Over the past couple of years, the D&O Diary has followed how geopolitical developments, including wars, sanctions, tariffs, export controls, and trade disputes, can create public company D&O exposure. These developments can present disclosure challenges and have led to securities suits arising from export controls, tariffs, and related business impacts.

A recently filed securities class action against Photronics, Inc. (Photronics) highlights how later statements about geopolitical tensions and supply chain challenges can be woven into broader claims that a company’s earlier disclosures were misleadingly incomplete. Photronics manufactures photomasks, the highly precise templates used in the process to produce semiconductors. While the complaint primarily alleges misstatements about product demand and financial performance, it also cites disclosure failures related to the U.S.-Iran conflict and supply chain disruptions.

The discussion below examines the lawsuit allegations and related D&O underwriting considerations arising from geopolitical risk disclosures. A copy of the complaint can be found here.

The Lawsuit

On July 6, 2026, a shareholder filed a securities class action lawsuit in the United States District Court for the District of Connecticut against Photronics and three of its senior executives. The complaint asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 on behalf of investors who purchased the company’s securities between December 10, 2025, and May 27, 2026.

According to the complaint, Photronics repeatedly emphasized robust demand for its higher-end integrated circuit photomask products, highlighted its competitive position in the U.S. market, and pointed to AI-related semiconductor demand and domestic reshoring initiatives as drivers of continued revenue growth. The company also projected continued strength in its high-end business despite acknowledging softness elsewhere in the market.

The shareholder plaintiffs allege that these statements were materially false or misleading because the company purportedly knew that customer design releases had slowed, elevated foundry utilization rates were delaying new product launches, and other operational headwinds were adversely affecting demand and future financial performance. Plaintiffs contend that these conditions had already undermined the company’s outlook while management continued providing optimistic guidance.

On May 28, 2026, Photronics announced second-quarter results below expectations and provided third-quarter guidance that also fell short of market expectations. During the accompanying earnings release and conference call, company executives allegedly attributed the disappointing results to several factors, including delayed customer design releases, elevated foundry utilization, memory supply constraints, and geopolitical uncertainty. Plaintiffs cite management’s statements that the U.S.-Iran conflict had increased macroeconomic uncertainty and affected customer decision-making.

Immediately after the disclosure and conference call, Photronics’ stock price allegedly declined approximately 36%.

Discussion

The Photronics complaint is, at its core, a typical earnings guidance and disclosure case. Plaintiffs allege that the company failed to disclose adverse developments affecting demand for its products while continuing to present an optimistic outlook. What makes the complaint noteworthy is not that it arises from geopolitical events, but rather how the plaintiffs incorporate the company’s own discussion of geopolitical uncertainty into their allegations.

Specifically, the complaint points to management’s statements that delayed customer design releases and weaker results were attributable to several factors, including supply chain issues stemming in part from geopolitical uncertainty arising from the U.S.-Iran conflict. Plaintiffs contend that these conditions were already affecting the business before the company disclosed them publicly. In that respect, the alleged securities law violation stems from the adequacy and timing of the company’s disclosures rather than the geopolitical developments themselves.

The allegations against Photronics fit within disclosure themes highlighted in prior D&O Diary commentary. Recent posts have pointed to securities litigation involving Super Micro Computer, Seagate, Kaspi.kz, and Pinterest, where plaintiffs relied on export controls, sanctions, tariffs, or other geopolitical developments to allege that companies failed to adequately disclose the business and financial consequences of changing external conditions.

The lawsuit against Photronics reflects a similar dynamic. It does not allege that the company caused or could have predicted geopolitical developments. Rather, shareholder plaintiffs latch on to management’s subsequent explanation that geopolitical uncertainty was one of several factors contributing to weaker financial performance and argue that investors should have been informed sooner that these headwinds were affecting the company’s outlook.

From a D&O underwriting perspective, the allegations against Photronics serve as another reminder of the importance of disclosure controls and ongoing assessments of evolving business risks. When management later attributes disappointing results to external developments, such as geopolitical uncertainty or supply chain disruptions, plaintiffs may argue that those conditions were already affecting operations and should have been reflected in earlier disclosures, guidance, or risk factor discussions. As this case illustrates, a company’s own explanations for disappointing performance can provide the basis for allegations that prior disclosures were materially incomplete.

In the following guest post, Evan Bundschuh and Burkhard Fassbach share and analyze their research into the geopolitics-related Form 10-K disclosures of 26 large-cap U.S.-listed public companies, as well as 52 small-cap and mid-cap companies, in order to assess the level and significance of public companies’ disclosure statements pertaining to geopolitics. Evan is Vice President at GB&A, a retail insurance brokerage in New York, and Burkhard is a D&O lawyer in private practice in Germany. My thanks to Evan and Burkhard for allowing us to publish their article on this site. Here is their article.

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Introduction

As previously discussed in our prior post, risks related to artificial intelligence are a leading concern among corporate officers, fueling more disclosures and greater transparency in 10k filings. For many companies however, geopolitical risks are an even greater concern – risks that have quickly escalated beginning with Covid’s imposed shutdowns and resulting shipping delays, to constantly shifting tariffs, sanctions, and supply chain risks posed by ongoing armed conflicts. As a result, geo-political disclosures within 10K filings have evolved considerably. Where prior disclosures were more blanketed boilerplate statements acting as catch-alls, the geo-political disclosures that are emerging have become considerably more abundant and specific in nature. The evolution of these disclosures goes hand in hand with recent guidance issued by major law firms advising that public companies (particularly those with international supply chains, substantial import or export exposure, or global sourcing) assess whether tariffs, trade restrictions, or trade policy changes could materially affect their business or results of operations.

To assess the frequency and specificity of the disclosures themselves, we sourced the filings of 26 companies across a variety of sectors in the large cap range – as listed in the Reference Appendix. In addition, we analyzed 52 small cap and mid cap companies. Our study yielded some interesting findings, with considerable variation across sectors and market caps.

Roughly 90% of large cap companies in our sample group referenced specific geopolitical risks within their disclosures. Had the sample omitted US healthcare companies (who lacked meaningful disclosures) that number would have been close to 100%. This is in contrast to approximately 73% of mid cap companies and approximately 50% of the small cap companies who noted such risks within their filings. There was also considerable variation among sectors. Whereas all of the small cap tech, automotive, energy and chemical companies did disclose specific risks, smaller cap companies operating in the consumer products, healthcare, insurance, and finance/banking sectors often lacked any disclosures. It should be noted that these companies were often those with limited foreign risk such as smaller consumer product brands, community banks and domestic insurers. Despite reduced foreign exposures however, such companies may in fact still be exposed to geopolitical risk. Potential cyber-attacks by nation state actors, retaliatory boycotts, and effects of future pandemics (risks cited by some of the larger cap companies) are just a few such examples. The analysis also reveals some thematic clusters:

1. Tariffs and Inflation

Unsurprisingly, among the themes identified in 2025 filings, disclosures related to tariffs were the most prominent, as companies are no longer treating tariff risk as a theoretical future concern but are now acknowledging their wider implications.

At their most basic, a number of companies have cited tariffs and high inflation as creating procurement challenges (including hardware for internal usage) that could affect supply chains‘ timing and profit margins. Consumer goods companies such as Coca-Cola, PepsiCo, and McDonald’s are being particularly affected by the impact of trade measures on agricultural commodities and retaliation in markets where US tariffs have generated political backlash – demonstrating the emergence of reputational risk as a result of geo-political tensions. Interestingly, at least one consumer products company even cited „impacts on consumer confidence and expectations around inflation and currencies“ as a cause of (negative) consumption trends. Disclosure of potential exposure to anti-corruption laws and potential risk of expropriation was also noted among the filings.

The automotive sector is another great example of how such disclosures are evolving. In addition to disclosing reduced market demand and procurement challenges, some of the large auto manufacturers are also disclosing their strategic responses under consideration, including domestic reshoring initiatives, supplier renegotiations, and pricing adjustments, demonstrating that investors‘ expectations have evolved from merely acknowledging known risks, to actively managing them.

2. Export Controls, Trade Policy, Sanctions and Forced Exit Risk

Risks related to China exposures, export controls and sanctions were another common theme among filings, with routine disclosures made by companies operating across a wide range of sectors. These controls, implemented by the agencies such as the BIS (Bureau of Industry and Security) and China’s Ministry Of Commerce, are restricting a wide range of exports including advanced computing chips, processors and semiconductors (used by technology companies), minerals (used by energy companies, auto manufacturers, and data centers), and pharmaceuticals and bio-tech equipment (affecting companies in the bio-tech and pharmaceutical sectors). In addition to creating the potential for market exit scenarios and forced operational bifurcation, such disclosures also pose a unique challenge: how to disclose material risk associated with potential degradation, restriction, or forced exit from the Chinese market without triggering the very regulatory or commercial consequences they are describing.

Technology companies are among those facing the most pressure. The expansion of U.S. Bureau of Industry and Security (BIS) export controls to cover advanced AI training chips (including certain GPU configurations and AI accelerator hardware) has created a direct link between AI strategy and geopolitical risk disclosure. Despite the fact that one of the large tech companies in our cohort doesn‘t provide any consumer-facing services in China, the company still disclosed geopolitical risk related to U.S.–China tensions, including the „risk that escalating trade measures could produce retaliatory restrictions on U.S. digital services companies globally, or that legislative action in the U.S. could restrict the company’s ability to operate in specific jurisdictions“. Similarly, another large tech company’s disclosures cites, „such restrictions could impair its ability to deploy AI infrastructure globally, limit cloud service offerings in certain jurisdictions, or constrain the operation of data center facilities using controlled hardware“. In addition to the potential for retaliatory restrictions, tech companies are also being affected by escalating restrictions on US investments in Chinese technology (and vice versa).

Chemical companies, operating in a particularly volatile regulatory environment, contained some of the more complex disclosures. Many addressing procurement challenges arising from export controls from China, EU compliance exposure related to climate and carbon regulations such as CBAM (the Carbon Border Adjustment Mechanism), and constantly shifting end-Use certificate requirements.

Government mandated supply chain audits and domestic sourcing requirements (emerging from both US and EU regulations) are also creating the potential for supply chain shortages of generic active pharmaceutical ingredients (APIs), resulting in a number of large pharmaceutical companies routinely disclosing risks associated with their active ingredient procurement supply chains – a substantial portion of which runs through Chinese manufacturers. Another notable disclosure made by companies operating in the Chemical sector, was the ingredients potential for U.S.–China trade tensions to create regulatory “whipsawing”; the simultaneous application of conflicting national rules to the same global supply chain.

One of the lesser recognized risks, is the resulting shift in competition. According to one large pharmaceutical company, „In China, we expect to continue to face intense competition by certain generic manufacturers, which has resulted, and may result in the future, in price cuts and volume loss of some of our products.“ Logistics-separation challenges are also emerging. Per the disclosures made by a separate pharmaceutical company, “Finding alternative suppliers if and as necessary due to geopolitical developments or otherwise may not be feasible or could require significant time and expense due to the nature of our products and the need to obtain regulatory approvals”.

Many of the large energy companies disclosed China-related geopolitical risk primarily in the context of liquefied natural gas (LNG) off-take agreements and downstream petrochemical joint ventures. Disclosures in this sector have evolved from more generic „international operations risk“ to now specifically addressing the risk of contract disruption or counterparty non-performance in response to any potential increased tensions between the U.S. and China.

Companies operating in the banking sector provided some of the most detailed disclosures within the analysis. All four institutions disclosed risks associated with the expansion of U.S. and allied country sanctions targeting Russian, Iranian, and other designated entities. Of particular note are disclosures concerning secondary sanctions risk; the potential exposure arising not from direct dealings with sanctioned parties, but from transactions with third parties who may themselves have sanctioned counterparty relationships. The following disclosure made by one large US bank effectively summarizes such risk, „The Firm is also subject to the regulations and economic sanctions programs administered and enforced by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”) and EU and U.K. authorities which target entities or individuals that are, or are located in countries that are, involved in activities including terrorism, hostilities, embezzlement or human rights violations.“ The resulting secondary-sanctions poses a number of challenges, as it is difficult to quantify and nearly impossible to fully eliminate, making it one of the most challenging geopolitical risk categories for both disclosure and D&O insurance purposes.

3. ESG Tensions

The analysis also reveals growing ESG-related tension. For years, public companies have encountered pressure to commit to robust standards regarding human rights, supply chain transparency, and carbon neutrality. However, many of the recently filed 10k‘s reveal that fulfilling these promises is becoming a liability minefield due to geopolitical fragmentation.

Some companies are also encountering compliance challenges.The filings frommajor pharmaceutical leaders now explicitly address the friction between public ESG pledges and sourcing dependencies in high-risk regions. A primary example is the Uyghur Forced Labor Prevention Act (UFLPA). Companies disclose that government-mandated supply chain audits are often at odds with the limited transparency permitted by local authorities in key manufacturing hubs, creating a “transparency vacuum”.

Similar to the risks posed by AI-washing, companies many also become the target of inaccuracies related to their ESG commitments. From a D&O perspective, this section of the 10-K has evolved from target setting, to more of a defense mechanism against ESG-washing liability. If a company maintains high-profile sustainability ratings or public human rights commitments but fails to disclose the geopolitical obstacles to achieving them, it faces potential securities litigation when they are ultimately unable to live up to their commitments.

The 2025 filings also document a new risk: Divergent stakeholder pressure and”anti-ESG” backlash. According to the filings of one large consumer products‘ company, “There also exists ‘anti-ESG’ sentiment among certain stakeholders and government entities, which may result in scrutiny, reputational risk, product boycotts, lawsuits or market access restrictions… regarding our sustainability policies”. This risk is echoed again in disclosures made by one of the company’s competitors stating, „We could also be subjected to negative responses by governmental actors (such as anti-ESG legislation or retaliatory legislative treatment) or certain stakeholders (such as boycotts, litigation or negative publicity campaigns) that could adversely affect our business.“. Together these disclosures are evidence that meeting ESG targets and international sustainability standards can trigger retaliatory legislative action or boycotts in domestic or foreign markets. This leaves directors in a “whipsaw” position, where compliance with one jurisdiction’s ESG disclosure rules (like the EU’s CSRD) may create reputational or regulatory friction in another.

As a result, some companies have also disclosed amendments to their carbon targets. One large energy provider disclosing, „(our company) has set a number of lower carbon-related ambitions, which may include aspirations, targets, guidance, objectives, metrics, and/or goals…The company has changed and/or eliminated some of these aspirations, targets, and other ambitions and may continue to do so in the future for various reasons, including market conditions; its strategy or portfolio; and financial, operational, policy, reputational, legal and other factors.“

For boards, the 2025 filings signal that ESG related risk has evolved from simply demonstrating social responsibility and meeting targets, to recognizing the logistical challenges and carefully balancing ESG efforts against any potential financial, reputational and litigation risks.

4. Armed Conflicts, Terroristic Attacks, Civil Unrest and Retaliatory Cyber Attacks

Ongoing conflicts were another large driver of geo-political disclosures. These disclosures tended to fall into a few categories.

Many companies in the consumer products, energy, automotive and technology sectors regularly cited risks associated with; the conflicts in Ukraine and the middle east, recent attacks in the Red Sea, China’s threats to annex Taiwan, political conflicts near the Suez Canal, and potential terrorist attacks. These disclosures increased in frequency and specificity for companies that maintained greater foreign operations in affected countries. Among the disclosures observed were: supply chain and procurement challenges, increased cost of energy and agricultural commodities, potential for bans or boycotts, and potential for sabotage, as a result of the conflicts.

Companies in the hospitality and travel sectors are being particularly affected, routinely disclosing the potential for decreased revenue as a result of decreased travel demand, heightened travel security measures, and economic conditions in affected countries.

Several companies in the consumer products and telecom sectors also disclosed their suspension of exports to certain countries involved in current conflicts. These disclosures demonstrate that reputational risk is not limited to retaliation in response to the imposition of tariffs but extends to current and ongoing armed conflicts. Some Financial institutions and energy companies also cited potential credit risk from sovereign debt holders, difficulties in predicting future commodity pricing, and the effects geo-political tensions could have on global financial and energy markets.

Companies operating in the insurance sector are also facing multi-faceted challenges. In addition to the operational risks posed to their own investment portfolios, geo-political tensions are also creating underwriting challenges (through underwriting war risk, political risk policies, and sovereign credit instruments) – with many carriers reassessing their war risk exclusions.

Another risk often cited by companies with larger market caps, and more common among tech companies and financial institutions, was the potential for cyber warfare, retaliatory cyber-attacks, and potential for civil unrest. The following disclosure from a large US bank evidences the risks being addressed in recent filings, „(our company) continues to operate in multiple jurisdictions in the midst of geopolitical unrest or uncertainties, including, among others, those affected by the Russia–Ukraine war and the conflicts in the Middle East, which could expose (us) to heightened risk of insider threat, cyber threats from nation-state actors, hacktivists or other cyber incidents.“

While some companies further went on to disclose the potential risk of attacks on infrastructure and/or infrastructure failures, energy companies are undoubtedly encountering the greatest risk, as evidenced by one large energy provider in our cohort who issued disclosures pertaining to recent drone attacks that could affect their oil fields. While not fully reflected in these most recent filings, the tensions with Iran and the Strait of Hormuz will only add more complexity to future disclosures in the energy sector.

5. Future Pandemics, Viruses and Government Response

A final theme not formally discussed in the above, that we’ll touch upon briefly, were disclosures related to future pandemics, outbreaks and any government responses. Such disclosures were identified within filings across all sectors. Many filings routinely cited potential supply chain and business interruptions, staffing shortages and even changes in consumer behaviors, expectations and competition. Government response risks, including potential business shutdowns, shelter in place orders, and reduced travel was also regularly cited, particularly among hospitality companies. Lastly, a handful of companies specifically referenced the potential for increased litigation (as evidenced by Covid-19), and the potential for market turmoil to illicit stock drops, while also creating challenges accessing capital on favorable terms. 

Conclusion

The 2025 10-K filings demonstrate that geopolitical risk management has evolved from a peripheral operational concern into a core governance obligation. Our analysis shows that corporate disclosures have moved decisively away from blanket, boilerplate language toward granular, sector-specific risk mapping. International volatility now permeates every facet of corporate strategy, and disclosure practices have adapted accordingly.

This shift toward micro-level disclosure carries significant legal and fiduciary implications for directors and corporate officers. The unprecedented specificity found across the 26 large-cap and 52 small- and mid-cap filings analyzed suggests that general awareness of geopolitical risk is no longer a sufficient defense against regulatory scrutiny or shareholder dissatisfaction. As companies increasingly document detailed operational vulnerabilities, boards are correspondingly held to a higher standard of accountability—what was once disclosed in general terms now sets a documented benchmark against which board oversight can be measured.

The 2025 filing season should therefore serve as a wake-up call for corporate boards. To mitigate the rising tide of event-driven Directors and Officers (D&O) liability claims and securities litigation, boards must move from passive risk acknowledgment to active, real-time oversight. Implementing robust, technologically advanced systems to monitor shifting tariffs, trade policies, and global friction points is no longer optional; it is a baseline requirement for safeguarding corporate resilience, preserving investor confidence, and ensuring long-term stability in an increasingly fragmented global market.

Reference Appendix

The following 26 unique companies provided the foundational data for this analysis through their Form 10-K filings for the fiscal year ended December 31, 2025.

Technology

• Alphabet Inc.
• Amazon.com, Inc.
• Meta Platforms, Inc.
• Netflix, Inc.
• Tesla, Inc.

Automotive

• Ford Motor Company
• General Motors Company
• Tesla, Inc. (Also listed under Technology)

Banking

• JPMorgan Chase & Co.
• Bank of America Corporation
• Citigroup Inc.
• Wells Fargo & Company

Insurance

• American International Group, Inc.
• Berkshire Hathaway Inc.

Healthcare / Health Insurance

• UnitedHealth Group Incorporated

Pharmaceutical

• Pfizer Inc.
• Eli Lilly and Company
• Merck & Co., Inc.

Food & Beverage

• The Coca-Cola Company
• McDonald’s Corporation
• PepsiCo, Inc.

Telecommunications

• AT&T Inc.
• Verizon Communications Inc.

Energy / Oil & Gas

• Exxon Mobil Corporation
• Chevron Corporation

Chemical

• 3M Company
• Dow Inc.

One of the questions that has accompanied the Securities and Exchange Commission’s changing approach to digital asset regulation is whether a decline in enforcement activity would lead to an increase private plaintiff litigation against cryptocurrency and crypto-adjacent companies.  A July 7, 2026, report by NERA Economic Consulting (NERA) suggests the answer may be more nuanced. While, according to NERA’s analysis, private securities litigation has become a larger share of crypto-related litigation, it has not fully replaced the reduction in SEC enforcement actions.  The changing nature of crypto-related claims could have a significant impact on D&O underwriters operating in the sector. The NERA report provides a useful framework for evaluating the D&O implications of these developments.

A link to the NERA report published by Simona Mola, Ph.D. can be found here.

NERA Findings

The NERA study analyzed 181 federal crypto-related cases filed between January 1, 2021, and May 31, 2026, including 89 SEC enforcement actions and 92 private federal lawsuits. These matters involved a broad range of participants in the digital asset ecosystem, including token issuers, stablecoin providers, cryptocurrency exchanges, DeFi platforms, staking and lending programs, mining operations, NFT projects, and other crypto-market participants.

From 2021 through 2024, SEC enforcement actions represented a significant portion of federal crypto-related filings and contributed to an increase in annual filings from 28 cases in 2021 to 40 cases in 2024. Following the change in administration and the SEC’s reduced focus on crypto enforcement, SEC filing activity declined sharply. NERA reports that the SEC filed 75 crypto-related enforcement actions during Gary Gensler’s tenure (April 2021–January 2025), compared with 11 actions filed between April 21, 2025, and May 31, 2026. Consistent with this decline in SEC activity, total federal crypto-related filings fell from 40 cases in 2024 to 31 cases in 2025.

The report further notes that SEC enforcement actions have been concentrated in token offerings, stablecoins, staking and lending programs, and other crypto investment schemes. NERA found that 68 of the SEC’s 89 enforcement actions (approximately 77%) fell into one of those categories. By contrast, private plaintiffs have pursued a broader array of claims, including actions against cryptocurrency exchanges and trading platforms, mining companies, NFT projects, banks, auditors, promoters, and other service providers throughout the crypto ecosystem.

Discussion

By way of background, the regulatory framework governing digital assets in the United States remains fragmented and continues to evolve. Historically, the SEC has been the primary federal regulator overseeing digital assets that it views as securities and has pursued numerous enforcement actions against cryptocurrency issuers, exchanges, and other industry participants. At the same time, the CFTC has exercised authority over digital assets that qualify as commodities, bringing its own enforcement actions involving fraud, market manipulation, and derivatives-related activities.

The proposed Digital Asset Market CLARITY Act seeks to establish clearer jurisdictional boundaries between the SEC and the CFTC, with many sufficiently decentralized digital assets potentially falling under the CFTC’s oversight. The legislation passed the House with bipartisan support and is currently awaiting Senate action, where negotiations have focused on ethics provisions, decentralized finance (DeFi) oversight, and other proposed amendments. D&O Diary readers may also recall that the GENIUS Act, signed into law on July 18, 2025, established the first federal regulatory framework for payment stablecoins, including reserve, disclosure, and compliance requirements for issuers.

Even as Congress and regulators attempt to provide market participants with greater clarity regarding regulatory oversight and compliance obligations, the recent NERA report indicates that cryptocurrency-related securities claims against digital asset issuers and market participants continue to increase.

From a D&O coverage perspective, the distinction between regulatory enforcement and private securities litigation is important. While SEC proceedings may present threshold coverage issues, securities claims may expose a D&O underwriter to substantial defense expenses, settlements, and long-tail litigation. A decline in regulatory enforcement does not necessarily translate into a reduction in D&O exposure.

In addition, the NERA report’s analysis is consistent with digital asset litigation trends that The D&O Diary has been tracking. Digital asset companies can remain vulnerable to private securities claims when investors challenge the accuracy and completeness of disclosures concerning regulatory risks, business prospects, or other material developments. Coinbase provides a useful example. As The D&O Diary previously noted, the company faced securities and derivative litigation alleging that investors were not adequately informed about regulatory risks and the potential treatment of customer assets in a bankruptcy scenario. The litigation illustrates how disclosure-related claims can arise from market and regulatory developments, independent of the ultimate direction of SEC enforcement policy.

NERA’s findings also align with the themes that The D&O Diary has frequently chronicled regarding governance and control risks in the digital asset sector. One notable example is SafeMoon, a decentralized finance (DeFi) cryptocurrency token launched on the Binance Smart Chain in March 2021. As we discussed here, the alleged SafeMoon liquidity pool fraud highlights how D&O exposures can arise from issues involving fiduciary duties, asset custody, disclosures, and board oversight. These allegations illustrate how governance and control failures can generate significant D&O exposures regardless of shifts in regulatory enforcement priorities.

Viewed in the context of the current securities litigation environment, the NERA report’s findings suggest that the nature of cryptocurrency-related D&O risk may be changing, but not necessarily diminishing. Securities class action filing activity through the first half of 2026 remains elevated despite fluctuations in specific categories of litigation. While regulatory activity against cryptocurrency companies may be declining, the underlying drivers of securities litigation remain. For D&O insurers with cryptocurrency-related exposures, the NERA report may suggest that risk is increasingly tied to disclosure, governance, and oversight issues rather than regulatory enforcement alone.

As readers know, in May, the SEC proposed a rule that would provide companies currently subject to the agency’s quarterly reporting requirements with the option to instead file interim reports semiannually. Following the agency’s announcement of the proposed rule, the proposal has been subject to public comment. The comment period is now closed, although apparently some late filed comments are still being made public. What does the commentary show?  The filed comments show that while public reaction to the proposal has varied, the filed comments were almost exclusively negative.

As far as figuring out what the comments filed with the SEC show, it is important to know that there is an online source that has been tracking the comments. Ohio State University Professor Tzachi Zach has posted a searchable database of the responses. Professor Zach’s tracking database shows that there were over 80,000 comments filed in response to the proposal, of which over 60,000 were form letters. All of the form letters opposed the proposal. Of the non-form comments, over 99% opposed.

Which is not to say that there were no comments in support of the proposal. Notably, in a July 6, 2026, comment letter, the pharmaceutical company Eli Lilly not only expressed its support for the proposal, but also stated that if the proposal is adopted, it would exercise the option to file its periodic reports semiannually.  In addition, in a separate letter, nine prominent pharmaceutical companies (including Lilly) also voiced their support for the proposal.

As for the comments opposing the proposal, University of Colorado Ann Lipton has a very interesting breakdown in a July 10, 2026, post on the Business Law Prof Blog. Professor Lipton’s overall observation is that “the comments overwhelmingly come from retail investors – not just the form letters, but even the individualized ones.”

Professor Lipton also notes that a number of the commentators made the observation that the proposal to allow option semiannual reporting is only one of several pending proposals that would affect public company reporting, including for example the SEC’s proposal to limit the number of companies subject to the full set of reporting requirements, and to make S-3 registration available to more issuers. These and other changes, the commentators pointed out, is that “this is a huge number of changes that will dramatically reshape (read: reduce) reporting obligations, and several commenters are concerned that the SEC has not adequately considered the effects individually, let alone collectively.”

 Among the commentators making this “collective effects” comment is the group of academics who call themselves the “Shadow SEC”; these academics criticize what they call the agency’s “blunderbuss” approach to revising public company reporting requirements.

Professor Lipton points out that the opposition to the proposal comes not just from retail investors; institutional investors have come out against the proposal as well. For example, Vanguard submitted a comment opposing the proposal, as did SIFMA. The trade association the Investment Company Institute also submitted a comment opposing the proposal.

Interestingly, these institutional investors and investor representatives noted that while they strongly support reducing regulatory burdens for reporting companies, they questioned whether the semiannual reporting proposal would help achieve those goals.

Professor Lipton also notes that the SIFMA letter expresses particular concern that under the proposal, company management is free to choose the reporting cadence they prefer; the SIFMA letter notes that “Throughout the Proposal, the Commission refers to companies selecting the reporting cadence most appropriate for their investors, but leaves all the decision making with the management of publicly listed companies with no need to justify their decision.”

Professor Lipton makes an excellent final point as well, relating to the benefits of having a uniform reporting system applicable to all companies:

One really important aspect to this is how much you think each company stands alone, versus the spillover effects – positive externalities – of having a uniform disclosure system with a rich pool of information available to everyone.  If you think of the benefits of that collective system of disclosure, which allows investors (and others) to monitor trends overall, that’s a very different calculus than if you think it’s every company (and its investors) for itself.

What Happens Now?

The official comment period closed on July 6, 2026. Now that the comment period has closed, the proposal now goes into the rulemaking phase. The agency’s staff will now review the comments and present recommendations to the Commission. Any final rule would be subject to Commission vote, either in a public forum or in a written vote. If adopted the final rule would then be published. The agency has not yet announced a timetable for a final decision.

I do not think I am being too cynical in thinking that, notwithstanding the overwhelming retail and institutional investor opposition to the proposal, the likelihood is that some form of the optional semiannual reporting proposal ultimately will be adopted. I am not along in thinking this — for example, on July 20, 2026, the Wall Street Journal published an article entitled “SEC Set to Change Earnings Rule Despite Backlas.”

For starters, the initial proposal to allow semiannual reporting came from President Trump.

Another factor is that the Commission is currently down to only three Commissioners, all of whom are Republican appointees. The Democratic seats on the Commission remain unfilled. Moreover, the Commission will soon be down to only two Commissioners, when Hestor Pierce leaves the agency in November 2026. And one of the two is the Chair, Paul Atkins, who launched the agency’s proposed rulemaking allowing optional semiannual reporting. Not hard for groupthink to set in when the group consists of only two people of the same political persuasion, and it is equally unlikely for dissent to emerge.

Of course, what ultimately will happen remains to be seen. As for myself, I remain of the view that allowing even optional semiannual reporting is poor idea that could lead to reporting problems and potentially increased numbers of securities class action lawsuits. As I said at the time of the initial proposal:

Among other things, the longer the time between reporting periods, the more information there is available to insiders that is not available to investors. For that reason, I think longer reporting periods could contribute to more insider trading, as trading windows inevitably would be open longer, providing more opportunities for managers with insight into company performance to trade on their awareness of how the company is doing.

