The Northern California wildfire known as the Camp Fire – reportedly the deadliest and most destructive wildfire in California history – has finally been fully contained. But while the fire has been doused, the fight about the fire has only just begun. Investigators will now undertake to determine the fire’s cause. And the inevitable lawsuits will now get rolling as well.
As I noted last week, investors already filed a wildfire-related securities class action lawsuit while the fires were still burning. And now a shareholder has filed a shareholder derivative lawsuit in federal court against the board and certain officers of PG&E Corp., and its regulated utility operating company, Pacific Gas and Electric Company, relating to the companies’ alleged role in causing the Camp Fire. As discussed below, this recent lawsuits may represent examples of the kinds of lawsuits we may expect to see in increasing numbers as a result of climate change-related effects. The derivative lawsuit complaint, filed in the Northern District of California on November 21, 2018, can be found in two parts here and here.
The Derivative Lawsuit
The complaint, which purports to be both a derivative complaint filed on behalf of PG&E and a double derivative complaint filed on behalf of the utility subsidiary, alleges alleged wrongdoing not only in connection with the recent Camp Fire, but in connection with earlier California wildfires as well.
The Complaint refers to a series of wildfires in October 2017 in connection with which the utilities power lines are being examined for possible involvement in causing the fires. The complaint alleges that following news of this earlier investigation, the PG&E’s share price declined and the company suspended its quarterly cash dividend. The complaint also alleges that in May and June 2018, the California Department of Forestry and Fire Protection concluded that PG&E utility power lines had caused as many as 17 of the October 2017 fires. The company’s share price declined further on this news.
In addition to the October 2017 wildfires, the complaint also refers to the Northern California wildfire that has become known as the Camp Fire and that began near Paradise, California on November 8, 2018. The complaint alleges that on November 12, 2018, the California Public Utility Commission announced that it was investigating PG&E’s regulatory compliance in connection with the Cam Fire. PG&E’s share price fell about 16.5% on the news. In addition, at about the same time, persons injured or whose property was damaged by the Camp Fire launched a state court lawsuit against PG&E alleging that the company failed to maintain its infrastructure and that it had a flawed corporate culture.
The complaint alleges that “(1) the Company failed to comply with state safety requirements and regulations in maintaining its transmission and distribution networks; (2) as a result of the foregoing, the Company was in violation of such state laws and regulations; (3) the Company had made less progress on safety enhancements, and in particular, wildlife safety enhancements, than it had represented; (4) the Company did not double its typical vegetation management spending in 2016; (5) the Company’s electricity transmission and distribution networks could foreseeably, and ultimately did, cause a number of wildfires in the State of California due, at least in part, to the Company’s failures of regulatory compliance; (6) as a result of the Company’s safety issues, the Company’s dividend was not as secure as the Individual Defendants led the market to believe; (7) the Company failed to maintain internal controls; and (8) due to the foregoing, Defendants’ statements regarding the Company’s business, operations, regulatory compliance and prospects were materially false, misleading, and lacked a reasonable basis in fact at all relevant times.”
The complaint alleges further that the individual defendants failed to correct the company’s misleading statements, rendering them personally liable. The complaint also alleges that in breach of their fiduciary duties, the individual defendants willfully or recklessly caused the Company to maintain internal controls. The complaint also alleges that the misleading statements inflated the company’s share price, and while the share price was inflated, five individual defendants traded in their personal shares of company stock.
Finally, the complaint alleges that because the board members’ involvement in the wrongdoing they “cannot consider a demand to commence litigation against themselves on behalf of the Company with the requisite level of disinterestedness and independence.”
The complaint asserts three substantive claims for relief: first, the complaint seeks damages under Section 14(a) of the Securities and Exchange Act of 1934 for alleged proxy statement misrepresentations; second, the complaint seeks damages from the individual defendants for alleged breaches of fiduciary duty; and third, the complaint seeks damages from the individual defendants for alleged unjust enrichment.
