Corporate Sustainability Statements: Litigation
Risks and External Assurance as a Way to
Mitigate Them
William ROBERT
Mastertrack: European Private Law Supervisor: Nathalie den Hollander Date of submission: 27 July 2018
Abstract
Over the last years, the percentage of companies making sustainability statements has grown tremendously. While this reduces – at least to a certain extent – information asymmetry between companies and their stakeholders, rendering such information public exposes companies to new litigation risks. Several cases in the U.S. and in Europe have witnessed investors collectively challenging these sustainability statements because of their inaccuracy or fraudulent nature resulting in financial losses. Through a combination of case- and literature review, I find that recent procedural developments across Europe contributed to exacerbate such liability risks. I make some recommendations for harmed investors and for firms making sustainability statements, amongst which the use of external assurance as a risk-reducing tool. I observe that, while the majority of large firms now use external sustainability assurance, this is mostly done by big accounting firms through the use of inadequate standards with an overall poor-quality outcome, to the detriment of stakeholders but also of the companies themselves. I recommend the use of better standards like the AA1000 in order to provide investors with a more accurate picture of the companies’ sustainability aspects and thereby reducing litigation risks.
Table of Contents
Introduction……….4
Chapter I – Corporate Sustainability Statements and Litigation Risks……….5
Section I – Corporate Sustainability Statements……….5
Section II – Litigation Risks………..…………10
§1 – Shareholder Litigation in the United States………..…..11
§2 – Shareholder Litigation in Europe………...18
§3 – Implications for Companies and Investors………...…………...25
Chapter II – External Assurance of Sustainability Reports………27
Section I – Criticisms of Current Practice………...29
Section II – Regulatory Implications……….33
Introduction
In recent years, there has been a global increase in the number of companies making sustainability statements, through the production of sustainability reports as well as via other means. As companies face greater pressure from the investment community but also from NGOs and stakeholders in general, reporting on their sustainability aspects has now become common practice amongst large firms. Yet, it is probably the case that this trend exposes companies to new liability risks. While disclosing sustainability data reduces information asymmetry between companies and their stakeholders, conversely, it also increases the amount of information that could potentially be used against firms in the event of false or misleading statements. This thesis seeks to evaluate the extent to which such assumption is true: does this recent trend in corporate sustainability statements led to increased liability risks for companies making such non-financial statements, either voluntarily or because they are required to do so by law?
I start the first chapter by giving a rapid overview of the current practice of sustainability statements with an emphasis on sustainability reporting (Section I). Then, through a combination of case- and literature review, Section II gives a broad – though succinct – overview of the current state of affairs, in the U.S. and in Europe, of investor collective lawsuits challenging sustainability statements and of the way by which recent procedural developments across Europe led to increased investor litigation. As a result, I conclude the first chapter by describing some of the liability risks that companies making sustainability statements are currently facing in Europe and current opportunities for aggrieved investors wishing to challenge these statements because of their inaccurate or fraudulent nature. In the second chapter, I identify external assurance as one of the main measures that companies can take in order to mitigate litigation risks. After describing some of the current trends in terms of sustainability assurance and its effect on corporate reports, I evoke some of the most recurrent criticisms as well as the regulatory implications caused by the specific nature of sustainability assurance as opposed to the assurance of financial statements.
Chapter I – Corporate Sustainability Statements and Litigation Risks
Before assessing the litigation risks that companies making sustainability statements face, I will start with a brief introduction on the current landscape of sustainability statements. While there are many ways by which companies can render such information public, I focus primarily on sustainability reporting. Nevertheless, what is stated infra in terms of litigation risks arising from sustainability reports similarly applies to sustainability statements made through other channels of disclosure as well.
Section I – Corporate Sustainability Statements
Sustainability is regularly used in the business sphere as to mean a “process of conducting business in ways that protect Earth and its inhabitants from irreparable damage caused by human activities”.1 In a 1987 report called “Our Common Future”, the UN defined sustainable development as a “development that meets the needs of the present without compromising the ability of future generations to meet their own needs”.2
As for “corporate sustainability”, several definitions are found in the literature. Most of them focus on the long-term aspect of the corporation’s impact on the environment, economy, and society. They also stress the interactive effect of these three elements3. According to Matthews
and Rusinko, in order to be ‘sustainable’, an organization must be able to “support itself indefinitely and create profit for its shareholders, while protecting the environment and improving the lives of those with whom it interacts”.4
Corporate sustainability is frequently used alongside the term ‘Corporate Social Responsibility’ (CSR). CSR operates around four constitutive elements: environmental impact, corporate governance, social impact, and workplace practices. Even though the two expressions are often mentioned as to mean the same thing, CSR is actually a subset of sustainability in the sense that the former focusses on the impact of an organization on the society overall, while the latter also considers the financial self-sufficiency of this organization.5
1 Gwendolen B. White, Sustainability Reporting: Getting Started, Second Edition, Business Expert Press, 2015, 1. 2 Report of the World Commission on Environment and Development: Our Common Future [1987].
3 Gwendolen B. White, Sustainability Reporting: Getting Started, Second Edition, Business Expert Press, 2015, 5.
4 John O. Matthews and Cathy A. Rusinko, ‘Sustainability Disclosure: Increasingly Important for Banks and Commercial Lenders’ [2010] Com Lending Rev 25(5), 13.
5 Nigel Finch, ‘The Motivations for Adopting Sustainability Disclosure’ [2005] MGSM Working Paper No. 2005(17), 2.
There has been a growing demand for sustainability information these last years. The financial market is increasingly concerned with the level of transparency of companies about their sustainability performance and policies with a particular focus on the environmental and governance aspects.10 Investors tend to be more interested in environmental, social, and governance (ESG) information than lenders, probably because of the fact that, while lenders care mostly about the downside risk of a business, investors are also attentive to possible upside opportunities.11 Sustainability disclosure indeed allows investors to identify the most efficient and competitive companies, since sustainability components can influence companies’ value, especially in the long run.12 Sustainability disclosure is similarly increasingly important for lenders because it allows analysts to better assess a company’s credit risk by using a more comprehensive set of data. This helps them evidence “hidden risks that may not be apparent from more traditional accounting data.”14 It is also more and more relevant for banks’ investors and customers who may want to make up their mind about their bank’s sustainability position before engaging with it on the long-term.15
The level of corporate sustainability disclosure worldwide is linked to the degree of regulatory and societal attention.16 These last years, many countries – especially OECD nations – have
witnessed a surge in the number of existing reporting instruments (both mandatory and voluntary).17 And while sustainability disclosure is still not legally required in some
jurisdictions18, companies have other incentives for reporting on such matters.19 Several studies have shown that communicating about ESG information can produce a positive impact on companies themselves.20 For instance, publishing sustainability information can have internal
10 Robert G. Eccles, George Serafeim, and Michael P. Krzus, ‘Market Interest in Nonfinancial Information’ [2011] Journal of Applied Corporate Finance 23, 113.
