Author: Walker Newell
Shareholder derivative litigation can take many forms. If something bad happens at a company, it's easy for securities plaintiffs to allege that directors breached their fiduciary duties to shareholders by failing to prevent the bad thing from happening.
Winning a derivative case, of course, is harder for plaintiffs. But as anyone who has been named as a defendant in shareholder litigation can tell you, even if the case is ultimately thrown out, the experience is often quite unpleasant and expensive. And, when a fiduciary duty case has legs, directors and officers may be forced to stare down the barrel of an eight- or nine-figure settlement.
Also, in many jurisdictions (including Delaware, where most prominent companies are incorporated), corporations are prohibited by law from directly indemnifying officers and directors for derivative litigation settlements, leaving personal balance sheets potentially at risk. This is one of the reasons why Side A Directors and Officers (D&O) insurance is needed to ensure that corporate leaders can get sleep at night.
Derivative litigation follows the money
From a plaintiff's perspective, derivative litigation is wonderfully flexible. A CEO is dethroned by a hair-raising scandal? Allege that directors breached their fiduciary duties. A company is hit with a damaging regulatory matter? Allege that directors breached their fiduciary duties. A company's products cause significant harm to consumers? Allege that directors breached their fiduciary duties.
For derivative litigation to make sense for plaintiffs' lawyers, however, there has to be good money in it. If bad things happen at a company but there is no corresponding direct harm to the business, it's hard (although not impossible, in some creative cases) for plaintiffs' lawyers to get excited about it.
Most fundamentally, companies with high valuations are the prime targets for derivative litigation. According to a mid-2026 Bloomberg analysis, over 50% of the current valuation of the S&P 500 is made up of AI-related companies1.
Derivative litigation follows the money, and the money is in AI.
LLM training, IP infringement and derivative litigation
In September 2025, Anthropic agreed to a $1.5 billion settlement with a class of authors who claimed the company violated copyright law by using improperly obtained copies of various works to train its AI large language models (LLMs)2. Nine-figure settlements tend to attract attention. Similar LLM-training intellectual property (IP) litigation has been filed against numerous prominent technology companies alleging copyright and Biometric Information Privacy Act (BIPA) violations. Apart from the Anthropic settlement, however, most of these cases remain pending, with final outcomes yet to be determined.
Despite the absence of large non-Anthropic settlements, in recent months, shareholder plaintiffs have filed derivative litigation against some of the prominent technology companies facing LLM-training IP litigation. One example is a recent case against NVIDIA's board and senior executives. In the litigation, plaintiffs claim that due to leadership's supposed "failure to take required steps to eliminate copyrighted works — from NVIDIA's AI datasets, NVIDIA will be subject to potentially massive liability."
At the ground level, this new species of LLM copyright derivative litigation has some interesting features for D&O wonks, including that:
- Historically, IP infringement risks haven't been a big driver of shareholder derivative cases.
- Similarly, with some notable exceptions, privacy law hasn't been a significant source of follow-on securities litigation.
- In many of these cases, beyond being served with civil litigation, the "potentially massive liability" plaintiffs suggest hasn't actually materialized. Until and unless massive liability does arise for non-Anthropic companies, these LLM copyright derivative litigation cases feel a bit like placeholders. Pre-settlement defense costs alone probably don't meet the mark for a breach of fiduciary duty.
For the future of D&O risk, the more interesting questions are less about the specifics of these cases and more about what they mean for AI-related litigation and insurance in the coming years.
Here are some potential implications:
The medium is the message
At the moment, LLM-training derivative litigation is the new hot thing for the plaintiffs' bar. The next new hot thing will likely be something else related to the AI industry. From a plaintiffs' lawyer's perspective, an AI focus makes all the sense in the world. If over half of the valuation of the S&P 500 is made up of AI-related stocks — and this doesn't account for the many multi-billion-dollar AI companies in the private markets — as a plaintiffs' lawyer, why would you look anywhere else?
The next narrative: TBD
It's hard to predict exactly what will catalyze the next batch of AI-related securities litigation. It seems safe to say, however, that whatever happens with the AI industry — continued exponential growth or something else — plaintiffs' lawyers will find a way to bring securities cases. If past periods of significant investment and disruption are any guide, there will be corporate winners and corporate losers. The losers will likely face litigation. And the winners may also face litigation when they experience temporary road bumps on the way to outsized success.
Remember that private companies can be sued derivatively
While large public companies are the primary recipients of big-ticket derivative litigation, private companies can also be sued. Public companies are more frequently sued derivatively because of the large dollars at stake and the diversified shareholder base that comes with trading on a public exchange (which makes it easier to find willing plaintiffs). With private markets increasingly providing liquidity for decacorns and centicorns, some privately held companies also have an increasingly diverse shareholder base. With bigger valuations and more shareholders, the odds of derivative cases against private companies theoretically increase.
What can companies and boards do to reduce AI-related securities risk?
Process and documentation: The board's best friend
Here at the D&O Notebook, we're broken records on process and documentation. The best things a board can do to nip shareholder derivative litigation in the bud are to have genuine, rigorous and ongoing discussions about key risks to the business and to implement well-crafted processes to maintain and document this dialogue.
Side A and Side A DIC: Also the board's best friend
When it comes to litigation risk, boards actually have two besties.
Side A of the D&O insurance policy will step in for individual directors and officers when the company is unable or unwilling to indemnify. Two key situations in which this can occur are (1) shareholder derivative settlements (at least in Delaware) and (2) insolvency.
Side A difference in conditions (DIC) — a separate dedicated policy and limit not shared with the company — is an important component of public company D&O programs, benefiting senior executives and boards. Happily, Side A DIC coverage is generally less expensive than ABC coverage.
Carefully analyze private unicorn D&O limits
Compared to life in the public markets, life as a privately held unicorn comes with much lower securities litigation risks. In light of this reduced risk, some hypergrowth privately held companies carry a relatively small amount of D&O insurance relative to their valuations. Other private companies begin to scale the D&O program as they achieve significant scale, both to prepare for a potential future exit and, importantly, to protect senior executives and board members against unpredictable downside scenarios that can arise at fast-growing companies.
Private company D&O insurance is a relative bargain. It's also tricky to benchmark. To arrive at the right limits, work with an expert D&O broker with deep experience working with highly valued disruptive tech companies.
Published August 2026
