As Covid-19 has disrupted supply chains, shifted product demands, and created product shortages—it has also threatened to create an uptick in shareholder lawsuits, creating new challenges for officers and directors of public companies, particularly those developing or manufacturing Covid-19 related treatments and vaccines, as well as ventilators or personal protective equipment (PPE).
In fact, a Covid 19-related securities litigation case was filed on March 12 against Inovio Pharmaceuticals Inc. (Inovio), even before most stay-at-home orders were put in place. The plaintiffs alleged that Inovio’s stock price spiked based on statements executives made about Inovio’s progress on a Covid-19 vaccine, but then later dropped when additional details about the extent of the company’s progress on the vaccine became public.
We anticipate numerous similar suits against companies involved in developing treatments or vaccines for Covid-19, as well as against companies involved in the production of ventilators and PPE. In the current environment, shareholders (and plaintiffs’ attorneys) may scrutinize with particular care a company’s disclosures, projections, or business plans connected to Covid-19 related products.
Further, under recent Delaware cases, the board is held to a higher standard when supervising regulatory compliance for key products. As development of Covid-19 treatments and vaccines proceeds at a breakneck pace, boards may face additional challenges proving in hindsight that they appropriately supervised clinical studies and other activities related to the disease.
Significantly, market dislocation has historically led to increased shareholder litigation. Most recently, shareholder suits spiked after the 2008 market downturn, in part because the bear market incentivized plaintiffs to bring claims that would not otherwise have been worthwhile.
Perhaps recognizing this vulnerability, the chairman of the Securities and Exchange Commission and the director of the SEC’s Division of Corporation Finance, released a statement on April 8, urging public companies to disclose:
- Where the company stands operationally and financially, in light of Covid-19,
- How the company’s Covid-19 response, including its efforts to protect the company’s workforce and customers, is progressing, and
- How the company’s operations and financial condition may change, as efforts to fight Covid-19 progress.
The SEC statement underscores that companies manufacturing or investigating products related to Covid-19 are not the only companies at risk. All medical product companies—and indeed, all companies—face risks from shareholder derivative suits alleging that officers and directors failed to protect the company from the effects of Covid-19.
In this environment, we recommend that companies implement the following mitigation measures.
- Companies must revisit risk factor disclosures in SEC filings or other public documents. It is important not to describe current events or impacts as potential risks and uncertainties. For example, many companies include in their Forms 10-Q and 10-K a generic risk disclosure that international events or sector-wide downturns may affect results. A favorite tactic of plaintiffs’ lawyers is to claim that this disclosure is misleading in a quarter or year where international events or a sector-wide downturn had already caused negative financial results. Similarly, pharmaceutical companies often include a boilerplate disclosure that clinical results may reveal that an investigational drug is not effective or not safe. Plaintiffs will argue that this disclosure is misleading if the company has already seen disappointing clinical results for the drug. Companies taking advantage of regulatory flexibility to develop drugs or devices on a more rapid timeline should be particularly careful to regularly revisit and update their disclosed risk factors.
- Pharmaceutical and device companies investigating or manufacturing COVID-related medical products should carefully vet public statements related to these products. Plaintiffs’ attorneys assuredly are monitoring the sector for any optimistic statements indicating that a company expects to benefit financially from Covid-19 by, for example, developing a vaccine or other treatment. Companies must ensure that statements regarding Covid-19 products are appropriately qualified so they are not rendered false or misleading by future events. Companies should also take care to include language that takes advantage of the safe harbor for forward-looking statements under the Private Securities Litigation Reform Act (PSLRA).
- To limit exposure to derivate suits claiming breaches of fiduciary duties, boards and management should robustly document their decision-making processes. It may be challenging to robustly document these processes when key decisionmakers are working remotely. Although many regulators (including the SEC) have relaxed some wet-signature and in-person-meeting requirements as an emergency measure, other formalities may still apply by operation of state law or the company’s bylaws.
- As in any economic downturn, companies should conduct a board-level briefing on company indebtedness and solvency. Companies should give due consideration to how any projections or plans may be affected by the evolving Covid-19 crisis.
- Management must be careful to involve the board, and particularly board members with relevant expertise or training, in oversight of clinical trials for Covid-related investigational drugs and devices, as well as other clinical trials impacted by the outbreak. Significantly, FDA issued a guidance in March, and updated it in April, titled “FDA Guidance on Conduct of Clinical Trials of Medical Products during COVID-19 Public Health Emergency.” The board should seek appropriate counsel on changing regulatory requirements during the pendency of the crisis and have an exit plan to return to normalcy once the emergency has expired.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Lisa Dwyer has been practicing food and drug law for 20 years, and is a partner in King & Spalding’s FDA/Life Science’s team in Washington, D.C.. Just prior to joining King & Spalding, she served in two senior leadership roles in the FDA Commissioner’s Office.
Paul Bessette is a partner and co-chair of King & Spalding’s Corporate and Securities Litigation practice. He specializes in defending companies and individuals in securities and shareholder litigation, as well as in SEC investigations and enforcement actions. Bessette has over three decades of experience representing clients in a wide array of complex commercial and business litigation matters.
Mike Biles is a partner in King & Spalding’s Securities Enforcement and Regulation practice. He focuses on securities litigation in the federal and state courts. Biles represents companies and company insiders in securities cases, including class actions, investigations and regulatory matters.
Rebecca Matsumura is an associate in the Austin, Texas, office of King & Spalding and focuses her practice on complex civil litigation, with an emphasis on securities and shareholder litigation, bankruptcy, and related investigations. She primarily represents companies and their officers and directors in securities fraud class actions, shareholder derivative lawsuits, bankruptcy proceedings, regulatory investigations, and SEC enforcement actions.