At a time when cyber liability and other hot topics dominate the discussion, potential corporate liability arising from environmental disclosures often does not receive the attention it should. However, as I have previously noted on this blog, environmental issues have been and remain an area on which plaintiffs’ lawyer have been focused. A recently filed securities class action lawsuit underscores the significance of environmental issues and the connection of these issues to corporate liability exposures.
On April 30, 2015, plaintiffs’ lawyers filed a securities class action lawsuit in the Middle District of Florida against Rayonier Advanced Materials (RYAM) and certain of its directors and officers. RYAM is a relatively new publicly traded company. It was formed as a result of the June 30, 2014 spin-off of the Performance Fibers Division of Rayonier, Inc.
The securities class action lawsuit relates to RYAM’s January 28, 2015 fourth quarter and full year earnings release (here). Among other things, in the press release, RYAM announced that it was increasing its reserve for environmental liabilities associated with discontinued operations by $69 million. This reserve represents the company’s estimate of its likely costs associated with the remediation and maintenance of disposed operational sites.
According to the plaintiffs’ lawyers’ May 4, 2015 press release (here), RYAM’s financial statement were misleading because the company had improperly recorded or failed to record its liabilities for environmental remediation and related obligations and failed to provide sufficient disclosures to investors to permit “meaningful evaluation of the true scope and extend of the environmental remediation and related liabilities, which were associated with decades of environmental pollution.”
The plaintiffs’ complaint (which can be found here) specifically alleges that:
(1) Defendants incorrectly accounted for RYAM’s remediation and long-term monitoring and maintenance for environmental liabilities; (2) as a result, the Company understated its Environmental Reserves; (3) as a result, the Company did not record appropriate reserves as required by GAAP; (4) as a result, the Company did not disclose a range of possible reserves for probable and reasonably estimable environmental remediation and related liabilities as required by GAAP; (5) as a result, RYAM did not properly estimate known and probable environmental remediation obligations as required by GAAP; and (6) as a result, RYAM did not maintain adequate internal and financial controls.
The complaint also alleges that RYAM misled investors about the demand for its product, and that contrary to the company’s representations, demand for acetate was slowing. The complaint further alleges that the company made misrepresentations regarding the debt incurred in connection with the spin-off.
As this case and other recent case filings show, environmental issues are an area of increasing focus for plaintiffs’ lawyers. As I have noted, a number of these environmentally focused shareholder lawsuits have proven to be viable. At a minimum, these cases underscore the fact that reporting companies’ environmental compliance disclosures are facing increasing scrutiny, making the quality of the environmental disclosures increasingly important. As I noted in connection with the recent shareholders derivative lawsuit involving Duke Energy, environmental concerns can also lead to mismanagement claims based on alleged breaches of fiduciary duties.
The typical D&O liability insurance policy will contain an exclusion for loss arising from claims for pollution and environmental liabilities. However, many of these exclusions also contain a provision carving back coverage for shareholder claims. This case shows the importance of this kind of coverage carve back. The carve back ensures that directors and officers hit with this kind of shareholder suit filed in wake of an environmental incident are able to rely on their D&O insurance to defend themselves against the shareholder suit.
In recent years, a number of D&O insurance carriers have introduced policy forms that eliminate the pollution exclusion altogether but that also incorporate into the policy’s definition of “Loss” a provision stating that Loss will not included environmental remediation or cleanup costs.
An April 28, 2015 article in Corporate Counsel entitled “D&O Insurance for Environmental Liability Exposures” (here) discusses the D&O insurance issues relating to environmental liability in more detail