11 Ibid.
12 Alyson Slater and Sean Gilbert, ‘The evolution of business reporting: Make room for sustainability disclosure’ [2004] Environ. Qual. Manage. 14, 41. As they put it, « the quality of sustainability management can help investors distinguish between companies that are efficient and well positioned to protect their market competitiveness and those that are headed for a bumpy ride. »
14 John O. Matthews and Cathy A. Rusinko, ‘Sustainability Disclosure: Increasingly Important for Banks and Commercial Lenders’ [2010] Com Lending Rev 25(5), 13.
15 Ibid.
16 Ans Kolk, ‘Sustainability reporting’ [2005] VBA journal 21.3, 36.
17 ‘Carrots & Sticks: Global trends in sustainability reporting regulation and policy’ [2016], available at www.kpmg.com, 9-12.
18 Such countries include for example, Luxembourg, Czech Republic, or also New Zealand (KPMG, ‘The KPMG survey of corporate responsibility reporting 2017, available at www.kpmg.com, 15-16). For more insight about national regulatory instruments, see www.carrotsandsticks.net.
19 Gwendolen B. White, Sustainability Reporting: Getting Started, Second Edition, Business Expert Press, 2015, 19.
20 Lawrence Loh, Thomas Thomas, and Yu Wang, ‘Sustainability Reporting and Firm Value: Evidence from Singapore-Listed Companies’ [2017], Sustainability 9(11), 2.
benefits for firms by helping them assess to what extent their operations are getting more sustainable.21 But maybe more importantly – at least from the point of view of firms with no specific agenda regarding sustainability –, it has been demonstrated that companies who do publish a sustainability report get an overall higher market value.22 This reflects the importance investors attach to such reports and the external benefits that communicating on sustainability issues has the potential to bring, especially in terms of corporate reputation.23 On average, Kolk noted that “for an increasing and substantial number of companies, the arguments in favour of reporting prevail over those against”.24 In light of these reasons, one can imagine why many large companies were already rendering sustainability data public before any legal requirements applied to them.
Sustainability statements can be made via diverse channels: on companies’ website or through social medias, by means of press releases or during investor conferences. However, today, the most visible way for large companies to communicate about sustainability issues is to publish an integrated annual report or a separate sustainability report. As Kolk explains, the first wave of sustainability reports took place in the 1970s when companies in Western Europe and in the US started communicating about their “social and economic effects (...) on society” through what was referred to as ‘social reporting and accounting’.28 By 1978, 90% of the Fortune 500
companies were reporting on their social performance annually. This ‘social reporting’ was however rather poor with often less than a page in the company’s annual report. Yet, this trend did not last more than a few years. Interest for social reporting rapidly faded away in the 1980s, most probably because of the economic recession happening back then with a focus on economic-oriented concerns at the expense of social and environmental issues. Only a few companies kept reporting on these matters. Sustainability reporting somehow made its comeback at the end of the 1980s, mainly by taking the form of environmental reports elaborated in order to counter the bad publicity caused by major environmental disasters.29 From that moment on, sustainability reporting never ceased to increase globally.30
21 Gwendolen B. White, Sustainability Reporting: Getting Started, Second Edition, Business Expert Press, 2015, 119.
22 Lawrence Loh, Thomas Thomas, and Yu Wang, ‘Sustainability Reporting and Firm Value: Evidence from Singapore-Listed Companies’ [2017], Sustainability 9(11), 2.
23 Ibid.
24 Ans Kolk, ‘Sustainability reporting’ [2005] VBA journal 21.3, 38. 28 Ibid., 35.
29 Gwendolen B. White, Sustainability Reporting: Getting Started, Second Edition, Business Expert Press, 2015, 16.
Nowadays, the amount of organizations publishing ESG information has increased considerably with 93% of the G250 companies disclosing sustainability information in 201731.32 Reporting rates however vary across regions. In 2017, the Americas had a reporting rate of 83 percent amongst their 100 largest companies, whereas the average disclosure score of N100 companies in Europe hit 77 percent the same year. By comparison, Asia Pacific countries had an average disclosure score of 78 percent, while on average only 52 percent of the N100 companies in Middle East and Africa countries published sustainability data in 2017. Disclosure scores also differ amongst sectors. Oil & Gas (81%), Chemicals (81%) and Mining (80%) had the highest reporting rates in 2017, confirming the idea that, on average, polluting and other “sinful” industries are more transparent than other sectors, probably because of the greater social pressure that they face.33 Similarly, the volume of CSR information that companies disclose is often positively linked to their size: large companies tend to publish more information since they are under bigger scrutiny from the government and pressure from other social groups.34
A recursive criticism of the current state of affairs is the fact that the absence of a “generally accepted information framework and reporting standards” has had a dampening influence on the use of nonfinancial information by investors and other stakeholders by making it hard to compare, assess and assure reports.35 Nonetheless, when disclosing, the vast majority of large
organizations (89% of G250 and 74% of N100 companies) use at least some kind of guidance or framework. To this day, the Global Reporting Initiative (GRI) framework has been the most popular one (75% of G250 and 63% of N100 reports). The GRI was founded in 1997 by the Coalition for Environmentally Responsible Economies (CERES). Its objective was to harmonize the existing sustainability reporting systems and to provide free access to “standardized, comparable and consistent information about corporate performance”.36 Other
31 KPMG, ‘The KPMG survey of corporate responsibility reporting 2017, available at www.kpmg.com.
32 Ans Kolk, ‘A Decade of Sustainability Reporting: Developments and Significance’ [2004] International Journal of Environment and Sustainable Development 3(1), 51.
33 Nabil Tamimi and Rose Sebastianelli, ‘Transparency among S&P 500 companies: an analysis of ESG disclosure scores’ [2017] Management Decision 55(8), 1674.
34 Grigoris Giannarakis, ‘The determinants influencing the extent of CSR disclosure’ [2004] International Journal of Law and Management 56(5), 409.
35 Robert G. Eccles, George Serafeim and Michael P. Krzus, ‘Market Interest in Nonfinancial Information’ [2011] Journal of Applied Corporate Finance, 23, 116.
36 Halina Szejnwald Brown, ‘Global Reporting Initiative’ in Thomas Hale and David Held, The Handbook of
standards include for example stock exchange guidelines, which were in being used by 13% of N100 companies and 12% of G250 companies in 2017.37
Furthermore, given the growing demand in recent years by the investment community and by society in general, mandatory sustainability disclosure regulations appeared in an increasing number of countries.38 These regulations generally focus on large listed companies. At EU level, the relevant instrument is the Directive 2014/95/EU on the disclosure of non-financial and diversity information by certain large undertakings and groups.39
This ‘Non-Financial Reporting (NFR) Directive’ entered into force in January 2017 and amends the Accounting Directive 2013/34/EU. It applies to large ‘public-interest entities’ of more than 500 employees and with a balance sheet total of €20 million or a net turnover of €40 million. Public-interest entities are understood in the Accounting Directive as to encompass entities with securities traded on stock exchanges, certain credit institutions, insurance undertakings, and any other entity designated as such by Member States.40 Such entities have the obligation, under the Directive, to include certain non-financial information in their management report or in a separate report. The required information to be disclosed consists in the information “necessary for an understanding of the undertaking’s development, performance, position and impact of its activity, relating to, as a minimum, environmental, social and employee matters, respect for human rights, anti-corruption and bribery matters”.41
For each of these areas, the entity must provide information about its business model, the pursued policies and due diligence processes that are in place, the outcome of those policies, and finally the principal risks in relation to the specific matter and the way the organisation manages them.
The objective of this instrument was twofold: to provide better information in order to enhance long-term sustainability and profitability and to enhance transparency and thus improve CSR practices. While corporate sustainability reporting initiatives increased considerably around the globe lately, the NFR Directive is the first instrument dealing with ESG disclosure at EU level.42
37 KPMG, ‘The KPMG survey of corporate responsibility reporting 2017’, available at www.kpmg.com, 28. 38 David Monciardini, ‘Good Business? The Struggles for Regulating ESG Disclosure’ [2012] Oñati Socio-Legal Series 2(3), 4.
39 Directive 2014/95/EU of the European Parliament and of the Council of 22 October 2014 amending Directive 2013/34/EU as regards disclosure of non-financial and diversity information by certain large undertakings and groups [2014] OJ L330/1.
40 John Quinn and Barry Connolly, ‘The non-Financial Information Directive: An Assessment of Its Impact on Corporate Social Responsibility’ [2017] ECL 14(1), 16.
41 Article 1(1)
42 John Quinn and Barry Connolly, ‘The non-Financial Information Directive: An Assessment of Its Impact on Corporate Social Responsibility’ [2017] ECL 14(1), 15.
As Deirdre Ahern puts it, this incursion of the EU in the field of non-financial disclosure “has coincided with a shift in regulatory approach concerning corporate social responsibility”, as CSR was long perceived as voluntary in nature by the EU which originally refrained from adopting compulsory regulation on the subject.43
Section II – Litigation risks
As mentioned above, more and more companies worldwide make sustainability statements through various means as they face increasing pressure by stakeholders and regulators.44 Regardless of the ways in which companies report and regardless of whether they do so voluntarily or because they are required to, the fact is that this global increase of available sustainability data combined with a growing demand from companies’ various stakeholders is likely to generate increased litigation risks for reporting organizations. Such risks are accentuated by the fact that stakeholders are getting increasingly attentive to what companies have to say about their sustainability aspects and, as a result, “engage in creative legal strategies to challenge the veracity of such statements in courts of law”, especially when some environmental or social incident happens).45 NGOs, for example, increasingly analyze
companies’ sustainability statements to compare what companies say against what they do in reality.46
As a result, in recent years, there has been an increase in the number of lawsuits filed by investors who were allegedly harmed by false or misleading sustainability statements made by companies through various means. In an attempt to evaluate the extent to which companies making such statements are facing shareholder litigation risks (and therefore to what extent investors who suffered financial losses as a consequence of these statements can claim damage in regard with such misleading statements), I will hereafter give a broad picture of the situation in the United States and in Europe by describing several major cases and important legal developments that have implications for firms reporting on sustainability information as well
43 Deirdre Ahern, ‘Turning Up the Heat ? EU Sustainability Goals and the Role of Reporting under the Non-Financial Reporting Directive’ [2016] European Company and Non-Financial Law Review 13(4), 599.
44 James Iness and Natasha Hamilton-Foyn, Companies must carefully consider ESG disclosures under UK
non-financial reporting directive,
<https://www.latham.london/2018/03/companies-must-carefully-consider-esg-disclosures-under-uk-non-financial-reporting-directive/> accessed 25 May 2018.
45 Sara K. Orr and Bart J. Kempf, ‘Voluntary Sustainability Disclosure and Emerging Litigation’ (Latham &
Watkins LLP, 2015),
<https://www.lw.com/thoughtLeadership/voluntary-sustainability-disclosure-and-emerging-litigation> accessed 25 May 2018.
46 James Iness and Natasha Hamilton-Foyn, ‘Companies must carefully consider ESG disclosures under UK non-financial reporting directive’ (Latham & Watkins LLP, 13 March 2018)
as for investors suffering financial losses as a consequence of false or misleading sustainability statements. I will then conclude the chapter with some relevant recommendations for companies and investors.
§1 – Shareholder Litigation in the United States
In the past years in the U.S., investors but also consumers have begun to challenge the accuracy of companies’ sustainability statements by means of class actions. As a result some U.S. courts acknowledged their right to argue that they relied on such statements when making their purchasing or investment decisions.47 Most of these cases are class action lawsuits that were introduced on behalf of consumers or shareholders challenging some sustainability statements made by the company from which they purchased a product or in which they invested.48 Consumer lawsuits are also mentioned here because they share a similar pattern with investor lawsuits in that both sorts of plaintiffs, as they assert, relied on the statements to make their decision, statements which later turned out to be false or misleading In result, they suffered damages as a consequence of either purchasing a product or security that they would not have purchased had the company not made such misleading or false statement, or by paying an unwarranted price premium because of the statement.49 The reliefs sought by the claimants
generally consist in modifications to the challenged statements, damages, restitution and attorneys’ fees and legal costs.50
The usual claim in cases of consumer lawsuits is that the challenged sustainability statement is false and misleading under state consumer protection laws.51 Investors on the other hand generally construe their cases as securities fraud lawsuits.55 In these cases, shareholders generally argue that they relied on some sort of sustainability statement when deciding to purchase or hold their shares in the company. However, some environmental or social incident
47 Sara K. Orr and Bart J. Kempf, ‘Voluntary Sustainability Disclosure and Emerging Litigation’ (Latham &
Watkins LLP, 2015),
<https://www.lw.com/thoughtLeadership/voluntary-sustainability-disclosure-and-emerging-litigation> accessed 25 May 2018.
48 Jason Meltzer, Elizabeth Ising, Andrew Tulumello, David Debold, Perlette Jura, Lori Zyskowski and Bryson Smith, ‘Corporate Social Responsibility Statements – Recent Litigation and Avoiding Pitfalls’ (Gibson, Dunn &
Crutcher LLP, 9 March 2017) <
https://www.gibsondunn.com/corporate-social-responsibility-statements-recent-litigation-and-avoiding-pitfalls/> accessed 25 May 2018. 49 Ibid.
