As I have previously noted on this blog, one recurring source of securities class action litigation exposure for publicly traded companies is the companies’ underlying environmental liabilities. In the latest example of this type of litigation, a plaintiff shareholder has now filed a securities suit against The Chemours Company, a chemical company that spun out of E.I. du Pont de Nemours and Company (“DuPont”) in July 2015. One of the extraordinary things about the new securities suit is that it draws heavily on allegations Chemours itself raised in a 2019 Delaware Chancery Court lawsuit it filed against DuPont, in which, among other things, Chemours alleges that when DuPont spun out the company, its environmental liabilities reserves were “spectacularly” inadequate. A copy of the on October 8, 2019 securities class action complaint filed in the District of Delaware against Chemours, its CEO, and its CFO can be found here.
Prior to its July 2015 spin out, Chemours had been the Specialty Chemicals division at DuPont. Prior to the spin-off, DuPont had had a series of environmental challenges arising from the manufacture in its Specialty Division of various chemicals, including in particular its manufacture of perfluoroalkyl and polyfluoroalkyl substances (“PFAS”), toxic chemicals that according to the subsequent securities complaint “have become the basis for environmental regulatory actions, governmental prosecutions, personal injury lawsuits, and extensive remediation and other clean-up efforts.”
The securities complaint alleges that DuPont had long known about the extent of its environmental liabilities. The complaint alleges that instead of “actually addressing” these liabilities, DuPont developed a plan to “unload the vast majority of its environmental liabilities onto Chemours.” In the Delaware Chancery Court lawsuit that Chemours filed against DuPont in May 2019, Chemours alleged that DuPont set about to “shift as much liability onto Chemours as possible – and at the same time to extract for DuPont a multi-billion dollar dividend payment from the new company.”
The securities complaint alleges that in connection with the spin-off, Chemours concealed these facts, instead marketing the spin-off by saying that its environmental liabilities were “well understood [and] well-managed” and that the possibility of incurring environmental liabilities greater than its accruals was “remote.” The complaint further alleges that throughout the Class Period, Chemours had reassured investors that any potential environmental liability exposures exceeding the accrual amounts would not be material to the company’s financial position.
The securities complaint alleges that “in reality, the Company’s accruals were woefully insufficient and Chemours knowingly and systematically understated its known environmental liabilities exposure.” In making these allegations, the securities complaint quotes extensively from the complaint that the company filed against DuPont in May 2019, and that the Chancery Court unsealed on June 28, 2019.
In the Delaware lawsuit, Chemours claims that DuPont misled the company and its executives about the amount of liabilities the spinoff would be taking on and that Chemours was forced to accept responsibility for what could total billions of dollars. Among other things, the Delaware lawsuit alleges that while Chemours inherited only 19% of DuPont’s business lines, it was spun off with two-thirds of DuPont’s environmental liabilities and 90% of DuPont’s pending litigation by case volumeIn the Delaware lawsuit, Chemours seeks a declaratory judgment that it is not obligated to indemnify DuPont for the full cost of environmental liabilities, as would otherwise be required under the separation agreement that supported the spin-off, or alternatively that DuPont should return the $3.91 billion dividend Chemours paid DuPont at the time of the spinoff.
The subsequent securities lawsuit complaint, drawing on the allegations in Delaware lawsuit, alleges that contrary to what Chemours said in its SEC filings that the chances of its environmental liabilities exceeding its $500 million accruals as being “remote,” the company in fact, as it stated in its Delaware complaint, faced environmental liabilities of over $2.5 billion – an amount that does not even take into account the company’s PFAS litigation exposure.
The securities complaint, relying on the allegations in the Chancery Court complaint alleges that throughout the class period, Chemours made “misrepresentations to investors” and that it “concealed the true extent of the massive environmental liabilities the Company incurred from decades of producing and releasing a variety of chemicals that have been linked to cancer and other serious health consequences.”
The complaint alleges that in the company’s August 1, 2019 press release and its August 2, 2019 SEC filing on Form 10-Q, the company disclosed significant increases in the Company’s estimated liabilities, including with respect to numerous new legal and regulatory actions related to PFAS. The complaint alleges that on these disclosures, the company’s share price declined 19% (after having already declined 10% following the unsealing of the Delaware Chancery Court complaint).
The securities lawsuit complaint purports to be filed on behalf of a class of Chemours investors who purchased the company’s securities between February 16, 2017 and August 1, 2019. The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, and seeks to recover damages on behalf of the plaintiff class.
As I noted at the outset, this lawsuit is only the latest example of a securities class action lawsuit arising out of underlying environmental liability exposures. The most recent prior example is the lawsuit filed in August 2019 against 3M, which I discussed in a prior post (here). The interesting thing about these two lawsuits is not only that the both arise from underlying environmental liabilities but that both of the securities suits refer to the defendant companies’ expanding liability exposures relating to PFAS litigation – a significant point that may be of interest to D&O underwriters attempting to develop underwriting criteria relating to applicant companies’ environmental liability exposures.
It is interesting to note that while the complaint refers extensively to statements made at the time of the July 2015 spinoff, the beginning date of the purported class period is not the date of the spinoff, but rather is February 16, 2017, the date of the company’s year-end 2016 earnings call, in which the company’s CEO made numerous statements relating to the recent settlement of an Ohio MDL action and in which the CEO make statements about the settlement’s impact on the company’s environmental liabilities exposure. The securities complaint alleges that these various statements were false and misleading.
Whether or to what extent these February 2017 statements may support the plaintiff’s liability claims remains to be seen, but the fact is that the earlier statements made in connection with the July 2015 spinoff and cited extensively in the complaint cannot be the basis for liability claims on behalf of an investor class who did not purchase the company shares until on or after February 16, 2019.
The most distinctive feature of the new complaint is the extent to which the plaintiff is able to rely on the company’s own allegations in the separate Delaware Chancery Court action. The company’s Delaware complaint is written in particularly vivid language, on which the plaintiff in the securities suit heavily relies. However, most of the allegations in the Delaware complaint relate to disclosures and valuations made in connection with the spin-off — that is, made well before the start of the class period stated in the securities complaint. It remains to be seen how the company might respond to allegations based on the company’s own statements in the Delaware lawsuit, but one probable response is that the company’s own allegations in the Delaware complaint are irrelevant to the securities suit, with its later class period.
In any event, as this lawsuit and the prior lawsuit against 3M show, companies’ environmental disclosures clearly will face increased scrutiny. This latest complaint underscores a point that I have made in prior posts, which is that companies’ environmental liabilities and disclosures can be the source of significant management liability litigation exposure, including securities class action litigation exposure. As numerous examples show, the management liability litigation exposures can be serious.
D&O insurance underwriters considering companies whose operations may present environmental concerns will want to review the environmental disclosures in the companies’ periodic reports in order to assess the extent to which the disclosures provide a specific and detailed picture of the company’s environmental compliance circumstances. As noted above, exposures to PFAS related regulatory action and litigation may be of particular concern.
As for companies that have environmental liability and regulatory exposures, it clearly is going to be important for them to ensure that their D&O policy contains no pollution exclusion (as is the case in many current D&O insurance policies, which, rather than including a pollution exclusion simply carve out environmental remediation costs from the definition of covered loss), or, if they have a pollution exclusion, that the exclusion contains a provision carving back coverage for derivative claims and securities suits.