Of Oil Slicks and D&O Claims
One side-effect from the oil slick spreading across the Gulf of Mexico following the blowout of the Deepwater Horizon oil rig, and a direct result of the massive economic and environmental damage it has caused, is the efflorescence of lawsuits from persons whose property or livelihood have been threatened or damaged by the spill. Given the magnitude of the damage and the extent of the ensuing litigation, it was perhaps only a matter of time before the expanding litigation wave came to include D&O claims too.
On May 7, 2010, a BP shareholder filed a shareholders’ derivative lawsuit (complaint here) against BP PLC, as nominal defendant, and 15 individual directors and officers, including Tony Hayward, BP’s CEO. The defendants also include Transocean Ltd. and related entities, the Deepwater Horizon’s rig owner; Cameron International Corp., which manufactured the blowout prevention devices that allegedly failed; and Halliburton Energy Services, which was installing cement casing on the well-head at the time of the explosion. The complaint also purports to name as defendants the third-party defendants’ insurers.
The complaint seeks recovery against the BP defendants for breach of fiduciary duty and corporate waste. The complaint alleges that despite numerous other prior safety and environmental concerns at BP the defendants "elected to cut costs, including safety and manufacturing expenditures in pursuit of profitable results, even lobbying regulatory authorities to "remove or decrease the extent of safety and maintenance regulation."
The complaint also asserts claims against the third-party defendants for contribution and constructive trust alleging that their misconduct was a "substantial factor in the disaster" and therefore they "should be held responsible for the effects of the disaster."
Among the damages to BP that the plaintiff alleges are the costs of $6 million per day that BP is spending to try to stop the leak and remediate its effects; BP’s required cleanup costs under federal and state statutory mandates; its exposure to lawsuits; as well as damage to BP’s reputation and good will, which as already resulted in a drop in BP’s share price.
There are a number of very interesting things about this lawsuit, particularly with respect to the claims against BP’s directors and officers.
The is that, in arguing that the BP board cannot objectively evaluate whether to bring the claims alleged in the complaint, the complaint explicitly references BP’s prior disasters, including the infamous 2005 Texas City, Texas refinery explosion and fire and the 2006 Prudhoe Bay oil spill. In particular this most recent complaint references the Prudhoe Bay shareholders’ derivative lawsuit filed against BP’s directors and officers, in which the defendants had (according to the latest complaint) agreed to "certain corporate governance changes at BP designed in part to prevent a recurrence of safety and maintenance problems at the company." (General background regarding the Prudhoe Bay lawsuit and its outcome can be found here.)
The Deepwater Horizon lawsuit complaint alleges that notwithstanding the commitment in the Prudhoe Bay litigation settlement agreement BP has "merely gone through the motions" to make the agreed upon changes, as a result of which the company has "not experienced one iota of improvement in its workplace and environmental safety." Elsewhere the complaint alleges that notwithstanding the severity of the safety concerns that led to this prior settlement that company has been "making purely cosmetic changes at the corporate level while ignoring the substance of the safety violations and the threat to" the environment as well as to "the Company’s own survival as a going concern."
Second, as another argument why demand on the current board should be excused, the complaint also cites the massive wave of litigation that has already been filed against BP in the wake of the Deepwater Horizon disaster. The complaint argues that the BP defendants "cannot reasonably be expected to defend BP itself against allegations of misconduct in [the other lawsuits] while simultaneously pursuing these claims" in the derivative suit "for the very same or very substantially related misconduct." Given the vast number of claims, the complaint contends, "it is not possible for the Director Defendants in this case…to impartially consider whether to bring these claims."
Third, the complaint, though filed in Louisiana, expressly references the standards identified in the British Companies Act of 2006, particularly the Act’s requirement in Section 172 that corporate boards ensure that their companies conduct operations with due regard for "the impact of the company’s operations on the community and the environment." This express reference to U.K. law is interesting given that the case is filed in Louisiana and highlights what may be one fundamental problem the plaintiff may face, as discussed further below.
Fourth the plaintiffs’ bid to join the third-party defendants’ insurers seemingly represents an attempt to take advantage of the fact that Louisiana is one of the few jurisdictions permitting tort claimants to bring so-called "direct actions" against their tortfeasor’s liability insurers.
Though the plaintiff’s complaint invokes the full-throated rhetoric of righteous outrage, it nevertheless faces certain hurdles that could shut the case down before it gets started.
The first of course is that the plaintiffs have not made the requisite demand on BP’s board to bring these claims directly on the company’s behalf. As noted above, the plaintiff has argued that due to prior litigation against BP and current Deepwater Horizon-related litigation now emerging, demand should be excused.
Setting aside the question whether or not demand is excused, there are other potential threshold hurdles. One that is amply illustrated in the complaint’s reference to the U.K. law noted above which is that BP is a U.K. corporation organized under the U.K.’s laws. BP will undoubtedly attempt to argue that the "internal affairs doctrine" dictates that the U.S. court should decline jurisdiction, so that these claims involving a U.K. corporation and U.K. law may be heard in U.K. courts.
The "internal affairs doctrine" was argued successfully by another U.K. corporation, BAE Systems, which successfully had derivative litigation in the U.S. arising from the company’s bribery scandal dismissed in reliance on the "internal affairs doctrine." Indeed, BP itself unsuccessfully raised similar arguments in the Prudhoe Bay derivative litigation.
The plaintiffs’ complaint attempts to anticipate these arguments. The complaint is full of explicit references to the myriad vital contacts between BP and the U.S. Among other things the complaint emphasizes that 39% of BP’s shareholders are located in the U.S. and that its energy production and capital expenditures are larger in the U.S. than in any other country. The plaintiff is clearly cueing up an argument that the circumstances uniquely affect the U.S. and its interests and therefore the case comes within an exception to the doctrine.
Where the BP derivative litigation may ultimately head remains to be seen. At a minimum, BPs directors and officers face the prospect of enormous expense defending against this litigation, and significant potential liability.
It should not be overlooked that this lawsuit represents yet another example of a company domiciled outside the United States facing a D&O claim in the U.S. courts. The susceptibility of non-U.S. companies to U.S.-based D&O litigation is a topic of recurring interest, among other reasons because of the securities law issues regarding the extraterritorial jurisdiction of the U.S. securities laws, of the kind raised in the National Australia Bank case now pending before the U.S. Supreme Court.
These questions of non-U.S. companies’ exposure to U.S. claims are also a topic of recurring interest to D&O insurers. The most obvious concern to insurers is the extent to which non-U.S. companies face threats of D&O litigation in the U.S. and therefore should be paying D&O premiums commensurate with the existence of the U.S.-based litigation exposure.
My final observation about the new BP lawsuit is that while I was reading the complaint I had the premonition that the BP derivative complaint may represent the precursor of the as-yet-unfiled but undoubtedly soon-to-arrive first D&O lawsuit based on global climate change related allegations.
The BP complaint’s allegations about the extent of the environmental and economic damage from the Deepwater Horizon oil spill, as well as the reputational harm to the company, and about management’s failure to anticipate and prevent the alleged harm, both to the spill victims and to the company, may prefigure the way the first global climate change lawsuit will be written (up to and including the tone of unrestrained moral outrage). The only thing missing is some event – or perhaps some alleged disclosure violation – and the existing environmental disaster derivative lawsuit template will be adapted for new global climate change derivative litigation.
Whether or not the litigation template is adapted to global climate change, the threat of environmentally-related D&O litigation undoubtedly will persist. Indeed, heightened concern and anxiety in the wake of the Deepwater Horizon disaster will only make this type of litigation more likely in the future.
A good overview of the litigation environment surrounding the oil spill and the general implications for the insurance industry can be found in a May 7, 2010 memo from Laura Foggen and Benjamin Theisman of the Wiley Rein law firm entitled "The Gulf Oil Spill: Considerations for Insurers" (here).
A May 10, 2010 Bloomberg article about the new BP derivative lawsuit can be found here.
Let Us Remember Justice Stevens – and The Bee, Don’t Forget the Bee: Everyone here at The D&O Diary is very interested in President Obama’s nomination of Solicitor General Elena Kagan to the U.S. Supreme Court. Press coverage in coming months undoubtedly will be filled with stories concerning her nomination and the confirmation process. Though attention is appropriately focused on the nominee, we think it is also appropriate to pause and consider the Justice she hopes to replace, John Paul Stevens.
We can think of no better place to being that in Ian Frazier’s piece, "Remember Justice Stevens" in this week’s issue of the New Yorker (here). Be forewarned, you may start to suspect that the article is going off the tracks right about the point where the author states: "A few minutes passed before Justice Stevens became aware of the bee under his shirt, just at the base of his neck."
The recent Environmental Protection Agency (EPA) proposal to find that greenhouse gases "contribute to air pollution that may endanger public health or welfare" is just the latest in a series of actions and events suggesting that climate change related issues could affect a large number of companies, in a variety of ways, including most specifically with respect to at least some companies’ disclosure obligations. These trends could have important implications for potential liability exposures of directors and officers of public companies.