50 Ibid. 51 Ibid.
55 Jason Meltzer, Elizabeth Ising, Andrew Tulumello, David Debold, Perlette Jura, Lori Zyskowski and Bryson Smith, ‘Corporate Social Responsibility Statements – Recent Litigation and Avoiding Pitfalls’ (Gibson, Dunn &
Crutcher LLP, 9 March 2017) <
(as with what happened to British Petroleum, see infra) - then occurred, making them incur a loss because of the drop in share price that followed the incident.56
Both sorts of claim therefore require that the sustainability statement made by the company has had a material impact on customers’ and investors’ decision to purchase, invest, or hold their investment, and that these customers or investors were wrongfully induced to do so because of the alleged inaccuracy of the statements.57 While each challenged statement is different, there are some recurrent problematics against which sustainability statements are regularly tested and challenged, such as mistreatment of employees or various supply chain issues (forced labor, child labor, unsafe working conditions, or failure to eradicate such issues through audit mechanisms and appropriate risk management).5859
At this point, it is important to note that so far most of the US claims challenging sustainability statements, whether introduced by customers or by investors, have been dismissed at the pleading stage. The majority of courts found that the challenged statements are only aspirational and do not constitute guarantees that companies will always behave in that specific way because of the vagueness of the statements.60 Other claims were rejected on the ground
that plaintiffs did not sufficiently argue that they saw and relied on the challenged statement before deciding to buy the product or to acquire/hold their shares.61 Also, some courts rejected
claims asserting that companies that did not disclose on certain sustainability matters had a duty to do so.62
However, several claims did go through the pleading stage and survived motions to dismiss.63 This is precisely what happened to British Petroleum in the context of the Deepwater Horizon catastrophe in 2010, leading to a major settlement between BP and its U.S. investors. I will now
56 Sara K. Orr and Bart J. Kempf, ‘The legal risks associated with corporate sustainability reporting’ (Latham &
Watkins LLP, 23 July 2015)
<https://www.lw.com/thoughtLeadership/corporate-sustainability-reporting-associated-legal-risks> accessed 25 May 2018. 57 Ibid.
58 Jason Meltzer, Elizabeth Ising, Andrew Tulumello, David Debold, Perlette Jura, Lori Zyskowski and Bryson Smith, ‘Corporate Social Responsibility Statements – Recent Litigation and Avoiding Pitfalls’ (Gibson, Dunn &
Crutcher LLP, 9 March 2017) <
https://www.gibsondunn.com/corporate-social-responsibility-statements-recent-litigation-and-avoiding-pitfalls/> accessed 25 May 2018.
59 Examples of challenged sustainability statements can include statements such as « suppliers must under no circumstances use, or in any other way benefit, from forced labor » or « the company is committed to fair treatment of all employees wherever it operates. »
60 Jason Meltzer, Elizabeth Ising, Andrew Tulumello, David Debold, Perlette Jura, Lori Zyskowski and Bryson Smith, ‘Corporate Social Responsibility Statements – Recent Litigation and Avoiding Pitfalls’ (Gibson, Dunn &
Crutcher LLP, 9 March 2017) <
https://www.gibsondunn.com/corporate-social-responsibility-statements-recent-litigation-and-avoiding-pitfalls/> accessed 25 May 2018. 61 Ibid.
62 Ibid. 63 Ibid.
discuss this case as it illustrates the kind of claims that companies can face when they issue sustainability statements.
Deepwater Horizon
The securities litigation that followed the 2010 Deepwater Horizon oil spill in the Gulf of Mexico is probably one of the most iconic investor lawsuits related to sustainability statements. In the aftermath of this environmental and social catastrophe, several lawsuits were filed in the US, including securities fraud claims. These investors cases were all transferred to the Southern District of Texas, which had to rule on the plaintiffs’ motion for class certification. This securities litigation before the Texas federal court evidenced the litigation risks that sustainability reporting may entail and the conditions required to avoid the claim from being dismissed.65
The Decision
On April 20 2010, the Deepwater Horizon dig operated by British Petroleum sank after the Macondo well blew out. In addition to the death of eleven rig workers, this blowout spilled over four million barrels of oil into the Gulf of Mexico, making it ‘one of the worst environmental disasters ever’.66 Consecutive to the catastrophe, a claim against BP was brought as a class
action on behalf of ‘(1) all persons and entities who purchased or acquired BP American Depository Shares between January 16, 2007, and May 28, 2010, and (2) all persons and entities who purchased or acquired BP ordinary shares in domestic transactions executed on foreign exchanges” (in this case the London Stock Exchange) during the same period. Defendants included both corporate defendants (BP plc, BP America Inc., and BP Exploration & Production Inc.) and individual defendants (ten of BP’s present and former officers and directors).
Plaintiffs’ claim was pretty straightforward: they sought compensation for their financial losses that followed the explosion of BP’s rig. The oil spill lasted for eight-seven days before BP was finally able to contain it. As a result, it was estimated that the company lost between $20 and $40 billion. As a result, between the explosion of the rig and May 28, 2010, BP’s securities lost 48% of their value, thereby making plaintiffs lose around 40% of their investments. Plaintiffs
65 Matthew L. Mattila, ‘Sustainability Reporting and the Law: Practical Considerations for Avoiding Liability’ (Triple Pundit, 6 December 2012) <https://www.triplepundit.com/2012/12/sustainability-reporting-law-practical-considerations-avoiding-liability/> accessed 25 May 2018.
66 Graeme Wearden, ‘BP oil spill costs to hit $40bn’ (The Guardian, 2 November 2010) <https://www.theguardian.com/business/2010/nov/02/bp-oil-spill-costs-40-billion-dollars> accessed 25 May 2018.
alleged that their financial losses were directly caused by false and misleading statements made by BP before and after the catastrophe.
The decision starts by emphasizing the fact that, despite being the third-largest energy company in the world making record profits, BP already had an “unfortunate record of safety failures and catastrophic incidents that have adversely affected both the individuals and the environments that have come into contact with BP’s operations worldwide” (and this was true even before the Deepwater Horizon calamity).67 Several reports forced BP to rebuild is corporate image and to promise its investors at multiple occasions that it would process safety reforms across its operations.68
Plaintiffs claim that dozens of these statements made between January 2007 and the day of the Deepwater Horizon incident then appeared to be false and misleading. These statements, both oral and written, were made at diverse occasions: various conferences, calls with investors, annual reviews, form 20-F annual report filings, sustainability reports, testimonies before both House and Senate Committees, etc.69 Claimants challenged these statements as being “false representations and empty promises”.70 Hereafter is a relevant passage of the decision:
The reality – as revealed in the Deepwater Horizon catastrophe – was that BP had deceived investors as to BP’s true risk profile in deep sea drilling because “the company failed to conduct the process safety overhaul it represented to investors it would implement.” According to plaintiffs, not only was the Deepwater Horizon disaster a predictable consequence of BP’s failure to implement safety reforms, but BP possessed actual knowledge of serious equipment failures, maintenance delays, and authorized changes that reduced the safety redundancies on the Deepwater Horizon to such an extent that the company was on notice that such a disaster was likely to occur. While the Deepwater Horizon disaster shocked investors, plaintiffs claim that it should have come as no surprise to BP.71
In addition to statements made before the catastrophe, plaintiffs claimed that BP continued to deceive them afterwards by lying both about the estimated amount of the spill and its ability to respond to it.72
67 Re: BP p.l.c. Securities Litigation, Civil Action No. 4:10-md-2185 (S.D. Tex. 2012). 68 Ibid., 10.
69 Ibid., 10-11. 70 Ibid., 31. 71 Ibid., 31. 72 Ibid., 35.
This case was constructed as a securities fraud claim. Plaintiffs invoked an alleged violation of the U.S. Securities Exchange Act of 1934. Amongst other things, section 10(b) of the aforementioned Act forbids “the making of any ‘untrue statement of a material fact’ or the omission of any material fact ‘necessary in order to make the statements made … not misleading”.73 According to the US Supreme Court74, purchasers or sellers of securities who are injured by the violation of this article have a right of action.75 However, in order for such action to be successful, plaintiffs must demonstrate the reunion of several elements.