I also worry that a longer reporting period could mean increasing uncertainty in the later months, which could hurt share prices, or at least make them more volatile. Longer reporting periods also increases the possibility of news disclosure surprises, of the kind that could lead to sharp share price declines – that is, declines of the type and magnitude that can lead to securities class action litigation.

So you can put me down with the 99% of commentators who expressed their opposition to the optional semiannual reporting proposal.

Those who follow Directors’ and Officers’ indemnification and advancement issues know that there are a host of recurring questions surrounding executives’ advancement rights, including whether there are duration or amount limits on a company’s advancement obligations. In the following guest post, John McCarrick, a partner at the Robinson & Cole law firm in New York, takes a look at these issues in the context of recent high-profile dispute involving executives at JPMorgan. Our thanks to John for allowing us to publish his article guest post on this site. Here is John’s article.

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          Companies routinely commit to broad indemnification and advancement obligations for directors and officers to encourage qualified individuals to serve without fear that their corporate affiliation will place their personal assets at risk. Those protections serve an important governance function. They help companies recruit capable directors and officers in an environment where corporate service can generate costly litigation, even for individuals who ultimately are vindicated.

          But advancement rights can create a different problem when they are drafted broadly and made mandatory. If the governing documents contain few conditions, courts may enforce the obligation as written, even where the company believes the defense costs are excessive or abusive. The recent JPMorgan dispute involving Charlie Javice and Olivier Amar illustrates the practical consequences of that drafting choice.

          Prior to the mid-1930s, corporate directors and officers faced liability principally under state corporate law — shaped by the business judgment rule, which gave directors broad protection for good faith decisions, and by common law indemnification principles, which allowed corporations to reimburse directors and officers who successfully defended claims brought in their corporate capacity. The exposure was real but manageable. The legal framework, while imperfect, gave directors and officers reasonable confidence that faithful service would not end in personal financial ruin.

          That balance changed after Congress enacted the federal securities laws. The Securities Act of 1933 and the Securities Exchange Act of 1934 introduced forms of personal exposure that were more direct, more severe, and more difficult for directors and officers to manage through ordinary care alone.

          Two statutes, passed in the wake of the stock market crash in 1929, fundamentally altered that calculus. Section 11 of the 1933 Act imposed strict liability on directors for material misstatements or omissions in registration statements. Unlike common law fraud claims, Section 11 required no proof of scienter — a plaintiff need not show that a director knew the registration statement was false or intended to deceive. A director who signed a registration statement containing a material misstatement was presumptively liable, subject only to a due diligence defense requiring proof of a reasonable investigation and reasonable grounds to believe the statements were accurate.

          This was a profound change. Directors who had previously relied on management representations and expert opinions without independent verification suddenly faced personal exposure measured by the decline in a security’s value following a materially misleading registration statement. For outside directors in particular — who typically lacked access to the detailed information available to management — the exposure was substantial and difficult to manage through ordinary care alone.

          The 1934 Exchange Act added further exposure for corporate officers through its antifraud provisions, most importantly what would become Rule 10b-5, and through the short-swing profit recovery provisions of Section 16(b). Together, the two statutes created a federal liability regime that overlaid and significantly exceeded the state law exposure directors had previously faced.

          The immediate practical consequence was a director-service problem. Prominent businesspeople, lawyers, and financiers had long viewed board service as a mark of prestige and civic responsibility. After the federal securities laws expanded personal exposure, however, many qualified individuals had reason to reconsider whether board service was worth the risk.A director of modest personal wealth sitting on the board of a company that subsequently conducted a public offering faced potential liability measured in millions of dollars for a registration statement he or she had reviewed but not independently verified.

          This was not a theoretical concern. The deterrent effect of strict liability on the willingness of capable people to serve as directors was recognized almost immediately after the statutes’ enactment, and it created pressure on the legal system to respond. The problem was especially acute for outside directors. They were asked to certify corporate disclosures but often lacked the day-to-day access to information available to management. After Section 11, reliance on management and experts no longer fully insulated them from personal exposure.

          Even before any state legislature had enacted a statutory indemnification framework, corporations were advancing legal fees and indemnifying their directors under common law authority and pursuant to charter and bylaw provisions.

          The legal environment surrounding advancement and indemnification was not without complexity. The SEC initially took the position that indemnifying directors against even alleged Securities Act liability was contrary to public policy. The concern was that indemnification would dilute the personal accountability Congress intended to impose.

          That position became harder to defend once courts and practitioners distinguished between indemnifying adjudicated liability, advancing defense costs, and indemnifying settlements that involved no admission or finding of wrongdoing. The deterrence rationale carried less force when applied to a director who was ultimately vindicated after incurring substantial legal fees, or to a settlement resolving disputed claims without any finding of misconduct.

          As advancement and indemnification practices expanded and their legal foundations became more settled, pressure grew for a legislative solution. Delaware responded with its landmark 1967 statute, which codified and clarified permissible advancement and indemnification rather than creating those protections from whole cloth.

          Prior to 1967, significant uncertainty surrounded whether and under what circumstances advancement or indemnification could be available against liability or litigation costs. Delaware courts provided inconsistent guidance on whether charter or bylaw advancement or indemnification provisions were even enforceable.

          By the mid-1960s, the need for a legislative fix had become clear. The prior statutory framework, codified at 8 Del. C. § 122(10), was permissive, required affirmative corporate action, and prohibited indemnification where a director or officer had been adjudged liable for negligence or misconduct. Common law permitted indemnification in some circumstances, but it created no enforceable right to indemnification. Delaware’s 1967 statute addressed those uncertainties by clarifying and expanding the prior framework. It created a judicially enforceable mandatory right to indemnification for directors and officers who prevailed in litigation and authorized advancement before adjudication.

          The same protections that solved the director-service problem can create a different problem for corporations and acquirers. When advancement rights are drafted broadly and made mandatory, the company may be required to fund defense costs it views as excessive, unreasonable, or only tenuously connected to covered service.

          The recent JPMorgan dispute with Javice and Amar illustrates that tension. Charlie Javice and Olivier Amar were the founders of a company called “Frank,” a student financial aid application assistance company.  In January 2023, Javice and Amar were accused of fraudulently inflating data supplied to JPMorgan in connection with JPMorgan’s acquisition of Frank. They were later charged in a four-count grand jury indictment with securities fraud, wire fraud, bank fraud, and conspiracy.  Javice and Amar were convicted on all counts in March 2025 and are appealing those convictions.  JPMorgan also sued Javice and Amar directly, alleging fraud against the bank.

          The unusual feature of the dispute was not the existence of fraud claims, but the scale of the advancement obligation that followed.Javice and Amar have collectively incurred $136 million fighting their criminal and civil cases – with Javice responsible for $74 million of that amount. JPMorgan has attempted, largely without success, to stop or limit the ongoing legal spend, which it was required to advance under Delaware law, JPMorgan’s bylaws, and the merger agreement it signed with Frank.

          In its recent Delaware Chancery Court filings, JPMorgan argued that the defense teams were treating the advancement obligation as a “blank check” and identified expenses it characterized as non-legal or excessive, including the following:

• Food and snacks: Over $530 for gummy bears and a $581 dinner that included a $161 seafood tower.
• Travel and luxury: More than $25,800 in luxury hotel upgrades and roughly $3,000 in first-class airfare.
• Personal items: Charges for cellulite butter, a Cookie Monster toddler toy, and a pet hair roller.
• Subscriptions: Monthly Spotify charges and other personal effects.

