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SEC Enters Settlement in SPAC-Related Enforcement Action Against Akazoo

As I have noted on this site, the SEC has in recent months filed SPAC-related enforcement actions, including the action filed in July 2021 against Stable Road Acquisition Corporation (discussed here), and the Y, 2021 action filed against Nikola Motors founder Chad Milton (discussed here). These matters were not, however, the first SPAC-related SEC enforcement actions; there have been others previously, including the September 2020 SPAC-related enforcement action against music streaming company Akazoo, S.A. In something of a milestone regarding SPAC-related actions, on October 27, 2021, the SEC announced that it had reached a settlement of the Akazoo enforcement action. The SEC’s October 27, 2021 press release about the settlement can be found here. The October 27, 2021 Agreed Final Judgment in the Enforcement Action can be found here.

  Background

According to the SEC’s complaint against Akazoo (a copy of which can be found here), Akazoo claimed to be an emerging-markets-focused music streaming service with nearly 40 million registered users, nearly five million subscribers, and over $120 million in annual revenue. In actuality, the SEC alleged, the company had no paying users and negligible revenues. Akazoo, the complaint alleged, leveraged these misrepresentations to enter into a September 2019 business combination with the special purpose acquisition company (SPAC), Modern Media Acquisition Corporation (MMAC). (Further background regarding the SPAC and the business combination are further detailed in the separate private securities class action lawsuit that investors filed against Akazoo and others in April 2020, as discussed here.)

  As a result of the business combination, Akazoo’s shares became listed on Nasdaq. The SEC alleged that after the shares began publicly trading, Akazoo “proceeded to defraud” investors by misrepresenting that it had earned tens of millions of dollars in revenue during 2019 and increased the number of subscribers 28%. In reality, the SEC alleged, the company in fact had limited operations and no subscribers, “all while depleting more than $20 million in investor funds.”

  According to its recent press release describing the settlement, the SEC filed an “emergency action” against Akazoo in order to “preserve the company’s remaining $31.5 million in cash and other assets.” In April 2021, without admitting or denying the SEC’s allegations, Akazoo agreed to a bifurcated judgment that permanently enjoined the company from violating the antifraud provisions of the federal securities laws.

  The SEC enforcement action settlement announced on October 27, 2021 fully resolves the SEC litigation by ordering Akazoo to pay $38.8 million in disgorgement, an amount, the press release states, “that will be deemed satisfied by the company’s payment of $35 million to investors and victims of settlements in connection with several private class action lawsuits.” The separate April 2021 settlement of the private securities class action litigation is described in detail in a prior post on this site, here.

  Discussion

This sequence of events, including the settlements, along with the other SPAC-related enforcement actions show the extent of the SEC’s interest in monitoring SPAC-related transactions and market activities. Indeed, the SEC’s October 27 press release announcing the Akazoo settlement includes a statement from an SEC official as saying that “The SEC is intently focused on SPAC merger transactions, and we will continue to hold wrongdoers in this space accountable.”

  For insurance and legal practitioners active in the SPAC arena, both halves of this SEC’s official’s statement are noteworthy; first, it represents a declaration that the agency is not just watching SPAC activity but is in fact “intently focused” on it; and, second, it represents a further declaration that the agency is going to continue to pursue alleged misconduct in SPAC-related activities.

  The SEC settlement itself is a little bit unusual from my perspective. The enforcement action settlement is really just a piggyback on the separate private securities class action lawsuit settlement. This kind of an arrangement may not be unusual, but off the top of my head I don’t recall seeing a prior instance where the SEC so clearly accepted a private securities litigation settlement as sufficient to fulfill the agency’s objectives in filing its own enforcement action.

  The SEC official’s statement in the press release includes a comment with respect to the settlement of the Akazoo action to the effect that “One goal in filing this emergency action was to preserve assets for the benefit of injured investors, and this resolution accomplishes that goal.” It is, in my experience, a rare occasion in which the SEC so expressly acknowledges that separate private securities litigation has sufficiently fulfilled the agency’s objectives in seeking to compensate injured investors.

  There are a number of aspects of the circumstances involved here that are work considering in connection with the more recent wave of SPAC-related securities class action litigation. That is, by my count, there have been 26 SPAC-related securities class action lawsuits filed in 2021 alone. The Akazoo securities suit, as well as the SEC’s enforcement action, were both filed in 2020, and so the Akazoo suit is not reflected in the tally of 2021 actions. However, though the Akazoo suit relates to an earlier time period, some of the allegations in the case are similar to many of the allegations in the more recently filed actions. For example, both the private securities suit against Akazoo and the SEC enforcement action related to a collapse in the company’s share price following publication of a short-seller report raising questions about the company’s operations and finances. As I noted in a recent post (here), ten of the 26 SPAC-related securities suits involving companies whose share prices declined following publication of short-seller reports. In addition, another of the SPAC-related securities suits filed in 2020, the high-profile lawsuit against Nikola, also contain allegations of a decline in the company’s shares following the publication of a short-seller report. Clearly, it is not just the SEC that is focusing on SPAC-related transactions; short-sellers are as well.