First, there must be a misrepresentation or omission made by the defendant, and this misleading statement must be material: there must be a “substantial likelihood that a reasonable shareholder would consider [the fact] important in making an investment decision”.76 Accordingly, vague optimistic statements are not actionable because investors “are too sophisticated to rely on vague expressions of optimism rather than specific facts”.77 Defendants can however sometimes avoid liability by invoking the “safe harbor” provision when the challenged statement was forward-looking and was made by a natural person (provided that they did not know that the statement was false and misleading).78
Second, since the ratio legis is not to protect investors against mere negligence or corporate mismanagement, plaintiffs must prove that the specific individual who made the statement acted with scienter. In securities fraud claims, as reminded in the decision, scienter is understood as to mean that the defendant must have had “the intent to deceive, manipulate, or defraud” investors or knew – or should have known – that there was a danger that the statement would mislead them.
In addition to these two elements, plaintiffs must show that there is a causal link between the misrepresentation or omission and the purchase or sale of a security, that they relied upon the misrepresentation or omission, that they incurred an economic loss, and that this loss was a consequence of the misleading statement.
In order to assess whether these conditions were reunited, the court categorized the 46 alleged misrepresentations made by BP or its officers or directors in several groups of misleading statements. For each statement, the court verified if the facts identified by investors were 73 Ibid., 41. 74 Tellabs, 551 U.S. 75 Ibid., 41. 76 Ibid., 43. 77 Ibid., 44. 78 Ibid.
“sufficient to plead with particularity the falsity or misleading nature of each alleged misrepresentation or omission.”79 The Court found that several statements were not actionable for various reasons. However, it found that the facts identified by investors were “sufficient to plead with particularity the falsity or misleading nature” of at least some of the challenged statements.
Therefore, the Court continued its analysis by checking whether these “adequately alleged misrepresentations” were material (i.e. whether a reasonable investor would probably “consider the information to have significantly altered the total mix of information about investing in the company”).80 Defendants argued that the statements made by BP concerning safety and the progress made in implementing process safety changes were not material because materiality must be judged at the time of the alleged misrepresentation. The Court nonetheless ruled that these statements were indeed material, mostly because they misled investors concerning BP’s risk profile, and “the omission of a known risk, its probability of materialization, and its anticipated magnitude, are usually material to any disclosure.”81
As for the scienter requirement, the Court first undertook an analysis for each individual defendant (as opposed to the company itself).82 The Court dismissed the claims against several
defendants, either because their statements were already judged not actionable by the Court or because appropriate scienter was not present. In contrast, the Court found that the scienter requirement was met regarding several individual defendants:
The Court also assessed the potential liability of BP itself. It did so by treating both the misrepresentations issues in BP’s name and the misrepresentations attributable to individual defendants as having been made by BP. It found that the application of corporate scienter was appropriate for several misleading statements containing projections for BP’s ability to contain a spill in the Gulf because they “were so far from the truth as to support a finding of reckless indifference.”83 Other unattributed misrepresentations on the other hand did not raise the level of falsity to a sufficient level as to infer corporate scienter.84
The District Court however completely dismissed the claim of BP ordinary share purchasers because BP’s ordinary shares are traded exclusively on the London Stock Exchange (as opposed 79 Ibid. 80 Ibid., 87. 81 Ibid., 89. 82 Ibid., 91. 83 Ibid., 115. 84 Ibid.
to the ADS purchasers who bought the shares on the New York Stock Exchange). whereas the legal basis for plaintiffs’ securities fraud claim requires a “domestic purchase or sale” of the shares.85
Implications of the decision
This ruling was later confirmed by the New Orleans-based 5th U.S. Circuit Court of Appeals as well as by the Supreme Court and, eventually, the case ended up being settled in June 2016 with BP agreeing to pay $175 million to its deceived ADS investors (as opposed to the $2.5 billion shareholders were originally claiming in the class action).86 It is believed that the decision of the district court had a lowering effect on the final amount of the settlement since the court limited the number of actionable misleading statements, thereby limiting what investors could have hoped to get as a compensation should the case have gone to trial in July 2016 as initially planned.87
Nonetheless, the decision from the district court is of great significance since it refused to dismiss the plaintiffs’ claim in regard with several misleading statements. It evidenced that liability risk for companies making sustainability statements is not just a theoretical construction but well a growing reality in the U.S. for companies making public statements about some of their ESG aspects, especially when subsequent incidents reveal the falsity of these communications. This is true for statements made by corporate officers but also for unattributed misleading corporate statements for which companies can be liable as well. However, in case of unattributed statements, mere mistakes at the management level are not sufficient to establish liability; the false corporate statements must be “so dramatic” that they must have been approved by knowledgeable corporate officers.88 Corporate officers should therefore refrain from making sustainability statements they know (or should know) are incorrect since they can be liable for their own statements. Even though mere “mistakes at the management level” will not be sufficient to support a fraud claim, before making such important statements that may have an impact on the stock price officers should make sure that they relied
85 Ibid., 117.
86 Reuters Staff, ‘BP agrees to pay $175 million to settle claims with shareholders’ (Reuters, 3 June 2016) <https://www.reuters.com/article/us-bp-spill-settlement-idUSKCN0YP099> accessed 25 May 2018.
87 Rob Davies, ‘BP to pay $175m to investors over Deepwater Horizon spill’ (The Guardian, 3 June 2016) <https://www.theguardian.com/business/2016/jun/03/bp-compensate-investors-deepwater-horizon-oil-spill> accessed 25 May 2018.
88 Matthew L. Mattila, ‘Sustainability Reporting and the Law: Practical Considerations for Avoiding Liability’ (Triple Pundit, 6 December 2012) <https://www.triplepundit.com/2012/12/sustainability-reporting-law-practical-considerations-avoiding-liability/> accessed 25 May 2018.
on the data that were available to them at the time of the statement.89 It must also be noted that, while several of the challenged statements made by BP had to be disclosed under federal law and can therefore not be considered as a voluntary sustainability disclosure, it is the inadequacy between what was claimed in these statements and the reality of BP’s operations that led to this decision.
On the investors side, the decision shows that plaintiffs must come up with solid facts demonstrating that the person making the statement was or should have been aware of its inaccuracy. More generally, the fact that many statements were deemed as not actionable by the court stresses the need for investors building a securities fraud claim to demonstrate that the conditions for such claim are met: how was that specific statement material to them? Which facts corroborate the claim that the statement was misleading? Did the defendant acted with the required state of mind? These are some of the questions that investors will need to answer in their argument. Plaintiffs must also make it unequivocal that they relied on such statement when making their investment decision as otherwise their claim will presumably not survive the motion to dismiss phase.