          The examples were rhetorically powerful, but the court’s ruling underscores that vivid billing objections are not necessarily enough to defeat a mandatory advancement right absent proof satisfying the applicable bad-faith standard. 

          In late June 2026, the Delaware Court of Chancery held that JPMorgan had not met its “challenging burden” of showing that Javice’s legal fees were “so unmistakably unreasonable or clearly abusive” that they could only have been incurred in bad faith. The court also rejected JPMorgan’s effort to stop funding Amar’s disputed legal fees for a similar period. 

          Although adverse to JPMorgan, the Court of Chancery’s reading of the advancement obligations as broader and less susceptible to challenge than permissive indemnification obligations appears correct. It also reinforces the practical point that the “bad faith” standard is difficult to establish.

          The Delaware Court of Chancery has been unsympathetic to corporations’ efforts to avoid mandatory advancement obligations undertaken in their bylaws.  The reason is structural: Delaware’s advancement statute is enabling meaning corporations may broaden advancement rights, but also may draft conditions and limitations into the governing instrument. If they fail to include those limitations, the Court of Chancery generally will not add them after the fact.

          However, if such additional conditions or limitations are not included in the bylaws advancement provision, the Court of Chancery will not allow new conditions or limitations to be applied in the face of an advancement request from a director or officer. That principle is reflected in Weil v. VEREIT Operating Partnership, L.P., C.A. No. 2017-0613-JTL (Del. Ch. Feb. 13, 2018), where the Court of Chancery explained that advancement is a contractual right governed by the operative agreement. Where the agreement conditions advancement only on an undertaking to repay, the company may not later impose additional requirements such as proof of ability to repay or a secured bond.

          The JPMorgan dispute with Javice and Amar continues.  The drafting lessons are straightforward. First, companies should decide at the drafting stage whether advancement rights are intended to be effectively unconditional after receipt of an undertaking to repay. If not, the bylaws or other operative agreement should say so expressly. 

          Second, acquirers should pay particular attention to advancement and indemnification provisions in merger agreements. Where an acquirer assumes obligations to former directors or officers of the target, the agreement should address not only the scope of covered proceedings, but also procedures for review, billing support, reasonableness objections, and, where appropriate, security for repayment obligations. Depending on the transaction and the constituency being protected, those mechanisms may include billing protocols, periodic review rights, exclusions for plainly personal expenses, procedures for disputed invoices, undertakings with repayment support, or negotiated caps for specified categories of expenses.

          Advancement rights developed to solve a real governance problem: capable directors and officers needed assurance that corporate service would not expose them to ruinous defense costs. But the JPMorgan dispute illustrates the other side of that bargain. When advancement rights are drafted broadly and without meaningful conditions, courts may enforce them as written even where the resulting defense spend is extraordinary. The drafting lesson is not that advancement should be narrow in every case. It is that companies and acquirers should decide in advance how broad the obligation should be and put any limits in the governing documents before a dispute arises. 

[John F. McCarrick is an attorney and partner in the New York City office of Robinson & Cole, LLP.]

Continuation Vehicles (CVs) have grown in popularity with private equity (PE) firms as traditional exit routes, such as IPOs and strategic sales, have become unfavorable due to geopolitical turmoil, macroeconomic and AI- driven disruption.  However, the same features that make CVs attractive for PE sponsors may also create D&O and E&O exposure, as sponsors typically control key aspects of the transaction, including valuation, process design, and investor disclosures.

As recent developments in the private credit market have shown, concentrated control can attract heightened regulatory scrutiny and give rise to claims that certain investor groups were disadvantaged or that conflicts of interest were not adequately managed. The same concerns are increasingly relevant in the continuation vehicle market, where questions surrounding conflicts, valuation, governance, and disclosures can create potential D&O and E&O exposure.

What Is a CV?

A continuation vehicle is a private equity general partner (GP)-led secondary transaction in which a private equity sponsor transfers one or more portfolio companies from an existing fund into a newly created vehicle that it also manages. Existing limited partners (LPs) are typically given a choice: sell their interests for liquidity or roll over into the new fund, often alongside new investors that provide fresh capital to support the next phase of the assets’ growth.

CVs address a common timing mismatch in private equity: sponsors may believe an asset can create further value, while LPs in older funds may be approaching the end of their investment horizon and seeking liquidity. By creating a “new hold,” sponsors can extend ownership of such an asset without forcing a sale in unfavorable market conditions.

According to Bain & Company’s Private Equity Midyear Report (June 2026), PE firms are holding more than 30,000 unsold portfolio companies. And, on July 7, 2026, the Wall Street Journal reported that nearly 4,000 of these PE assets are older than six years, including roughly 1,500 that have been in portfolios for at least nine years. The WSJ cited a PricewaterhouseCoopers estimate that, at current exit levels, the industry would need approximately nine years to work through its inventory of portfolio companies.

As a result, CVs have emerged to address this backlog by allowing firms to attract new investors while returning capital to existing limited partners. Reflecting the growing importance of CV transactions, a February 20, 2026, PitchBook report found that fund manager-led secondary transactions, of which CVs constitute the majority, reached $106 billion in 2025, placing them on a scale comparable to traditional acquisitions and IPOs.

CV transactions concentrate many of the liability risks that have historically driven litigation and regulatory scrutiny in the private funds industry. They require sponsors to manage conflicts, establish fair valuations, and provide investors with sufficient information to make informed decisions while serving multiple roles in the transaction. As a result, CV transactions may give rise to both investment adviser E&O claims and D&O liability exposure for private equity firms and their directors and officers.

Conflicts of Interest and the Sponsor’s Dual Role

The defining feature of a CV transaction is the sponsor’s dual role. The general partner (GP) represents the selling fund while organizing and often controlling the continuation vehicle acquiring the asset. The sponsor typically continues to manage the portfolio company after the transaction and may benefit from ongoing fees, carried interest, or other economic incentives.

This structure arguably creates conflicts of interest and a potential basis for investor claims. Exiting LPs may argue they sold at an undervalued price, while rolling or new investors may contend they overpaid for an asset the sponsor was motivated to retain. Allegations can be amplified where the sponsor is perceived to have structured the CV to preserve fees, accelerate carry, or otherwise enhance its economics.

E&O claims may focus on whether the sponsor adequately managed conflicts, fulfilled its fiduciary duties, or structured the CV in investors’ best interests. D&O exposure may arise from claims against executives, investment committee members, or directors who approved or oversaw the transaction. As in disputes involving conflicted mergers, related-party transactions, or management buyouts, plaintiffs may frame these allegations as governance and oversight failures rather than simply poor investment outcomes.

In some circumstances, CV transactions may also create D&O exposure at the portfolio company level. Where sponsor-appointed directors participate in approving the transaction, stakeholders may allege that conflicts were not appropriately managed or that fiduciary duties were breached in connection with the transfer.

Valuation Risk

Valuation is another potential source of liability. Unlike traditional sale processes, where competing bids help establish market value, CV transactions are often more limited and sponsor-directed. To address conflict concerns, sponsors commonly obtain fairness opinions, engage independent valuation firms, conduct market checks, or seek LPAC approval.

Even so, valuation disputes may arise when a transaction is judged in hindsight. If the asset performs exceptionally well, former investors may claim it was sold too cheaply; if performance deteriorates, rolling and new investors may argue they overpaid. Plaintiffs might focus on whether alternatives were adequately explored, market testing was meaningful, conflicts were properly managed, and valuation disclosures were sufficient.

These allegations can create exposure under both E&O and D&O policies. Challenges to valuation methodologies, investment decisions, or CV structuring may give rise to asset manager or investment adviser E&O claims. Allegations that directors, officers, or investment committee members failed to exercise adequate oversight, or approved a deal despite known valuation concerns, may also result in D&O exposure. As a result, a single CV transaction potentially could generate claims under both coverage lines.

Regulatory Scrutiny

CV creation requires investors to decide whether to exit or remain invested, making the quality and completeness of sponsor-provided information critical.

Key questions often center on whether conflicts were adequately disclosed, valuation methodologies sufficiently explained, fee and carried interest changes clearly communicated, and investors given enough information and time to evaluate their options.

Regulators have increasingly focused on these issues, particularly in the private funds space. SEC scrutiny of continuation vehicles has emphasized many of the same concerns that arise in private fund examinations and enforcement actions, including conflicts management, valuations, transparency, and investor consent.

These inquiries, investigations, and enforcement actions may create D&O exposure, depending on policy definitions of covered investigations, administrative proceedings, and enforcement actions.

Conclusion

CV disputes can generate overlapping allegations involving conflicts of interest, valuations, disclosures, and fiduciary duties, creating both D&O and E&O risk. Thus, as CVs continue to grow in scale and prevalence, the potential for underwriting exposure may increase, particularly in connection with governance, valuation and disclosure-related issues.

Since the dawn of time, one of the biggest D&O insurance coverage issues has been allocation – that is, the division of loss between covered and noncovered claims or between covered and noncovered parties. After a series of developments in the mid-90s, including the standardization of policy allocation language, litigated allocation disputes became less frequent (though to be sure, allocation is still very much an issue in many D&O insurance claims.) However, in recent years, there has been a series of Delaware court decisions revisiting both allocation issues and what has become the standard D&O insurance allocation provision.

In the latest example of the reemergence of litigated allocation disputes, a Delaware court has held that the “Larger Settlement Rule” should be used to resolve an allocation dispute, notwithstanding the presence in the applicable allocation provision of relatively standard “relative exposures” language. With this latest decision, and in light of the other recent Delaware allocation decisions, some differentiating principles can be discerned, as discussed below.

A copy of the Delaware Superior Court’s June 18, 2026, decision in the Hemisphere Media Group case can be found here. The July 10, 2026, LinkedIn post of Geoffrey Fehling of the Hunton Andrew Kurth law firm discussing the court’s allocation decision in the Hemisphere case can be found here.

Background Regarding the Underlying Lawsuit

In May 2023, former stockholders of Hemisphere Media Group filed a class action lawsuit in the Delaware Court of Chancery, relating to a transaction in which Hemisphere’s controlling stockholder bought out Hemisphere’s minority stockholders, as well as to a related transaction through which Hemisphere divested itself of part of its business.

In the stockholder action, the plaintiffs asserted fiduciary duty claims against two sets of defendants. The first group was the “Director Defendants,” consisting of seven members of Hemisphere’s board of directors. The plaintiffs alleged that the directors breached their fiduciary duties by agreeing to the transactions, which, the plaintiffs contended, were not fair to stockholders. The second group was the “Controller Defendants,” which included three entities involved in controlling Hemisphere. The plaintiffs alleged that the Controller Defendants breached their fiduciary duties as Hemisphere’s controlling stockholders.

Of key interest to the subsequent insurance coverage dispute, all parties agreed that the Controller Entities are not Insured Persons under Hemisphere’s D&O insurance program.

After the defendants’ motions to dismiss the stockholder action were denied in part, the parties to the stockholder action settled the case for $15 million.

Background Regarding the D&O Insurance Coverage Dispute

At relevant times, Hemisphere maintained a program of D&O insurance consisting of a layer of primary insurance and several layers of excess insurance. Hemisphere submitted the stockholder action to its insurers as a claim under its D&O insurance program. Other insurers in the D&O insurance program have paid toward defense costs and toward the settlement. However, one of the excess insurers declined to contribute toward the settlement amount.

Hemisphere filed a coverage lawsuit against the non-paying excess insurer, alleging that the insurer had breached its contract, and seeking a judicial declaration that settlement and defense costs incurred in the stockholder action were covered under the excess insurer’s policy. Among other issues in dispute in the coverage lawsuit was the question of how the settlement should be allocated between covered and uncovered claims, the dispute arising because there were covered and uncovered defendants in the underlying lawsuit.

Hemisphere filed a motion for summary judgment on the allocation issue. Hemisphere argued that the allocation method to be applied is the “Larger Settlement Rule,” which provides that a settlement is to be allocated to covered claims except to the extent that the insurer shows non-covered conduct or parties increased the settlement amount.

The insurers opposed the motion, arguing in reliance on the allocation provision in the policy that the allocation method to be applied is the “relative exposures” standard, which provides that defense and settlement costs in a D&O lawsuit must be apportioned based on the comparative legal and financial liabilities of the covered parties and uncovered parties, or between the covered and uncovered matters.

The Relevant Policy Language:

The excess policy in dispute in the coverage lawsuit follows form to the primary policy. The primary policy provides with respect to allocation as follows:

(D) If both Loss covered by this Policy and loss not covered by this Policy are incurred, either because a Claim, Interview or Investigation Demand made against the Insured contains both covered and uncovered matters, or because a Claim, Interview or Investigation Demand is made against both the Insured and others (including the Company for Claims other than Securities Claims) not insured under this Policy, the Insured and the Insurer will use their best efforts to determine a fair and appropriate allocation of Loss between that portion of Loss that is covered under this Policy and that portion of loss that is not covered under this Policy. Additionally, the Insured and the Insurer agree that in determining a fair and appropriate allocation of Loss, the parties will take into account the relative legal and financial exposures of, and relative benefits obtained in connection with the defense and/or settlement of the Claim, Interview or Investigation Demand by, the Insured and others.

(E) In the event that an agreement cannot be reached between the Insurer and the Insured as to an allocation of Loss, as described in (D) above, then the Insurer shall advance that portion of Loss which the Insured and the Insurer agree is not in dispute until a final amount is agreed upon or determined pursuant to the provisions of this Policy and applicable law.

Historical Background on the Allocation Issue

Some background on D&O insurance allocation issues is pertinent here, as it provides important context for the parties’ positions on allocation. (This summary is adapted from my February 2020 discussion of the Delaware Superior Court’s decision in the Murdock case, about which more below.)

Back in the day, D&O insurance policies did not have express allocation provisions. Insurers argued then, in reliance in a 1986 Southern District of New York decision in the Pepsico case, that amounts should be allocated between covered and non-covered amounts, based on the “relative exposure” of the defendants to the covered and non-covered matters.

Policyholders urged that a different rule should apply, in reliance on a 1990 7^th Circuit decision in the Continental Bank case, which had first articulated what became known as the “larger settlement rule.” Under the “larger settlement rule” as it ultimately was described by subsequent court decisions, allocation is appropriate “only if, and only to the extent that, the defense or settlement costs of the litigation were, by virtue of the wrongful acts of the uninsured parties, higher than they would have been had only the insured parties been defended or settled.”

Insureds and policyholders duked it out for several years, with insurers urging the “relative exposures” allocation standard based on the Pepsico-line of cases, and policyholders urging the “larger settlement rule” allocation standard in reliance on the Continental Bank case.

Then in 1995 there was a trio of federal appellate cases that came down squarely in favor of the “larger settlement rule” – the Nordstrom and Safeway cases in the Ninth Circuit (which can be found here and here), and the Caterpillar case in the Seventh Circuit.

In the wake of the 1995 trio of appellate cases, several things happened in quick succession. First, insurers modified their standard D&O insurance policies to incorporate entity coverage, which eliminated many of the disputes over allocation between covered parties (individual directors and officers) and non-covered parties (before entity coverage, the company itself). Next, insurers modified their policies to expressly include allocation provisions – much like the allocation provision in dispute in the Hemisphere policy – that incorporated the “relative exposures” test. Almost all D&O insurance policies these days contain an allocation provision, and most expressly refer to the “relative exposures” standard.

Background Involving Recent Allocation Disputes in Delaware’s Courts

After the D&O insurers’ adoption of relatively standardized allocation language, litigated allocation disputes became less frequent. Indeed, between 2007 and 2020, I did not have occasion to write on this blog about allocation issues. However, in 2020, Delaware courts published the first of several decisions addressing allocation issues.

The first of these decisions was the January 2020 Delaware Superior Court decision in the long-running Dole Foods insurance coverage (often referred to as the Murdock case). As discussed here, in the Murdock case, Delaware Superior Court Judge Eric Davis held that, notwithstanding the presence in the allocation provision at issue in that case of the now-standard allocation provision reference to the “relative exposures” test, the allocation method to be used in allocating between covered and noncovered loss is the “larger settlement rule.”

Judge Davis said that, in his view, the allocation provision required the parties to use their best efforts to resolve the allocation dispute, and to do so with reference to the “relative exposures” between covered and noncovered matters or parties. The provision, Judge Davis said, “does not address the situation where the parties fail to agree. In the absence of language specifying what is to be done if the parties do not agree, and in light of the policy language, the larger settlement rule applies.”

In a March 2021 decision, discussed here, the Delaware Supreme Court affirmed Judge Davis’s ruling, largely on the same grounds on which Judge Davis had relied. The court said, among other things, that “any type of pro rata or relative exposures analysis seems contrary to the language of the Policies,” and determined that the trial court had “properly applied the Larger Settlement Rule.”

The Murdock courts’ resolution of the allocation issues in that case stands in contrast to the outcome of the allocation issues in the long-running Verizon insurance coverage dispute. In its December 2020 opinion in the Verizon case, the Delaware Superior Court, in reliance on the specific allocation language at issue in that case, held that the larger settlement rule did not apply, but rather the relative exposures test applied. The contrast in outcomes between the Murdock case and the Verizon case is largely due to the differences in policy language at issue in the two disputes.

The language at issue in the Verizon case provided as follows:

In connection with any Claim, other than a Claim that is or includes a Securities Claim, with respect to: (i) Defense Costs jointly incurred by, (ii) any joint settlement entered into by, or (iii) any Judgment of joint and several liability against any Organization and any insured Person, there shall be a fair and equitable allocation as between any such Organization and any such Insured Person, taking into account the relative legal and financial exposures and the relative benefits obtained by any such Insured Person and any such Organization, without any presumption that the coverage afforded to the Insured Person shall in any way reduce the allocation to the Organization which shall not be Insured for such allocation. In the event that a determination as to the amount of Defense Costs to be advanced under the policy cannot be agreed to, then the Insurer shall advance Defense Costs excess of any applicable retention amount which the insurer states to be fair and equitable until a different amount shall be agreed upon or determined pursuant to the provisions of this policy and applicable law.

The Superior Court distinguished this policy language from the language at issue in Murdock, saying that it “unambiguously provides a method that is independent of any agreement and reads as a completely controlling allocation method” – that is, the clause instructed that “there must be a fair and equitable allocation that accounts for the relative legal and financial exposures and the relative benefits obtained by those insured and uninsured.”

The June 18, 2026, Opinion

In a detailed June 18, 2026 opinion, Superior Court Judge Patricia Winston held that the policy at issue in the Hemisphere case “does not direct the parties to apply a specific allocation method,” in which case, the Court said, Delaware law “provides that the appropriate allocation method is ‘the Larger Settlement Rule.'”

In reaching this conclusion, Judge Winston said that in this case, like in Murdock but unlike Verizon, “the Policy lacks language mandating an allocation method.” Rather, as in Murdock, the allocation provision provides only that they will use their best efforts to determine a fair and appropriate allocation. The provision then specifies the considerations the parties will “take into account” in making those efforts to agree – that is “the relative legal and financial exposures of, and relative benefits obtained” by the insured and by other persons.

The provision then specifies if there is a disagreement, then the insurer will advance the portion of loss not in dispute, and a final amount will be “agreed upon or determined pursuant to the provisions of this Policy and applicable law.” And, the Court added, applicable Delaware law “directs that the Larger Settlement Rule shall apply.”

The insurer had tried to rely on the Verizon court’s analysis, which led that court to rely on the relative exposures test rather than the larger settlement rule. But Judge Winston said that in Verizon, “unlike here and Murdock,” the policy contained language instructing that “there must be,” as the Court observed, “a particular allocation regardless of whether there was agreement.” That mandate, Judge Winston said, “is not present here.” Murdock, and not Verizon, controls here, Judge Winston said.

Finally, Judge Winston noted that, “as Delaware courts have recognized,” the Larger Settlement Rule “best upholds the expectations of the insured in purchasing coverage.”

Discussion

I went to some lengths above to review the long history of D&O insurance allocation disputes. While it all may seem to some to be ancient history, and in many ways it is ancient history, it is important to know the history to understand how the “relative exposures” language got in the policy in the first place, and to understand what it was intended to do.

It is no accident that Judge Winston quoted extensively in her opinion from a thirty year old law review article about allocation disputes written by my good friends, the late Joe Monteleone and his then-colleague Nick Conca. From the mere presence of Judge Winston’s references to Joe and Nick’s article, you will understand that the issues involved in this case have an ancient pedigree. Indeed, just talking about them makes me feel hundreds of years old.

One very important thing to understand from that ancient pedigree of the allocation issues is that the whole point of the inclusion of the “relative exposures” language was, from the insurers’ perspective, to provide in the policy that allocation disputes were to be resolved using the “relative exposures” test, and not using the Larger Settlement Rule.

All of that said, I think where we are now given the recent history of allocation decisions in the Delaware courts is that whether or not the “relative exposures” test will in fact be applied to resolve allocation disputes will depend on the specific language used in the allocation provision.

If the language at issue resembles the allocation provisions at issue in Murdock and in Hemisphere, a Delaware court will rule that the provision does not specify a method (because the “relative exposures” language is directed only at the parties’ “best efforts” to agree on an allocation, and does not specify what method a court is to use in determining an allocation dispute), and therefore that by operation of Delaware law, the Larger Settlement Rule applies.

If however the language at issue resembles the allocation provision at issue in Verizon, a Delaware court will hold that the provision does specify an allocation method for courts to use in resolving allocation disputes, and the “relative exposures” are not merely factors for the parties to take into account in using their best efforts to resolve an allocation dispute.

Insurer side advocates seeking to ensure that allocation disputes will be resolved in the courts by application of the “relative exposures” test will want to study the language at issue in Verizon, and how it differed from the language at issue in Murdock and Hemisphere. The key is that the language in Verizon expressly said that “there shall be a fair and equitable allocation … taking into account the relative legal and financial exposures and the relative benefits obtained.” It did not say, as with the language at issue in Murdock and Hemisphere, only that (at least as interpreted by the courts in those cases) the “relative exposures” are merely factors for parties to use as part of their “best efforts” to resolve the dispute.

Policyholder side advocates, by contrast, will prefer the language in Murdock and Hemisphere, as it will, at least according to the view of the Delaware courts, be interpreted not to provide a method for courts to use in resolving allocation disputes, and so the court will apply the Larger Settlement Rule, by operation of law. This, Judge Winston said, will best uphold the expectations of policyholders in purchasing insurance coverage.

In his LinkedIn post discussing the Hemisphere decision, to which I linked above, Geoffrey Fehling noted that Judge Winston’s opinion addressed only the question of whether the Larger Settlement Rule applied, but not how the rule applied to the settlement at issue in the insurance dispute. That question, Fehling notes, is left to another day while the case proceeds under standards required by the Larger Settlement Rule.

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.

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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).