Securities litigation, long a prominent – and expensive – feature of jurisdictions such as the US, is increasingly emerging as a threat within the English litigation landscape.
Put simply, securities actions seek redress for losses said to have been suffered by investors who have acted on the basis of untrue or misleading information issued to the market. This is generally where bad news leads to a sharp and sustained drop in the share price.
A number of factors have combined to create additional litigation exposures for companies across all sectors, but the rapid rise of Environmental, Social and Governance (ESG) issues and the recalibration of societal norms towards sustainability will be felt acutely by those operating in the energy sector.
The sector is adapting to significant change and market turbulence. At the same time, it is in the crosshairs of political, legislative and judicial scrutiny as attention turns to corporate performance in the context of sustainability and climate impact.
The increasing focus of the principal UK financial services regulator, the Financial Conduct Authority (FCA) on these issues, as well as of bodies such as the UK Oil and Gas Authority (OGA) on the performance of companies in the energy sector against such metrics, reflects these shifting dynamics.
Adverse regulatory findings – whether in the context of ESG or otherwise – will often lead to share price falls and disappointed investors. The same is true of other “bad news” stories, particularly those that create an impression that diverges from what investors have been told.
Energy companies face increased investor demand for greater transparency as to their operations generally, and their performance against ESG metrics in particular. Prospective claimants – and claimant lawyers – will be watching closely for events that adversely impact the company’s share price, and scrutinising the company’s statements before and after those events.
The potential exposures arising from this trend cannot be divorced from a number of other emerging factors impacting English litigation over recent years. These have contributed to an environment more amenable to large group litigation.
A key difference between US class actions and the English approach has traditionally been that collective actions in England are generally brought on an opt-in basis, but there is an increasing focus on whether a single claimant could represent everyone with the same interest, i.e. an opt-out rather than an opt-in model.
Although not yet tested in the securities litigation arena, the attraction for claimant firms is that this would overcome the inhibiting factor of requiring potential claimants to make a positive decision to opt-in, increasing the overall size of the claim and the defendants’ aggregate potential exposure.
The involvement of third party funders and insurers has enabled collective actions to be structured so that members of the claimant class have no up-front outlay and are insured against the risk of being ordered to pay the defendant’s legal costs.
These developments have created an environment where collective actions have become an important part of the business model of many claimant lawyers – who have shown themselves to be adept at identifying opportunities to pursue claims on behalf of a large number of investors.
Recent years have seen securities claims brought against household name companies in a variety of sectors, ranging from RBS through to Tesco. The legal basis on which these claims are brought is equally applicable to listed energy companies.
The combination of the increased focus on sustainability, and the emergence of an active collective litigation market, all set in the context of social media and the consequent wide, and fast, dissemination of news, directly increases the risk factors for energy companies.
It is, of course, critical that public statements are checked carefully to ensure that they are accurate and not misleading.
This applies not only to offering documents, such as prospectuses and listing particulars, but also to a broad range of information communicated to the public through a recognised information service.
Announcements around commitments to, or the achievement of, “green” targets, or a company’s ESG credentials more generally, are likely to attract particular scrutiny from investors. If they are found wanting they may provide the basis for securities claims.
There are obvious benefits to having sophisticated and engaged investors, but it can also mean a heightened ability and willingness to mobilise for litigation. Securities litigation can be extremely expensive, reputationally damaging and a distraction from the execution of company strategy.
Aside from taking great care around all public statements, having robust strategies in place to react quickly and effectively to adverse events, covering early consultation with disputes specialists, careful handling of regulatory announcements and broader PR issues, through to document management (both retention and preventing the unnecessary production of what might turn out to be damaging documents) will serve companies well.
James Whitaker, Stuart Pickford and Mark Stefanini, all partners at international law firm Mayer Brown