There are a large and growing number of reasons why company directors, and in particular directors of listed companies, need to take their company's environmental, social and corporate governance (ESG) credentials and statements seriously. The rise of ESG litigation, a trend which is expected to continue to grow over the next few years, is just one of those reasons. However, the potential legal and financial ramifications for directors and companies who don't take steps to assess and address the risks which this presents and which they may face should accelerate the move to put ESG high on the corporate agenda.
ESG litigation takes many forms, and is already hitting the headlines (see, for example, the recent announcement by ClientEarth of its intention to bring a derivative action against the directors of Shell alleging a breach of the duties imposed by the Companies Act 2006 for failing to do enough to take sufficient steps to reduce emissions). Whilst those "failure to act" litigation risks should be considered by all company directors (but especially those in high-profile, listed companies operating in sectors where the ESG agenda is already prominent), the purpose of this note is to briefly highlight the potential for shareholder action pursuant to section 90 and 90A of the Financial Services and Markets Act 2000 (FSMA).
The section 90A regime is available to anyone who acquires, continues to hold or disposes of listed securities. Therefore, whilst there are a number of hurdles to successfully bringing a claim (including a need to demonstrate that loss was suffered "as a result" of the information, or lack of it, and the need to link the relevant issue to "a person discharging managerial responsibilities"), the broad shareholder base of English listed companies (and the corresponding diversity in shareholders' reasons for investment, including a rise in investors with a commitment to ethical investments) and the rise of activist, ESG-focussed shareholders (or shareholder action groups backed by litigation funding) create the potential for this to be another tool in the armoury of those looking to bring ESG-linked claims against listed companies. That risk is magnified by the extension of section 90A beyond published statements (i.e. ESG claims actually made to the market) to omissions and delays in publication.
Since coming into force, the legal market has been waiting for a case to come to trial and deliver a judgment on the practical implementation and reach of section 90A. Settlements in previous, high-profile section 90 and 90A claims (such as the Tesco shareholder litigation) in themselves demonstrate the potential power of these claims (and the risks to issuers), but the recent decision (or summary of conclusions, pending a full decision which remains embargoed) in the claim by HP and others against two former Autonomy directors will create that first English Court determination under section 90A. The Autonomy judgment is also to address the potential for a "dog leg claim" under section 90A of FSMA by which: (1) a claim is made by a holder of securities against the issuer; and (2) the corporate issuer then brings a claim against the person or persons discharging managerial responsibilities (e.g. the directors), bringing those individuals personally into the liability framework.
The full judgment in that case, when published, is likely to shed further light on the potential for section 90A FSMA claims to be deployed in the ESG context and the extent of possible personal liability for directors. It is just one weapon which might be deployed (including by investors or activists with the benefit of third party funding) against listed companies and directors in attempts to either enforce ESG changes, or to make financial recoveries with ESG failures as a basis, and it should serve as a wake-up call for any who thought the claims would be confined to the statute book.
It is also noteworthy that the Autonomy claim was not a "traditional" shareholder action. Instead the FSMA aspects of that claim formed just part of a significant (USD 11 billion) post-acquisition dispute. Coupled with a gradual move towards bolstering ESG-related warranties and commitments in an M&A context, this indicates that the consequences of ESG statements and commitments could also play out in an M&A post-acquisition dispute (where, in addition to FSMA claims, breach of warranty, misrepresentation and/or claims in the tort of deceit may also arise, with the non-FSMA claims equally affecting unlisted companies and their directors).
In practical terms, caution will need to be exercised in striking the right balance between not engaging with the ESG agenda (which failure will bring with it not just reputational damage and market pressure, but potential claims arising from the very inaction) and in making statements which fall foul of the FSMA regime (for example, by attempting to overreach in demonstrating ESG credentials or by making claims which cannot be supported and which turn out to be inaccurate). That tightrope is not an easy one to walk, particularly in some industry sectors, but the time has come to do so or face the consequences.
If you would like to discuss your company's ESG strategy please contact Sean Adams, Emma Carr, Catherine Naylor, or your usual Gowling WLG contact.