their duties to the company by knowingly allowing copyright infringement, causing harm to the company.

The new lawsuit, discussed below, shows how a matter that would not typically be covered under a D&O policy (copyright infringement) can translate into a potentially covered matter (a breach of fiduciary duty lawsuit), and it also shows how AI-related exposures can seep into D&O insurance coverage, as well. A copy of the June 30, 2026, lawsuit filed against certain of Microsoft’s directors and officers can be found here.

Background

Microsoft is one of the world’s largest technology companies. Microsoft has been active in efforts to develop artificial intelligence (AI) products, tools, and solutions, both through its own efforts and through investment in and collaboration with other AI development companies (including, for example, OpenAI). The subsequently filed derivative lawsuit complaint alleges that during the period 2022 to the present, the company “told its shareholders and the market that it did not violate federal copyright laws with respect to development and training of AI software, AI generative models, and products.”

Beginning in September 2023, Microsoft and other defendants were sued in a series of lawsuits filed by or on behalf of authors, publishers, and other copyright holders, alleging that the company or others with whom it collaborated, copied copyrighted material to train AI models, without obtaining licenses, thereby infringing on the plaintiffs’ protected copyrights. Among other things, the complaints allege that Microsoft knew the copyrighted materials were being used for training.

The Lawsuit

On June 30, 2026, a plaintiff shareholder filed a derivative lawsuit in the Western District of Washington against 14 of Microsoft’s directors and officers, as well as Microsoft itself as nominal defendant, alleging that the defendants breached their fiduciary duties and violated Section 14(a) of the Securities Exchange Act of 1934.

The complaint alleges that “Microsoft’s officers and directors caused the Company to issue false and misleading statements touting the success of the Company’s AI strategy” while “concealing material problems, including the fact that Microsoft had violated federal copyright laws in the formulation of its AI strategy and it partnership with AI companies like OpenAI. The complaint also alleges that the defendants concealed the fact that its AI efforts were experiencing undisclosed problems with its AI product, Copilot, including issues with brand positioning, user experience, and capacity.

The complaint further alleges that this “misconduct” caused “substantial damage to Microsoft and its shareholders,” and that the “wrongdoing” was “directly committed or approved by the most senior executive officers and directors of Microsoft.” Among other things, the complaint alleges that the board of directors “received regular reports and approved the key decisions regarding Microsoft’s AI strategy.”

The lawsuit seeks “to hold the Company’s officers and directors responsible for breaching their fiduciary duties, causing the Company to engage in widespread violation of the copyright laws, and approving false and misleading statements, all of which caused substantial damages to the Company.”

Discussion

The new lawsuit against the Microsoft directors is not the first lawsuit of its type in which a company’s board members were hit with a D&O lawsuit alleging the defendants violated their fiduciary duties by knowingly allowing efforts to develop AI models and products to violate copyright holders’ intellectual property rights. As discussed here, in April 2026, a plaintiff shareholder filed a similar lawsuit involving similar allegations against the board of Adobe.

Indeed, this new derivative lawsuit is not even the first lawsuit involving Microsoft alleging that the company issued misleading statements about the company’s AI strategy and the success of its AI products and efforts. As discussed here, in June 2026, a plaintiff shareholder filed a securities class action lawsuit against the company and certain of its directors and officers, alleging that the defendants overstated the company’s AI prospects and success, while downplaying the difficulties it was facing.

While the new lawsuit may reflect allegations that have been seen in prior lawsuits, the derivative suit nonetheless also reflects two important emerging D&O liability exposures.

The first is that the lawsuit shows, in what is something of a recurring phenomenon, how matters that would not otherwise be covered under a D&O insurance policy (in this case, alleged copyright infringement) can be translated into potentially covered D&O claims, through the medium of a follow-on lawsuit.

 This “follow on” lawsuit phenomenon is not new; we recently discussed the same effects in operation in connection with the derivative lawsuit filed against Uber’s board, in which the defendants were alleged to have breached their duties by allowing the company to pursue or continue practices and policies that caused the company to be sued in extensive underlying sexual harassment and assault litigation.

In the Uber post, we cited numerous other examples where follow-on suits translated non-covered underlying matters into potentially covered D&O claims. As we noted, these kinds of follow-on suits illustrate the often-repeated principle that sooner or later everything becomes a D&O claim. The common thread among these kinds of claims is the allegation that the underlying problem was the board’s fault.