§2 – Shareholder Litigation in Europe
The dismissal of the claim for investors holding ordinary BP shares that are not traded in the U.S. leads to the question as to whether non-U.S. investors harmed by false or misleading sustainability statements made by a non-U.S. company whose shares are not traded in the U.S. (“foreign-cubed” plaintiffs) can bring their claim in the EU.
It has traditionally been quite difficult for shareholders to organize collective litigation in Europe, especially in civil law countries where class actions are often not available.90 The fact that, in most European countries, each individual investor needs to bring his own claim or “opt in” in order to get damages was usually one of the main obstacle for shareholders (especially small ones) wishing to enforce their rights.91 This is also true for securities fraud lawsuits based on misleading sustainability statements.92
89 Ibid.
90 Martin Gelter, ‘Mapping Types of Shareholder Lawsuits Across Jurisdictions’ in Research Handbook on Shareholder Litigation by Jessica Erickson, Sean Griffith, David Webber and Verity Winship, eds., Forthcoming; Fordham Law Legal Studies Research Paper No. 3011444; ECGI - Law Working Paper No. 363/2017, 10. 91 Eberhard Feess and Axel Halfmeier, ‘The German Capital Markets Model Case Act (KapMuG): a European role model for increasing the efficiency of capital markets? Analysis and suggestions for reform’ [2014] The European Journal of Finance 20(4), 361.
92 Brian R. Cheffins and Bernard S. Black, ‘Outside Director Liability Across Countries’ [2006] Texas Law Review 84: 1411.
However, there has been a general increase of collective shareholder actions in Europe recently, which is due to several factors. An important driver for this growth is the fact that, as illustrated by the BP securities fraud case, the possibility for non-U.S. investors that purchased non-US securities outside the US to bring their claim under U.S. securities laws (‘foreign-cubed class actions’) was severely limited by the 2010 decision of the Supreme Court in Morrison v.
National Australia Bank93.94 This decision put an end to fifty years of jurisprudence that allowed foreign investors harmed in transnational securities fraud cases to bring their claim in the U.S.95 Other determinants for this increase of shareholder collective actions in Europe include the rise of shareholder associations making it easier to aggregates plaintiffs together and share the costs of litigation, combined with the growth of mechanisms like litigation funding or specific insurances that mitigate risks in “loser pays” legal systems as civil law countries.96
Furthermore, the last decade has witnessed the emergence of collective redress mechanisms in several European countries in order to strengthen the position and bargaining power of plaintiffs in securities litigation.97 The European Commission published a recommendation in that sense
in 2013 insisting that “All Member States should have collective redress mechanisms at national level for both injunctive and compensatory relief”.98 To illustrate this trend, I will now briefly
describe several mechanisms that were lately adopted in the Netherlands, in Germany, and in the United Kingdom, as these relatively new procedural mechanisms de facto increase the potential risks of litigation for companies making sustainability statements..
WCAM (The Netherlands)
The Netherlands introduced their “Dutch Act on the Collective Settlement of Mass Damage Claims” (de Wet Collectieve Afhandeling Massaschade or WCAM) in 2005. This regulation provides for collective redress in mass damages based on a settlement agreement concluded
93 Morrison v. National Australia Bank Ltd., 567 U.S. 247 (2010).
94 Richard Swallow, The Class Actions Law Review, Second Edition, 2018.
95 Genevieve Beyea, ‘Morrison v. National Australia Bank and the Future of Extraterritorial Application of the U.S. Securities Laws’ [2011] Ohio State Law Journal (72): 537.
96 David M. Edwards, Joseph N. Sacca, and Anke C. Sessler, ‘The Growth of Collective Shareholder Actions in Europe’ (Skadden, Arps, Slate, Meagher & Flom LLP, 6 July 2017) <https://www.skadden.com/insights/publications/2017/07/the-growth-of-collective-shareholder-actions>
accessed 25 May 2018.
97 Eberhard Feess and Axel Halfmeier, ‘The German Capital Markets Model Case Act (KapMuG): a European role model for increasing the efficiency of capital markets? Analysis and suggestions for reform’ [2014] The European Journal of Finance 20(4), 361.
98 Commission Recommendation 2013/396/EU of 11 June 2013 on common principles for injunctive and compensatory collective redress mechanisms in the Member States concerning violations of rights granted under Union Law [2013] OJ L201/62.
between the parties. Once the agreement is concluded, parties can request the Court of Appeal to declare it binding. One of the particularities of the WCAM resides in the fact that the settlement takes place on an opt-out basis: it is concluded “between one or more representative organisations and one or more allegedly liable parties for the benefit of a group of affected persons to whom damage was allegedly caused”, and, if declared binding, all persons represented by the organization benefit from it unless they expressly opt out.99 This however only concerns the settlement of the claim: no provision currently allows for the collective prosecution of damages claims in the Netherlands.100 This constitutes a substantial difference with the U.S. class actions under which plaintiffs can claim monetary damages in a class action procedure.101 Another noticeable difference is that U.S. class actions allow an individual person (as opposed to a representative organization under the WCAM regime) to claim damages on behalf of the entire group.102
KapMuG (Germany)
Also in 2005, Germany enacted its Capital Markets Model Case Act (Gesetz über
Musterverfahren in kapitalmarktrechtlichen Streitigkeiten or KapMuG). This legislative
initiative was motivated by an untenable workload for German courts in the beginning of the 2000’s as a result of retail investors cases who lost all or most of their investment because of allegedly false or misleading prospectus.103 The most iconic of these cases is probably the 2001
Deutsche Telekom case which witnessed the filing of more than 2.000 individual lawsuits
against the company at the Frankfurt trial court.104 The KapMuG was an attempt to avoid such enforcement failures in the field of investor protection by creating a collective redress mechanism for investors who suffered damages due to misleading capital markets information.105 The procedure, specific to securities fraud claims, is unique in that, once plaintiffs have filed their individual lawsuit at the trial court level, they can ask the Higher
99 Hélène van Lith, The Dutch Collective Settlements Act and Private International Law. Aspecten van
Internationaal Privaatrecht in de WCAM, 2010, IPR Thema Reeks (2), 11.
100 David M. Edwards, Joseph N. Sacca, and Anke C. Sessler, ‘The Growth of Collective Shareholder Actions in Europe’ (Skadden, Arps, Slate, Meagher & Flom LLP, 6 July 2017) <https://www.skadden.com/insights/publications/2017/07/the-growth-of-collective-shareholder-actions>
accessed 25 May 2018.
101 Karen Jelsma and Manon Cordewener, ‘The Settlement of Mass Claims: A Hot Topic in The Netherlands’ [2011] The International Law Quarterly, 13.
102 Ibid.
103 Harald Baum, ‘The German Capital Markets Model Case Act – A Functional Alternative to the US - Style Class Action for Investor Claims?’ [2017] SSRN Electronic Journal, 2.
