European Union: Dynamic Regulations And Shareholder Actions Guide The Board's Shifting Role In Cyber (Part One Of Two)

Last Updated: 1 March 2018
Article by Jeewon Kim Serrato, Marc Elzweig and David Lee

One well-known cost of breaches is post-breach litigation. A growing trend that merits further attention is the rise of shareholder derivative suits filed against boards of directors of companies that suffered data breaches. Moreover, regulatory changes, including the GDPR, may make such suits more frequent in addition to creating other data-breach- response expenses. Boards of directors need to take note and understand these increasing costs and risks.

In part one of this two-part article series, we review the evolving understanding of the board of directors' responsibility for cybersecurity and consider several shareholder derivative suits filed in the wake of data breaches as case studies. In part two, we will consider some of the lessons that boards may learn from these suits.

Rising Costs and Regulatory Shifts

Not only are data breaches expensive in direct costs, but they may also have a persistent or permanent negative impact.

A recent CGI and Oxford Economics study found an average permanent loss of nearly 2% of a company's value resulting from a severe data breach, and that the impact is likely increasing. In addition, data breach reporting requirements in the E.U. GDPR are reasonably expected to increase the global reporting of and scrutiny on data breaches after the GDPR becomes effective on May 25, 2018. We may learn that data breaches are even more common and expensive than our current understanding.

Consumer class actions typically follow a breach, and there may be litigation with other third parties, such as credit card processers if payment card systems are compromised. Such suits often lead to significant expenses for the company, and the impact of consumer class actions and suits filed by financial institutions have received wide coverage.

In addition to class actions, in several recent large-scale data breach incidents, shareholders have filed suits against the executives and directors for various theories including breach of fiduciary duties, mismanagement and material omissions.

With the GDPR on the one hand mandating data breach notifications and on the other explicitly allowing for private claims and group action claims – where individuals may mandate a not-for-profit body, organization or association to exercise their rights and bring claims on their behalf – we expect to see an increased awareness of data breaches and resulting claims against companies.

See "Key Post-Breach Shareholder Litigation, Disclosure and Insurance Selection Considerations" (Aug. 3, 2016).

Board Considerations

Increased regulatory obligations, alongside media reporting on data breaches that have led to the ouster of CEOs and shakeups of boards, have made cybersecurity threats a top concern for boards of directors. The new GDPR breach notification rules and the specter of fines and private claims will also dramatically increase the need for board oversight in handling E.U. resident data. Shearman & Sterling's 2017 Corporate Governance & Executive Compensation Survey, an annual survey of the 100 largest U.S. public companies, showed that 15% of the companies' shareholder engagement disclosures in their 2017 proxy statements included risk management and oversight, cybersecurity and compliance issues, compared to 7% in 2016.

An increase in knowledge and awareness of cybersecurity issues may be prompting more disclosures. The 2017 BDO Cyber Governance Survey reports that more than three- quarters (79%) of public company directors report their board is more involved with cybersecurity than it was 12 months ago. Given the exposure, we anticipate more companies will add cybersecurity statements in their proxy statements.

See "A CSO/GC Advises on How and When to Present Cybersecurity to the Board" (Feb. 22, 2017).

The following are some of the notable regulatory developments – through the GDPR and U.S. regulatory efforts – that boards should keep in mind.

GDPR's Breach Notification Provision

In the E.U., the GDPR is slated to be one of the most significant pieces of legislation in decades and presents ambitious and comprehensive changes to data protection rules that will surely be tested in court. Intended to harmonize E.U. member state legislations and increase data subjects' rights, the GDPR not only requires companies handling E.U. resident data to comply with privacy principles, but it also includes the first E.U.-wide mandatory data breach notification rule. Under Article 33, companies are required to report to the data protection supervisory authority within 72 hours all breaches leading to destruction, loss, alteration or unauthorized access to personal data that is likely to result in a risk to the rights and freedoms of the affected data subjects. Further, under Article 34, when a data breach is likely to result in a "high risk" to the rights and freedoms of natural persons, notification to data subjects is required without undue delay.

See "A Practical Look at the GDPR's Data Breach Notification Provision" (Jan. 17, 2018).

GDPR's Right of Compensation

In addition to this mandatory breach notification rule, which is similar to rules the U.S. has had for over a decade,1 the GDPR also gives individuals a right to compensation from a data breach. Under Article 79, individuals may bring private claims for any infringement of the GDPR relating to the processing of their personal data. Article 82(1) expands the scope of liability for infringement so that anyone who has suffered material or non-material damage shall have the right to compensation.

It is important to note that the injured person no longer needs to prove financial loss to recover from the lawsuit, as damages may be awarded to a person who suffered distress due to the breach. The GDPR also allows third party not-for-profit public interest bodies to bring claims on data subjects' behalf (Article 80(1)). These new rules significantly expand the pool of claimants who may seek damages against a company in the case of a data breach.

Not only will data breaches result in private claims, failures to comply with the GDPR can result in fines of up to 4% of global revenue. As a result, this legislation will likely place cybersecurity and personal data issues at the top of the board agenda.

See "A Discussion With Ireland's Data Protection Commissioner Helen Dixon About GDPR Compliance Strategies (Part One of Two)" (Mar. 22, 2017); Part Two (Apr. 5, 2017).

U.S. Regulators' Views on Board Behavior

In the U.S., there is no national data protection or cybersecurity law, but a patchwork of state and federal regulations have sought to address cybersecurity threats and privacy issues, with regulators increasingly signaling that the board has oversight responsibilities. In a 2014 speech to the New York Stock Exchange, then-SEC Commissioner Luis Aguilar noted that "boards must take seriously their responsibility to ensure that management has implemented effective risk management protocols. ... and there can be little doubt that cyber-risk also must be considered as part of boards' overall risk oversight."

Similarly, Jay Clayton, during 2017 confirmation hearings to become Chairman of the SEC, signaled his support for a Senate bill that would increase disclosure about directors' roles and expertise in cybersecurity. Mr. Clayton stated, "I believe that is something that investors should know, whether companies have thought about the [cybersecurity] issue, whether it's a particular expertise the board has," and further added, "It's a very important part of operating a significant company."These statements reflect the SEC's position that "the greatest threat to our markets right now is the cyber threat," as stated by Steven Peikin, SEC's co-director of enforcement.

See also "SEC Officials Flesh Out Cybersecurity Enforcement and Examination Priorities (Part One of Two)" (May 3, 2017); Part Two (May 17, 2017).

Originally published in

To view the article please click here.


1 The first such law, the California data security breach notification law was enacted in 2002 and became effective on July 1, 2003. See SB 1386, Cal. Civ. Code 1798.82 and 1798.29

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions