Once again, wildfires are raging across the length of California, from San Francisco to Los Angeles. Once again, the electricity transmission facilities of PG&E are thought to have caused or contributed to at least some of the wildfires. And once again, in the wake of the wildfires, shareholders have launched a securities class action lawsuit against company executives. As discussed below, the new lawsuit is the latest example of the way in which transformative changes arising from climate change can lead to directors’ and officers’ liability litigation.
The Complaint
On October 25, 2019, a plaintiff shareholder filed a securities class action lawsuit in the Northern District of California against three PG&E executives. (The company itself, which filed for Chapter 11 bankruptcy on January 19, 2019, is not named as a defendant.) The complaint, a copy of which can be found here, purports to be filed on behalf of a class of investors who purchased PG&E securities between December 11, 2018 and October 11, 2019. The complaint alleges that during the class period the defendants made material misrepresentations or omissions, damaging investors. The complaint seeks to recover damages on behalf of the class based on alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The complaint focuses on the remedial efforts and safety measures the company claimed that it was putting in place after the 2018 California wildfires. Among other things, the complaint refers to the company’s various statements about its community wildfire safety program, which included as a contingency, the provision for rolling electrical blackouts, to cut off electricity in areas in wildfire danger. The complaint also quotes the various company statements about measures the company claimed to have put in place to communicate with utility customers in the event of blackouts.
After having described the various measures the company claimed to have put in place, the complaint then quotes from an October 12, 2019 New York Times article (here) that described what happened when the company went to try to implement the planned safety measures, including deployment of blackouts. According to the article, which the complaint quotes at length, the utility’s “communications and computer system faltered” and the company “struggled to tell people what areas would be affected and when.” Roads, businesses, nursing homes, and government facilities “went dark without warning.” The complaint alleges that the company’s share price declined over 4% on this news.
According to the complaint, on October 23, 2019, after the company shut off power to 179,000 homes and businesses in 17 northern and central California counties, the company’s share price declined another 12.4%.
The complaint alleges that the Defendants made materially misleading misrepresentations or omissions by failing to disclose that “(i) PG&E’s purportedly enhanced wildfire prevention and safety protocols and procedures were inadequate to meet the challenges for which they were ostensibly designed; (ii) as a result PG&E was unprepared for the rolling power cuts the Company implemented to minimize wildfire risk; and (iii) as a result, the Company’s public statements were materially false and misleading at all relevant times.”
The Complaint’s Climate Change-Related Allegations
In addition to the company’s various statements about its wildfire safety measures, the complaint also quotes at length the company’s statements about why wildfires have in recent years have become both a serious and growing problem.
For example, the complaint quotes at length from the company’s December 10, 2018 press release, which, among other things, quote the company’s then-CEO as saying:
As Californians, we are all faced with the devastating realities of extreme weather and the growing wildfire threat. In recent years, we’ve made significant changes and additions to our business to combat these weather events, but the climate is changing faster.
The complaint also quotes the company’s December 13, 2018 press release, which refers to a company official as saying “As California experiences more frequent and intense wildfires and other extreme weather events, we must take necessary, bold, and urgent steps to protect our customers.”
The complaint also quotes a variety of other company statements and disclosures in which the company references “the growing wildfire threat” and “extreme weather events.” The company specifically notes that the company previously has been the subject of extensive litigation (which ultimately triggered the company’s bankruptcy filing) based on “widely publicized and catastrophic wildfire incidents that occurred in California in 2015, 2017, and 2018.”
Discussion
This new lawsuit against PG&E comes even as a trial goes forward in New York state court against the energy giant Exxon Mobil based on the company’s alleged misrepresentations concerning the company’s climate change risks. Indeed, just last week, the Massachusetts Attorney General initiated a separate lawsuit against Exxon Mobil relating to the company’s climate change-related disclosures and omissions. Exxon Mobil is also the target of a separate securities class action lawsuit pending in the Northern District of Texas relating to its climate change-related disclosure.
The new lawsuit against PG&E is also just the latest lawsuit to be filed against PG&E as a result of California wildfires taking place due to changed operating conditions arising from global climate change. As I noted at the time, PG&E was hit with a climate change-related securities class action lawsuit in the wake of the 2018 wildfires. The company was also hit with a separate shareholder derivative lawsuit after the 2018 wildfires. PG&E had also previously been the subject of another securities class action lawsuit filed earlier in 2018 relating to the company’s involvement in the 2017 California wildfires.
These two sets of litigation provide concrete examples of the ways in which climate change disclosure and changed operating conditions arising from wildfires can result in directors’ and officers’ liability claims.
Now, I know that a cynic might say that the various lawsuits in these two groups are in each set basically just the same lawsuit over and over again, and relate more to what is going on with respect to these two companies than to anything more general than that. Disparate problems involving just two companies are, the cynic might say, hardly enough to represent a trend.
To the cynic, I might first point out that PG&E is not the only company to have been hit with securities lawsuits based on changed operating conditions brought on by climate change. Following the 2018 California wildfires, another electrical utility, Edison International was also hit with a climate change related securities lawsuit.
And it should also be noted that there have been climate change-related disclosure actions outside the U.S. as well. For example, in August 2018, the non-profit legal group Client Earth filed complaints with the U.K. Financial Conduct Authority (FCA) against three different U.K. insurers. The legal group contended that the insurers’ annual reports failed to meet the requirements of the Disclosure Guidance and Transparency Rules due to the absence in the reports of any climate change-related disclosures. A similar action seeking increased climate change-related disclosure was filed in Australia against one of the leading banks.
But beyond these other examples of climate change-related litigation, my further response to a cynic seeking to minimize the general significance of the various Exxon Mobil lawsuits and the PG&E wildfire litigation is that the circumstances behind these lawsuits are not necessarily unique or company-specific. Exxon Mobil is only one of many companies making disclosures about the risks arising from climate change. And PG&E is far from the only company that is (or will be) faced with changed operating conditions arising from climate change.
Moreover, it is clear that investors are concerned about company disclosure of climate change risk. As noted in an October 9, 2019 Reuters article (here), institutional investors are very focused on corporate disclosure of climate change risk, and in fact are quite concerned with companies’ climate change disclosures, particular with the disclosures of companies in the oil and gas production industry.
By the same token, 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 — not just with respect to wildfires alone, but also, for example, relating to coastal flooding, drought, supply chain disruption, political unrest, and the many other kinds of effects and consequences that climate change may cause.
It is true that to date there have only been a small handful of climate change-related cases. But while there have indeed only been a few cases, that does not mean that the prospect of further climate change related D&O litigation is not a serious threat to companies, their executives, and their insurers. As noted in an October 28, 2019 memo from the Freshfields Bruckhaus Deringer law firm entitled “The Tipping Point? Climate Change and Directors’ Duties” (here), “It is only a matter of time before ‘climate compliance’ commands at least the same level of attention as other corporate compliance issues. Companies that fail to adapt may find themselves wrong-footed and exposed to risk.”
One final note about the new lawsuit. It has only just been filed and it remains to be seen whether or not it will prove to be successful. That said, I think it is fair to say that the court will struggle to find any allegations of scienter in this complaint. Indeed, the complaint reads much more like a mismanagement claim than a misrepresentation claim – as is often the case with event-driven lawsuits like this one.