Private Company Litigation: Yes, It Can Happen to You

Private companies do not typically suffer the same level of scrutiny as public companies, but they can still be sued and investigated, and sometimes with considerable press. The risks range from derivative suits to government enforcement and everything in between.

Major disputes that involve private company founders, board members, investors, and regulators can be extremely disruptive for smaller organizations, many of which may not have the same resources or protections in place.

In this article, I will outline some of the litigation scenarios that private companies face today. These kinds of disputes highlight why private company D&O insurance can be a critical safeguard for directors and officers, as well as the companies they serve.

What the Data Say About Private Company Litigation

Directors and officers do not like any litigation, of course, but litigation is relatively less problematic when it is brief and inexpensive.

When litigation costs $1 million or more, however, it is much more concerning.

AIG helpfully published an analysis of claims it has received for $1 million or more on private company D&O policies issued from 2016 to 2020. According to this analysis of AIG claims:

• Antitrust and bankruptcy claims accounted for 37% of amounts paid
• Customer and competitor claims accounted for 34% of the claim count, making up 25% of total losses paid
• Shareholder/breach of fiduciary duty claims represented 20% of the claim count, driving 23% of losses paid
• Regulatory claims represented 20% of overall claims in the study

Surprisingly, for smaller private companies (under $500 million in assets), regulatory claims accounted for 17% of total losses, showing that even relatively low visibility companies are not immune to government oversight.

The data show that litigation against private companies is diverse; the data also show that the litigation can be financially significant. The average claim in the analyzed cohort can easily reach into the millions, sometimes tens of millions.

The AIG report noted the highest average claims payments were as follows:

• Antitrust: $7.1 million (highest severity overall)
• Shareholder/breach of fiduciary duty: $4.3 million
• Bankruptcy: $3.7 million
• Regulatory: $2.9 million
• Customers or competitors: $2.7 million

Now that we have explored some of the statistical data, let us turn to some real-world examples of private company litigation.

Real-World Case Studies of Private Company Litigation

As a reminder, it was a private company—Blue Bell Creameries—that gave us the seminal case for the modern view of failures of board-level risk monitoring leading to a breach of the duty of loyalty.

That is the case in which a shareholder sued the board after a listeria outbreak caused three consumer deaths, not to mention financial turmoil including plant shutdowns and layoffs.

The issues were serious, and evidence of the board’s having put in place a system reasonably likely to bring risk issues to its attention was, at best, sparse. The case ultimately settled for $60 million.

UC Law San Francisco’s Startup Litigation Digest, published quarterly, reports on various types of private company litigation. This excellent resource provides case summaries that highlight the types of allegations that can pull a private company into costly litigation.

Government Actions

Perhaps surprising to many is the number of suits brought by the government against private companies, including their officers.

For example, Securities and Exchange Commission (SEC) investigations can result in enforcement actions, financial penalties, and even parallel criminal charges—all reminders that private status does not shield companies from federal oversight.

Here are two recent, high-profile cases involving US private companies.

Slync

Slync was a Dallas-based supply chain software startup that raised millions from investors before the founder’s misconduct put into motion the company’s downfall.