The new derivative suit against the Microsoft board also illustrates another phenomenon, which, as noted at the outset, is the phenomenon of “Silent AI.” In this case, it is the seepage of noncovered AI-related intellectual property exposure into the coverage of a D&O insurance policy. The D&O insurers may well contend that that they never intended to pick up these kinds of exposures.

For the insurers, this may be all too reminiscent of the early days when cybersecurity exposure was emerging and the potential for cybersecurity liability to hit various insurance coverages was becoming apparent, a development the insurance industry referred to as “Silent Cyber.” As readers may recall, in connection with cyber liability, the industry soon developed standalone products to try to address the emerging exposures. The same thing may be happening now, as various carriers are coming forward with various kinds of AI-focused products.

In the meantime, the D&O insurers may well want to try to protect themselves against exposures they do not mean to pick up in their policies. Along those lines, the news has recently circulated in the insurance industry press that a number of carriers have developed AI-related liability and claims exclusions. The insurers may well have had scenarios like the one described in the new Microsoft derivative complaint in mind when they conceived of these kinds of exclusions.

The problem for the insurers is that the insurance market currently is in a pronounced soft market phase, meaning that the insurers will have little ability to impose restrictive terms (as buyers will have numerous alternatives available without restrictive terms). However, the insurance market is cyclical, and when the market eventually moves to the next phase, insurers may well seek to restrict their policies’ exposure to “Silent AI.”

The bottom line for now is that as allegedly aggrieved parties continue to conjure up ways in which they allege they have been harmed by artificial intelligence, these parties’ claims may at least potentially trigger parallel follow-on D&O lawsuits, in which the underlying allegations are relied upon to support D&O liability claims.

ICYMI No.1: Just in case you didn’t see it over the holiday weekend, last Thursday I posted an article discussing the new tariff-related securities suit filed against First Solar, a case that is interesting among other things because it shows that even as the Trump administration’s tariff policies continue to shift, tariff-related securities suits continue to be filed. See the post here.

ICYMI No.2: You also may not have seen it over the weekend, but on Friday I reprised my 2012 essay about Time and Summer. This particular post is important to me. I hope you will take the time to read it. Please find the link to the essay here.

In recognition of the Independence Day holiday in the U.S., and in what has become an annual tradition, we are reprising Kevin’s 2012 essay about Time and Summer, which can be found here. Have a great Fourth of July holiday. Thank you to all of our loyal readers.

The current Trump administration’s tariff policies have created operating challenges for many companies, challenges that in at least some cases have translated into securities class action lawsuits. In the latest example, the solar panel company First Solar has been hit with a tariff-related securities class action lawsuit after the company experienced complications in its international operations due to the tariffs. A copy of the new First Solar securities class action lawsuit can be found here.

Background

First Solar is a solar technology company. It manufactures and sells photovoltaic (PV) solar modules that convert sunlight into electricity. In February 2025, the company announced that it would reduce production of Series 6 modules at its facilities in Malaysia and Vietnam to account for, among other things, the “uncertain U.S. policy environment following the 2024 U.S. elections,” and “a supply and demand imbalance for Southeast Asian Product.” First Solar nevertheless reassured investors that its primary market, the United States, enjoyed stable module prices.

On April 2, 2025, President Trump announced reciprocal tariffs on U.S. imports from all countries, including tariff rates of 24% and 46% on Malaysia and Vietnam, respectively, subsequently reduced to 10%. The company, according to the securities class action lawsuit complaint, continued to assure investors that the dynamic policy landscape presented a “long term favorable” for First Solar and actually “strengthened its relative position in the solar manufacturing industry.”

On February 24, 2026, First Solar announced its 4Q25 and full year 2025 financial results. Among other things, the company announced earnings that, according to the securities lawsuit complaint, “missed expectations by a wide margin.” The company also issued lower than expected FY 2026 revenue guidance, citing customer headwinds such as permitting delays under the Trump administration. First Solar’s share price declined on this news.

The Lawsuit

On June 23, 2026, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York against First Solar and certain of its officers. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities between February 26, 2025, and February 24, 2026.

