Equifax Data Breach May Prompt Shareholder Derivative Suit

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By Jimmy H. Koo

Equifax Inc. executives may face a shareholder derivative suit over the massive breach of 143 million Equifax customers’ data, corporate practice attorneys told Bloomberg BNA.

Equifax is already under attack by lawmakers, regulators, consumers, and shareholder classes in response to the breach. Those actions would hold the company liable, but a successful derivative suit could expose the corporation’s directors and executives to direct liability.

A shareholder derivative suit is filed by a shareholder on behalf of a corporation against a third party that is allegedly causing harm to the corporation—often an executive officer or a director.

The Atlanta-based consumer credit reporting agency Sept. 7 announced that hackers had obtained customers’ names, Social Security numbers, birth dates, addresses, and driver’s license numbers. The announcement resulted in a series of data breach class action lawsuits against Equifax, at least one securities class action complaint, and a threatened lawsuit by Massachusetts Attorney General Maura Healey (D).

In addition, three Equifax executives sold stock in the company after the breach was discovered, but before it was disclosed to the public.

Melissa Krasnow, privacy partner at VLP Law Group LLP in Minneapolis, told Bloomberg BNA that because the “facts are so amazing in this case,” it is likely at least one derivative suit will be filed. Derivative suits were filed after major breaches at Wyndham Worldwide Corp., Home Depot Inc., Wendy’s Co., and Target Corp., she said.

Georgia Law Rules

Derivative suits are based on the law of the state of incorporation. Usually, derivative suits involve Delaware law, where many companies are incorporated. However, if a derivative suit is filed against Equifax executives, “this would be a first because Georgia law is involved and Equifax is a credit bureau,” Krasnow said.

Under Georgia law, a shareholder must first make a written demand on the corporation—usually addressed to the board—to take action. The shareholder must wait 90 days after the demand before filing a derivative action.

Therefore, even if a shareholder had demanded that the Equifax board take action as soon as the data breach was announced, that shareholder couldn’t file a derivative lawsuit, in the event the board didn’t act, until December.

Denver G. Edwards, principal in the securities practice at Bressler, Amery & Ross P.C. in New York, told Bloomberg BNA that a derivative suit against Equifax will likely allege breach of fiduciary duty. The purpose of any derivative suit is to “redress damages done by directors and officers,” but it isn’t “easy to have the board take action as they need to look at what happened” and assess whether there were any red flags, he said.

SEC Enforcement Action

Securities and Exchange Commission enforcement action is also possible. Data breaches are new issues for the commission, but “if you listen to what SEC members have said, they’re not opposed to bringing enforcement action” against companies over allegedly lax cybersecurity, Edwards said.

Bloomberg News reported Sept. 7 that three Equifax senior executives, including Chief Financial Officer John Gamble, U.S. Information Solutions President Joseph Loughran, and President of Workforce Solutions Rodolfo Ploder, “sold shares worth almost $1.8 million in the days after the company discovered a security breach,” but before the information became public.

But the fact that Equifax executives sold stock doesn’t mean they committed insider trading violations, Edwards said. Companies experiencing data breaches should “immediately talk to employees” and caution them from trading to avoid such implications.

The SEC declined to comment. Equifax didn’t immediately return Bloomberg BNA’s email request for comment.

To contact the reporter on this story: Jimmy H. Koo in Washington at jkoo@bna.com

To contact the editor responsible for this story: Donald Aplin at daplin@bna.com

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