The Earlier Securities Class Action Lawsuit
Interestingly, the derivative lawsuit complaint refers to a securities class action lawsuit that was filed in the Northern District of California earlier this year against PG&E that I frankly had not previously noted. The earlier securities class action lawsuit complaint can be found here. The earlier lawsuit, which was first filed on June 12, 2018 refers to the October 2017 wildfires and alleges that Defendants “made false and/or misleading statements and/or failed to disclose that (i) PG&E had failed to maintain electricity transmission and distribution networks in compliance with safety requirements and regulations promulgated under state law; (ii) consequently, PG&E was in violation of state law regulation; (iii) PG&E’s electricity networks would cause numerous wildfires in California; and (iv) as a result of the foregoing, Defendants’ statements about the Company’s business and operations were materially false and misleading at all relevant times.”
Last week, when I commented on the securities class action lawsuit that was filed several days ago against Edison International in connection with the recent California wildfires, I noted that the lawsuit represented an example of event-driven securities litigation. The new derivative lawsuit filed against PG&E, as well as the June 2018 securities suit also filed against PG&E, also are examples of event driven litigation.
But in addition to representing examples of event-driven litigation, the new derivative suit and the June 2018 securities suit against PG&E, as well as the separate securities lawsuit against Edison International, arguably represent examples of a different kind of litigation phenomenon – that is, these cases arguably represent examples of the kind of management liability litigation that could emerge as a result of changes arising from climate change.
In the recent report issued by the federal government’s interagency task force on climate change, among the potential risks the report noted might emerge as climate change progresses is an increase in the frequency and severity of wildfires. These recent lawsuits show the kinds of claims that might emerge against company management if indeed wildfires were to become more frequent and more severe. And what is true of wildfires arguably is true of the many other risks that the government report said might arise from climate change. Companies whose operations will be affected by the changing physical conditions arising from climate change could find themselves the target of claims from investors and other constituencies for failure to anticipate and guard against climate change related conditions.
These kinds of lawsuit might not only involve the kinds of underlying problems here, where operations were affected by climate change-related conditions, but could also relate, for example, to supply chain disruptions; disruptions in supply of key materials or parts; failures to account for changing costs or contingent liabilities; as well as a host of other claims and assertions.
The California utilities have been hit with securities class action lawsuits alleging misrepresentations. And the recently filed derivative lawsuit also alleges proxy statement misrepresentations. However, the allegations raised in these various complaints (as is often the case with respect to event-driven litigation) to me read more like mismanagement claims. Because of the numerous procedural requirements and defenses, derivative claims are notoriously hard to pursue. However, in connection with these kinds of event-driven lawsuits, the mismanagement allegations are intuitively more plausible (at least to me) than the misrepresentation allegations. To the extent climate change-related conditions do in fact lead to further management liability litigation, the mismanagement claims arguably could prove to be more plausible and convincing.
In any event, I think we should be looking for more cases of this kind – not necessarily with respect to wildfires alone, but also (for example) relating to coastal flooding, drought, supply chain disruption, and the many other kinds of effects and consequences that climate change may cause.
A Preview of Coming Attractions: The Growth of Private Capital: Over the last 20 years, Private Capital has become an increasingly important part of the U.S. and global economy. In 2017 global Private capital raised $754 billion (as detailed here). The term “Private Capital” as used in this context is more inclusive than just Private Equity or Venture Capital. The term “Private Capital” as used here includes not only private equity, but also private debt, venture capital, hedge funds, sovereign wealth funds, pension funds, family offices and fund-less sponsors.
For traditional D&O underwriters and brokers, the growing importance of private capital represents both opportunity and risk. The suite of products that the insurance industry distributes, from D&O, to Cyber to General Partners Liability, are still the core products that matter to private capital investors. However, the exposures within the Private Capital industry vary and the products that insurance providers should recommend to any particular organization require differentiation. For example, the exposure of a venture capital fund with a 100 minority investments is very different than the risk faced by a family office that makes one or two control investments per year.
Starting next week, I will provide a three part series that focuses on the private capital industry and the unique risks and solutions the various participants within the industry need to consider. The topics will include: issues to address at the portfolio company; the investor’s unique liabilities; and minimizing risk in the transaction.