The complaint alleges that during the class period, the defendants made false or misleading statements or failed to disclose that: “(i) Defendants had overstated First Solar’s capacity to manage the impact of U.S. tariff policy on the Company’s business; (ii) Defendants understated the extent to which its responses to U.S. tariff policy, including the intentional underutilization of production facilities in Malaysia and Vietnam, and attempted relocation of production to the U.S., were likely to negatively impact First Solar’s projected performance in the 2026 fiscal year; and (iii) as a result, Defendants’ public statements were materially false and misleading at all relevant times.”

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiff seeks to recover damages on behalf of the class.

Discussion

This new lawsuit is not the first securities class action lawsuit to be filed in the wake of the current Trump administration’s implementation of its tariff policies. As discussed here, in August 2025, a plaintiff shareholder initiated a tariff-related securities suit against the industrial chemical company Dow. Similarly, in November 2025, a shareholder initiated a tariff-related securities suit against the auto retailer CarMax, as discussed here.

In addition, industrial clothing company Lakeland Industries was hit with a tariff-related securities suit in February 2026, as discussed here. In March 2026, a tariff-related securities suit was filed against the social media company Pinterest, as discussed here.

With the initiation of this new lawsuit against First Solar, there have now been a total of five tariff-related securities suits filed since August 2025, including a total of three so far in 2026. As also discussed on this site, most recently here, there have been a number of tariff-related enforcement actions filed as well.

Since the Trump administration began implementing its tariff policies last year, the tariffs have come to represent an important source of potential corporate litigation and regulatory enforcement exposure.

What makes this new lawsuit particularly interesting and relevant is that it is only now just being filed, even after various courts have declared the Trump administration’s IEEPA tariffs (discussed here) and Section 122 tariffs (discussed here) to be unlawful. The new complaint underscores the fact that notwithstanding the various adverse court rulings on the tariffs, the risk of further tariff-related litigation continues.

The new complaint also highlights the challenges companies face in trying to manage the impact of the tariffs on their operations and financial results. This company is alleged not only to have soft-pedaled the likely impact of the tariffs on its international operations, but also is alleged to have understated the impact that its efforts to respond to the tariffs, by shifting production to the U.S., would have on its financial performance. The shifting tariff levels and changing legal bases for the tariffs further complicate things for operating companies, as they try to adjust their strategies to trade policies that are both variable and difficult to predict.

In any event, notwithstanding the adverse track record of the prior Trump administration tariff policies in court, the Trump administration has made it clear that it intends to continue to deploy tariffs as an important element in its global trade policy. Following the prior adverse judicial rulings, the Trump administration has shifted its plan to impose its tariff policies to rely on Section 301 of the Trade Act of 1974. The U.S. Trade Representative has already launched Section 301 investigations of the trade policies of a number of countries, and has imposed a number of new tariffs, based on the premise that the tariffed countries had engaged in unfair trade practices (particularly involving the alleged use of forced labor). These new tariffs present their own complications and compliance challenges, among other things by adding a layer of complexity to supply chain management.

The bottom line is that the Trump administration will continue to deploy tariffs, and that tariffs will continue to challenge operating companies. The likelihood is that issues arising out of the administration’s tariff policies will continue to give rise to potential disclosure-related liability exposure for many companies. The likelihood is that we will continue to see tariff-related litigation in the months ahead.

One final note: First Solar is not unfamiliar with securities class action litigation. As discussed here, in January 2020, the company settled a prior, long-running securities class action lawsuit for $350 million.

A recent multi-state lawsuit challenging the Trump administration’s anti-DEI mandate highlights a major shift in the ongoing ESG backlash tracked by The D&O Diary. The case alleges that federal contractors are trapped by poorly defined requirements, which could lead to D&O exposure in a number of industry sectors. Because compliance is now tied directly to government revenue, even minor missteps could trigger contract termination, permanent debarment, and high-stakes fraud litigation under the False Claims Act.

The following analyzes the suit filed by attorneys general (AGs) from 19 states and the District of Columbia and its potential impact on D&O risk.

The AGs Complaint

On June 10, 2026, a coalition of AGs from mostly blue and a couple of purple states, filed suit in the District Court of Maryland seeking to block implementation of Executive Order 14398 (Order).  The Order, issued on March 26, 2026, directs federal agencies to include contract provisions prohibiting contractors from engaging in what the Order describes as “racially discriminatory DEI activities.” The complaint alleges that the Administration unlawfully implemented the new requirements without complying with federal procurement statutes and the Administrative Procedure Act and, perhaps more significantly, failed to provide meaningful guidance regarding what conduct is prohibited.

