Is Climate Change Impacting D&O Liability?

 

 

For the most part, the proliferation of litigation involving climate change in the United States has primarily focused on the corporate entities.  Recently, however, there have been some suits filed against Directors and Officers (D&O).  The few that have been filed have been mostly related to disclosures concerning fossil fuels; the same corporation that have been subject to increased regulatory scrutiny and environmental activism in the United States.  To date, the allegations against the D&Os have concerned their alleged failure to disclose corporate exposure in connection with their companys use of fossil fuels and the nexus between such non-disclosure and a host of environmental concerns.  Thus, there have been claims against D&Os of large oil companies, such as Exxon Mobil, as well as automobile companies, including Volkswagen.

One such matter is Ramirez v. Exxon Mobil Corporation et al before the US District Court, Northern District of Texas (16-cv-03111).  This class action shareholder derivative complaint against the D&Os of Exxon concerned alleged violations of federal securities law. The complaint describes well-documented history of intentionally misleading the public concerning global climate change and its connection to fossil fuel usage, as well as the impact the changing climate will have on Exxons reserve values and long-term business prospects.  The complaint notes that a number of statements by the D&Os provided investors with a materially misleading description of Defendants efforts to evaluate and account for the potential climate change-related risks associated with Exxons reserve assets and long-term business prospects. 

The Ramirez complaint also includes allegations that the D&Os failed to disclose these risks despite the fact that Exxons scientists had warned the Companys management that policy changes to address climate change might affect profitability.  The complaint outlines alleged violations of Section 10(b) and 20(a) of the Federal Securities Exchange Act of 1934 and, as to the D&Os states, in relevant part, they knew or recklessly disregarded [and] were misleading in that they contained misrepresentations and failed to disclose material facts necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading.  466.  On August 14, 2018, the Ramirez court found that the plaintiffs adequately pleaded securities fraud claims against the D&Os for certain statements related to specific investments by the company, though none of those statements was only related to the growing concern on climate change.  The class certification motion has been filed, but not yet ruled upon by the court.

Another noteworthy suit in the same Texas court is the In Re Exxon Mobil Corporation Derivative Litigation (19-cv-01067), a 2019 shareholder derivative action for violations of Federal securities law and breach of fiduciary duties also against the directors and officers for Exxon Mobil.  The Exxon Mobil matter involves the consolidation of six different shareholder derivative complaints, including one filed in February 2021.  The allegations against the D&Os in that matter, are similar to the allegations against the D&Os in Ramirez.  The basis for potential liability for the D&Os under the same Federal securities laws stems from Exxons failure to employ carbon proxy cost policies that actually corresponded to its public statements violated Generally Accepted Accounting Principles (GAAP), SEC accounting and disclosure requirements, and established accounting practices and guidance.  8.  Like Ramirez, this case is also still ongoing.

Disclosure related suits like, Ramirez and Exxon Mobil may be only the beginning of climate change related actions against D&Os. Still, climate change actions for the most part continue to only name the company itself, such as the July 7, 2021 pair of lawsuits Conservation Law Foundation v. Shell Oil Co. et al., case number 3:21-cv-00933, and Conservation Law Foundation v. Gulf Oil LP, case number 3:21-cv-00932, both in the U.S. District Court for the District of Connecticut.  These new lawsuits by the Conservation Law Foundation have argued that the oil companies are not accounting for the increased risk of flooding, major storms, and elevated sea levels which could impact their fuel storage facilities and as such put the surrounding community in peril.  Trade press reports on the subject have identified other potential areas of D & O litigation. These include suits involving climate condition, such as U.S. v. Southern California Edison Company, (20-cv-11020) in the US District Court, Central District of California, the suit against Californias utility company in the wake of the California wildfires, as well as potential suits by nongovernmental organizations such as Mayacama Golf Club, et al v. Pacific Gas and Electric Company, (SCV-266679) Superior Court of California, Sonoma County.

Yet another noteworthy suit is the active litigation against Volkswagens former CEO and chairman for alleged securities violations. That action, entitled SEC v. Volkswagen Aktiengesellschaft, et al.  was not brought by any security holder of VW; rather  it was brought by a US governmental agency, the United States Securities and Exchange Commission (SEC).  In the wake of the Volkswagen emission scandal, in 2019, the SEC brought an action against VW and its CEO Martin Winterkorn in the US District Court, Northern District of California (19-cv-1391).  The claims against Winterkorn in the amended complaint filed on September 4, 2020 are for violations of Section 10(b) and 20(a) of the Exchange Act and Section 17(a)(2) of the Securities Act for reckless conduct of making untrue statements of material fact in the sale of corporate bonds.  The alleged misstatements by Winterkorn are about the companys claimed clean diesel engines.  It is asserted that Winterkorn and other senior officials and engineers at VW knew that VWs clean diesel engine was a fraud because it failed to comply with applicable U.S. emissions laws. Once it was disclosed to the United States Environmental Protection Agency that such clean diesel claims were fraudulent, and after VW pleading guilty in US Court to three criminal felony counts, the price of its bonds fell.  This litigation is still in its infancy.

There has also been a litigation involving climate change, with a First Amendment, free speech twist.  That case, Roemer v. Williams, was filed in the US District Court, Eastern District of New York (19-cv-6855). In Roemer, a student filed a lawsuit against the president of a local New York college for refusing his request for permission to distribute a document that explains why the political movement to reduce the use of fossil fuels is a malicious hoax.  The complaint states that [t]his lawsuit is based on the premise that the global political campaign to diminish the use of coal, oil, and natural gas with the goal of improving the climate is beyond the pale of reason and that my 12-point document proves this.  The Roemer court later dismissed the suit for lack of subject matter jurisdiction because the plaintiff failed to demonstrate that he has standing to demand that the professors at the local school were required to include his position statement on climate change.  The court also ruled that there was no legal basis to order the school officials to invite the plaintiff to distribute his position paper or to hold the officials liable for the failure to do so.  Roemer v. Williams, No. 19-CV-6855, 2020 U.S. Dist. LEXIS 3026 (E.D.N.Y. Jan. 7, 2020).

While potential corporate scrutiny concerning climate change is likely to continue to grow, the bulls-eye may not be focused directly on the D&Os in the United States.  Shareholder activism for Environmental and Corporate Governance (ESG) is forcing D&Os to look at the global environmental impact of their organizations activities, which, in turn, may entail voluntary and mandatory disclosures regarding certain issues, including climate change.  For instance, in May of 2021, an activist hedge fund, with less than a one percent ownership interest in Exxon Mobil arguing that the company was slow in strategic transitioning to a low carbon economy, was able to gain seats on the Exxon board because of its strong commitment to ESG.  In that same vein, a group of state Attorneys General, led by New York and California, recently sent the SEC a letter urging it to impose on corporations broad ESG disclosures regarding financial risks stemming from climate change. 

Regulatory scrutiny, as well as lawsuits by environmental groups could also impact the decisions of the D&Os of the companies. In the near term, this may increase the number of D&Os being subject to government subpoenas and investigations.  However, at least at this juncture, in the near future it does not appear that there is a growing concern for class actions naming D&Os as defendants in the United States.  There are a number of other event-driven litigations in the United States that are actively targeting D&Os, including their response to:  cyber security incidents; racial diversity; sexual harassment, and most recently, the Covid-19 pandemic. For the present, at least, these other issues are more likely to represent a bigger exposure to D&Os than climate change.  Still, with the increased awareness of the importance of climate change, corporate leaders around the world, and their D&Os, will continue to be in the spotlight.