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Zoom Shareholder Suit Is A Warning to Directors and Officers About Pandemic-Related Stresses

April 13, 2020Alerts

In the midst of the COVID-19 pandemic, few companies have experienced the dramatic increase in visibility and business as video conferencing provider Zoom Video Communication, Inc. In fact, Zoom’s CEO, Eric Yuan, stated last week that Zoom’s daily active users had grown from 10 million to 200 million since December 2019.

But Zoom's meteoric rise was accompanied by stumbles that have now made the company an object lesson in corporate management as viewed under the microscope of a global crisis.

Unfortunately, just as Zoom started to become ubiquitous in home offices around the country, apparent flaws in its data security came to light on a national scale. The phenomenon of “zoombombing” – in which hackers, without authorization, enter business and personal meetings conducted on Zoom – led numerous organizations to switch to other video conferencing providers. This rapid increase in share value followed by a relative decline after data security concerns arose has at least some shareholders pointing the finger at Zoom’s Officers.

On April 1, 2020, Zoom shareholder Michael Drieu filed a putative class action complaint against Zoom that named Yuan and Zoom’s Chief Financial Officer, Kelly Steckelberg, alleging losses in share value purportedly resulting from undisclosed data security failures. Drieu alleges that deficiencies in Zoom’s encryption software were known to Officers since at least July 2019, but only have been realized as a result of the widespread use of Zoom during the pandemic. The suit alleges violations of the Exchange Act based on the defendants’ purported acts and omissions in reporting the weaknesses Zoom’s security.

While not all companies offer a product ripe for unprecedented use during the COVID-19 pandemic, all companies will face novel strains on their workforce and corporate resources. Directors and Officers need to candidly anticipate the stress that both the pandemic and likely recession will place on their organizations.  Special care should be given to inefficiencies or imperfections in data security, accounting, supply chain, and human resources processes and technologies which may be tested as employees work remotely and internal checks and balances shift.

For Zoom, shareholders all but ignored tremendous recent gains in share value when stock prices declined over a matter of days. The lesson for Directors and Officers helping their organizations meet the challenges of the pandemic, the "new normal" is likely to involve stakeholders intent upon holding them liable for any perceived misstep in these unprecedented times.