The AGs allege that the Order requires contractors to certify compliance with the new restrictions, provide access to books and records, report potential violations by subcontractors, and acknowledge that compliance with the provisions is material for purposes of the FCA. The complaint contends that the consequences for non-compliance are significant and are being imposed despite the government’s failure to adequately explain how the new requirements differ from existing federal anti-discrimination laws or decades of prior federal contractor obligations.

Discussion

As D&O Diary readers know, uncertainty itself frequently becomes a source of corporate liability. The most significant securities and derivative lawsuits often arise not because a company violated a law, but because management was forced to make difficult decisions in a rapidly evolving regulatory environment and later faced questions about disclosures, oversight, or compliance efforts. The AGs Complaint repeatedly emphasizes that contractors are being asked to comply with a new federal contracting regime without meaningful guidance regarding how the new requirements differ from existing legal obligations.

Thus, the potential D&O implications could extend well beyond the governmental entities that brought the lawsuit. Hundreds of thousands of federal contracts and subcontracts could ultimately be affected by the new requirements, and many publicly traded companies derive significant revenue from federal contracting activities. According to the complaint, federal regulators estimate that as many as 640,000 contracts and subcontracts involving more than 34,000 vendors may be subject to the Order’s requirements.

Defense contractors are among the companies most likely to face heightened exposure. Large defense companies maintain extensive recruiting, workforce development, supplier management, and compliance programs. Many also operate through complex subcontracting arrangements. The complaint specifically challenges provisions requiring contractors to report potential violations by subcontractors and to provide broad access to records and information. These obligations may create significant compliance costs and operational challenges for contractors that manage extensive supplier networks.

Aerospace and space-related contractors could face similar issues. Companies performing work for NASA and other federal agencies frequently rely on highly specialized recruiting pipelines, research partnerships, and workforce development initiatives. The uncertainty surrounding what activities may constitute prohibited conduct could create difficult compliance and disclosure questions for management teams and boards.

Higher education institutions may also face significant challenges in attempting to comply with the Order.  The AGs complaint repeatedly references state universities and research institutions that perform federally funded work. Universities frequently maintain mentoring programs, leadership development initiatives, recruiting efforts, and student support programs that may become subject to heightened scrutiny under the Order.  As of late, colleges and universities have found themselves at the center of political and regulatory disputes. This latest controversy adds yet another layer of complexity for institutions that depend heavily on federal funding.

Healthcare organizations, academic medical centers, and life sciences companies may also face increased risk. Many participate in federally funded research programs, provide services through government contracts, or receive substantial federal grants. For these organizations, uncertainty regarding compliance requirements may create operational challenges that ultimately become governance and disclosure concerns.

Technology companies represent another potentially affected sector. Many technology firms perform cybersecurity, cloud computing, artificial intelligence, and infrastructure work for federal agencies. These companies have often publicly discussed workforce diversity initiatives in SEC filings, sustainability reports, recruiting materials, and investor presentations. Any modifications to those programs could create disclosure issues if management determines that the potential impact is material to the business.

Finally, the False Claims Act dimension of the Executive Order may present the most significant long-term D&O concern. The complaint challenges the government’s attempt to characterize compliance with the DEI provisions as material to federal payment decisions and argues that the Executive Order improperly seeks to expand FCA exposure. Regardless of how the courts ultimately resolve that issue, the mere possibility of FCA investigations may alter the risk landscape for federal contractors. As D&O Diary readers have seen repeatedly, FCA investigations often serve as the catalyst for follow-on securities litigation, derivative lawsuits, books-and-records demands, and board oversight claims.

Therefore, the AGs lawsuit may illustrate how quickly political and regulatory initiatives can become governance and D&O issues. Over the last several years, companies have faced scrutiny for adopting DEI initiatives, pressure to abandon those initiatives, and growing litigation challenging corporate statements regarding diversity, inclusion, and ESG matters. This latest dispute introduces another source of risk by creating uncertainty regarding what federal contractors must do to remain eligible for government business.

From a D&O perspective, the AGs lawsuit highlights a recurring pattern. When legal standards become uncertain, boards and management teams are forced to make judgment calls. Those decisions often affect disclosures, compliance programs, workforce policies, recruiting practices, and strategic planning. If business performance later suffers, plaintiffs frequently seek to challenge those decisions through securities litigation or derivative claims.