104 Ibid.
105 Brigitte Haar, ‘Investor Protection Through Model Case Procedures – Implementing Collective Goals and Individual Rights Under the 2012 Amendment of the German Capital Markets Model Case Act (KapMuG)’ [2013] European Business Organization Law Review, 83.
Regional Court to open a model case thereby suspending all pending proceedings. If more than ten plaintiffs make such application, the Court will designate a “model case plaintiff” amongst the plaintiffs and will rule on the factual and legal questions that are relevant for all cases pending before the trial courts. This decision will then be binding on every other trial courts when they decide on each individual lawsuit.106 Baum (2017) noted that “The KapMuG is a unique piece of legislation with no precursor” because it “tries to chart a middle way between the traditional German system of individual (personal) claims based on the principle of party disposition and the US-style class action – a bête noir for German and other European lawmakers.”107
Group Litigation Orders (U.K.)
Even though England has been familiar with the process of group litigation for many years, group actions in the U.K. were reformed in 2000 with the introduction of ‘Group Litigation Orders’ (GLOs).108 This mechanism for managing multiple similar claims emerged spontaneously in English courts during the 1980s and 1990s in order to handle an important amount of large pharmaceutical multiparty cases before being codified in the Civil Procedure Rules (CPR).109 GLOs give the court maximum flexibility to handle multi-party litigations by
providing for the “efficient administrative management of similar cases” and follow the CPR’s new approach under which it is not the parties but the judge who controls the speed, complexity, and cost of litigation.110 The decision of issuing a GLO can be taken by a court (of its own motion or upon request from interested solicitors) when several individual claims “give rise to common or related issues of fact or law” (the ‘GLO issues’).111112 That court will then chose a ‘management court’ and will identify the pending cases that fall within the scope of the group action.113 Other claimants wishing to join the group must opt-in.114 This is a major difference
106 Harald Baum, ‘The German Capital Markets Model Case Act – A Functional Alternative to the US - Style Class Action for Investor Claims?’ [2017] SSRN Electronic Journal, 1.
107 Ibid., 3. For more insight on the KapMuG procedure see also Thijs Bosters, Collective Redress and Private
International Law in the EU (2017), 27-34.
108 Neil Andrews, ‘Multi-Party Proceedings in England: Representative and Group Actions’ [2001] Duke Journal of Comparative & International Law, 258.
109 Christopher Hodges, ‘England and Wales’ [2009], The ANNALS of the American Academy of Political and Social Science 622(1), 109.
110 Christopher Hodges, ‘Multi-Party Actions: A European Approach’, [2001] Duke Journal of Comparative & International Law 11, 345.
111 Christopher Hodges, ‘England and Wales’ [2009], The ANNALS of the American Academy of Political and Social Science 622(1), 109.
112 Neil Andrews, ‘Multi-Party Proceedings in England: Representative and Group Actions’ [2001] Duke Journal of Comparative & International Law, 258.
113 Ibid., 259.
114 Christopher Hodges, ‘Multi-Party Actions: A European Approach’, [2001] Duke Journal of Comparative & International Law 11, 345.
with English representative proceedings, which can take place “behind the backs of class members without their knowledge, participation or control”.115 Any decision rendered in relation to one of the GLO issues is then provisionally binding for all claims on the GLO register.116 One advantage of such enabling mechanism is the flexibility it offers because it does not, unlike the US, require that all the cases be substantively similar and raise the same legal issues: only some common issues between cases is sufficient to issue a GLO.117 That way, the management court can handle similar cases consistently (by ruling on the common issues) while conserving considerable discretion in the way it manages each of them individually. 118119
Cases brought under these new mechanisms
These recent developments in terms of procedure for investors wishing to collectively challenge sustainability statements increase the potential litigation risks faced by companies. To illustrate these risks, I will now evoke several cases recently brought in European jurisdictions by shareholders because of alleged misleading statements made by the companies in which they invested. Most of these cases were opened under the abovementioned mechanisms for collective redress. While not all of them concern sustainability statements, they are insightful as they allow to draw certain conclusions concerning the potential litigation risks that companies face in Europe when making statements on their sustainability aspects and, therefore, the likelihood of redress for shareholders alleging a financial loss because of a misleading sustainability statement made by the company in which they invested. I will now describe one (sometimes more) cases under each of the mechanisms previously described. In the U.K., thousands of investors (both private and institutional) of the Royal Bank of Scotland (RBS) sued the bank in the aftermath of the 2008 financial crisis. They alleged that the bank misled them into participating in its £12bn rights issue by lying in the prospectus about the bank’s real financial health. When RBS was bailed-out just a few months later, its shareholders lost around 80 percent of their investment. A similar action against RBS had been commenced in 2009 in the U.S. but investors that purchased the shares on non-US exchanges were excluded from it as a consequence of the U.S. Supreme Court Morrison decision (see
115 Neil Andrews, ‘Multi-Party Proceedings in England: Representative and Group Actions’ [2001] Duke Journal of Comparative & International Law, 260.
116 Ibid.
117 Christopher Hodges, ‘Multi-Party Actions: A European Approach’, [2001] Duke Journal of Comparative & International Law 11, 346.
118 Ibid.
119 Christopher Hodges, ‘England and Wales’ [2009], The ANNALS of the American Academy of Political and Social Science 622(1), 109.
supra).120 Hence, these F-cubed investors went before U.K. courts in 2013 to claim compensation, proceeding under a Group Litigation Order.121 The bank was facing a £4bn claim from over 27.000 shareholders.122 Eventually, a first £700m set of settlement was reached around the beginning of 2017, while the remaining aggrieved shareholders held out for an improved offer.123 They finally accepted RBS’s £200m offer (of 82p-per-share, more than doubling the original offers of 41.2p and 43.2124) in June 2017, thereby permitting the bank to avoid a 14-week trial that was supposed to start the day after.125 In addition, RBS spent more than £100m on legal fees since the lawsuit was initially filed, bringing its total bill to more than £1bn (as compared tothe £4bn originally claimed by claimants).126
Other noticeable lawsuits are the ones that were filed by Volkswagen investors in Germany in the context of the so-called ‘diesel gate’. The Volkswagen case is particularly relevant since it is about the (non-) disclosure of non-financial information. In September 2015, the U.S. Environmental Protection Agency discovered that many of Volkswagen diesel cars were equipped with a ‘defeat device’ or software that could detect when the car’s emission levels were being tested and could adapt these levels accordingly.127 In the aftermath of these
revelations the company then acknowledged that these revelations were accurate.128 In August
2016, the regional court of Braunschweig (in VW’s home state of Lower Saxony) allowed investors to pursue the automobile giant under the KapMuG procedure (see supra).129 One
120 David M. Edwards, Joseph N. Sacca, and Anke C. Sessler, ‘The Growth of Collective Shareholder Actions in Europe’ (Skadden, Arps, Slate, Meagher & Flom LLP, 6 July 2017) <https://www.skadden.com/insights/publications/2017/07/the-growth-of-collective-shareholder-actions>
accessed 25 May 2018. 121 Ibid.
122 Ben Martin, ‘RBS spends £1bn battling its own shareholders over rights issue’ (The Telegraph, 6 June 2017) <https://www.telegraph.co.uk/business/2017/06/06/rbs-shareholders-agree-200m-settlement-rights-issue/> accessed 25 May 2018.
123 Patrick Gower and Jeremy Hodges, ‘RBS Averts Trial as Investors Accept $258 Million Settlement’ (Bloomberg, 6 June 2017) <https://www.bloomberg.com/news/articles/2017-06-06/rbs-shareholders-accept-settlement-offer-averting-goodwin-trial> accessed 25 May 2018.
124 Ben Martin, ‘RBS spends £1bn battling its own shareholders over rights issue’ (The Telegraph, 6 June 2017) <https://www.telegraph.co.uk/business/2017/06/06/rbs-shareholders-agree-200m-settlement-rights-issue/> accessed 25 May 2018.
125 Patrick Gower and Jeremy Hodges, ‘RBS Averts Trial as Investors Accept $258 Million Settlement’ (Bloomberg, 6 June 2017) <https://www.bloomberg.com/news/articles/2017-06-06/rbs-shareholders-accept-settlement-offer-averting-goodwin-trial> accessed 25 May 2018.
126 Ben Martin, ‘RBS spends £1bn battling its own shareholders over rights issue’ (The Telegraph, 6 June 2017) <https://www.telegraph.co.uk/business/2017/06/06/rbs-shareholders-agree-200m-settlement-rights-issue/> accessed 25 May 2018.
127 Russel Hotten, ‘Volkswagen: The scandal explained’ (BBC, 10 December 2015) <http://www.bbc.com/news/business-34324772> accessed 25 May 2018.
128 Ibid.
129 Patrick McGee, ‘German court clears way for investors to sue Volkswagen’ (Financial Times, 8 August 2016) <https://www.ft.com/content/30f9f0d2-5d86-11e6-a72a-bd4bf1198c63> accessed 25 May 2018.
month later, the German court had registered more than 1.400 complaints from both institutional and individual shareholders for a total damage of €9bn allegedly incurred by 3.600 claimants.130 They claim that their financial losses, caused by a severe drop in stock price following the revelation of the scandal, were provoked by the inaction of Volkswagen who did not inform them immediately of “critical information about the cheating”.131 The question for the court to answer is whether management knew about this cheating device or not, since German law requires that individual members of the board or advisory board knew or should have known about the fraud. Should the court find that the management was not aware of such practices, Volkswagen as a company will not be liable for damages.132 In accordance with KapMuG procedures, the German court now selected one plaintiff (Deka Investment) as the model case, the findings of which will be binding on all claimants.133
As for investor claims in the Netherlands, several major settlements took place these last years under the relatively recent Dutch WCAM mechanism (see supra). Most of the procedures were initiated because non-U.S. shareholders were excluded from U.S. securities fraud class actions as they were “F-cubed” plaintiffs (foreign shareholders suing a foreign company and who purchased the shares on a foreign stock exchange). As a result, these shareholders could no longer claim compensation in the U.S. and sought reparation in the Netherlands. Such settlements were for example concluded between investors and companies such as Royal Dutch Shell, Converium, or Fortis. It is interesting to note that the Dutch WCAM settlement procedure does not allow investors to collectively pursue a liability claim but only to reach a binding collective settlement. Therefore, they normally pose a weaker litigation risk on companies facing a securities fraud law suit in the U.S. This means that the chance for European investors to reach a compensation similar (on a per-share basis) to the one awarded to U.S. investors in such cases is usually little (even though this has happened, for example with the WCAM settlement concluded between Royal Dutch Shell and its European shareholders in the aftermath of the write-down of its oil and gas reserves in 2004).134
130 Ibid.
131 Ibid. 132 Ibid. 133 Ibid.
134 David M. Edwards, Joseph N. Sacca, and Anke C. Sessler, ‘The Growth of Collective Shareholder Actions in Europe’ (Skadden, Arps, Slate, Meagher & Flom LLP, 6 July 2017) <https://www.skadden.com/insights/publications/2017/07/the-growth-of-collective-shareholder-actions>
Also in the Netherlands, another relevant recent case is the action filed in April 2015 by the VEB (the Dutch Association for Retail Shareholders) against BP in the Netherlands.135 Since foreign investors’ claims to recover their financial losses were dismissed in the U.S. securities fraud lawsuit, investors who purchased BP shares through a Dutch financial intermediary or account brought a claim in front of the Amsterdam district court in order to obtain a decision on the firm’s liability concerning the alleged misrepresentations it made before and after the Deepwater Horizon disaster.136 Consistent with BP’s defense, the district court decided to dismiss the claim due to lack of jurisdiction.137 Basing its decision on article 7(2) of the Brussels I regulation, the court ruled that the fact that the shares were purchased via a Dutch intermediary or account was not sufficient to create a close connection between the claim and the court and therefore decided that it did not have sufficient jurisdiction.138 This decision was later confirmed by the Amsterdam court of Appeal, which repeated that if special circumstances could allow for a deviation from this principle, such circumstances were not reunited in the case at hand.
§3 – Implications for Companies and Investors
This first chapter evidenced the recent increase in collective shareholder litigation in Europe which is due to several factors, amongst which one of the main determinant is the adoption in some European jurisdictions of new collective redress mechanisms (sometimes even specifically tailored for securities fraud lawsuits). This movement towards greater acceptation in Europe of new collective procedures surely increases the possibilities for investors to challenge misleading statements and therefore increases the liability risks for companies in regard with their shareholders, especially in light of the U.S. Supreme Court Morrison decision which now prevents foreign-cubed investors to introduce a securities fraud claim. This is evidenced by the numerous cases that have emerged in the aftermath of these new regulations and developments of shareholder associations and third-party funding and led to some major settlements.
135 ‘Court of Appeal denies jurisdiction over Deepwater Horizon mass claim of investors against BP’ (Houthoff) <https://www.houthoff.com/insights/News-Update/Mass-Claims---November-2017> accessed 25 May 2018. 136 Kevin LaCroix, ‘Dutch Court Dismisses Collective Investor Action Against BP on Jurisdictional Grounds’ (The
D&O Diary, 13 October 2016)
<https://www.dandodiary.com/2016/10/articles/international-d-o/dutch-court-dismisses-collective-investor-action-bp-jurisdictional-grounds/> accessed 25 May 2018.
137 ‘Stibbe represents BP Plc in a successful defence against a securities class action’ (Stibbe, 10 November 2017) <https://www.stibbe.com/en/news/2017/november/stibbe-represents-bp-plc-in-a-successful-defence-against-a-securities-class-action> accessed 25 May 2018.
138 ‘Court of Appeal denies jurisdiction over Deepwater Horizon mass claim of investors against BP’ (Houthoff) <https://www.houthoff.com/insights/News-Update/Mass-Claims---November-2017> accessed 25 May 2018.