  But the most important point about this enforcement action and the settlement is that the liability risks that SPAC transactions and SPAC-related cases include not only the possibility of private securities class action litigation, but also the possibility of SEC enforcement action. The ultimate outcome of the action also reinforces the observation that the risk of litigation and enforcement activity can result in significant costs and recoveries. The fact that Akazoo had to fight parallel private securities litigation and SEC enforcement action also has defense cost implications that could be important for post-SPAC-transaction companies will want to take into account when assessing the adequacy of their D&O insurance limits.

  In connection with the magnitude of this settlement, it is worth recalling, as I noted in my post about the prior Akazoo securities class action settlement, that the securities suit settlement was only a partial settlement, as the insurer’s on Akazoo’s post-merger go-forward D&O insurance program, as well as certain other parties, did not participate in the settlement. The $35 million settlement was funded in part by a cash payment from Akazoo itself, and a $9 million payment by MMAC’s D&O insurer. Depending on the outcome of the ongoing Akazoo private securities litigation (and perhaps attendant insurance coverage litigation), the ultimate aggregate cost of resolving the Akazoo litigation could prove to be more than $35 million.

  One final note. The sequence of litigation events relating to Akazoo involved first a securities class action lawsuit and then a subsequently filed SEC enforcement action. The recent events relating to Stable Road Acquisition Corporation, which was recently hit with an SEC enforcement action (as discussed here), was that first the SEC filed its enforcement action, and then plaintiff’s attorneys filed a separate private securities class action lawsuit based on the same allegations. The point here is that the private securities litigation and SEC enforcement activity is not mutually exclusive – as in fact the settlement of the Akazoo enforcement action discussed above underscores.

SEC Enters Settlement in SPAC-Related Enforcement Action Against Akazoo published first on http://simonconsultancypage.tumblr.com/

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London Again (Finally)

The Palace of Westminster

It is with a great deal of pleasure that I finally get to say this again after a long wait: The D&O Diary was on assignment in London last week. With two COVID vaccinations under my belt and a booster shot to boot, I just decided it was finally time to start traveling again. It was great being back in London and re-acquainting myself with one of my favorite cities. Pandemic precautions made some parts of the trip awkward, but in most other ways it felt almost normal to be traveling again.

  The primary purpose of my trip was to participate in a conference organized by The Geneva Association and held at Lloyd’s entitled “Evolving Liability Conference 2021: Long-Time Liability Implications of Pandemics.” I was a speaker on a panel entitled “Implications for Insurers from Shifts in Liability Standards/Duties of Care Following the COVID-19 Episode.” The conference was a hybrid event, with some audience members and speakers attending live, and other audience members and speakers attending virtually. It was really a pleasure to be at a live industry event again (even if only partially so), the first I have attended since February 2020. It was also great to be at Lloyd’s again. The event was interesting, thought-provoking, and well-run. I would like to thank The Geneva Association, and in particular GA’s Darren Pain, for inviting me to be a part of this excellent event.

  Here’s a picture of our panel, following the session. From left to right, Darren Pain of The Geneva Association (moderator); Neal Beresford, Clyde & Co; John Pilkington, Ascot Syndicate; me; and Andrew Hornsblow, Dale Underwriting Partners

  It was a particularly special part of my visit to Lloyd’s in connection with the conference to be invited to dinner in the famous Adam Room, an enduring vestige of venerable Lloyd’s traditions in the present-day ultra-modern building.

  The dome of St. Paul’s viewed from the 11th Floor of the Lloyd’s Building

  In addition to the conference and meetings, I did also have the opportunity to try to refamiliarize myself with London. The weather originally predicted was unpromising, with rain forecast every day. Fortunately for me, the weather turned out much better than predicted. I  used my umbrella only once, and otherwise I generally enjoyed pleasant weather and even sunshine during the rest of my visit. I took advantage of the agreeable conditions for a great deal of walking, particularly along the river.

  It was a beautiful Sunday morning for a walk in Hyde Park on my first full day in London

  After the walk, it was time for a traditional Sunday Roast at a pub on Old Brompton Road. Roast chicken in gravy, roast root vegetables (carrots, turnips, and parsnips), with a Yorkshire Pudding filled with sausages, and a little side salad.

  After lunch it was time for an afternoon concert at Cadogan Hall in Sloane Square. It was such a nice afternoon outside it was hard to go indoors.

  It was beautiful indoors as well. Cadogan Hall is such a great music venue. The concert was a performance of Beethoven’s Fifth Piano Concerto. The concert was part of what had been planned as a series of five concerts of Beethoven’s five piano concertos, with Elizabeth Sombart at the piano, to celebrate the 250th anniversary of Beethoven’s birth. I attended the first concert in the series in November 2019, the last time I was in London. However, due to the coronavirus outbreak, the second, third, and fourth concerts in the series were cancelled. The fifth concert was rescheduled to a time that coincided to my recent visit and there was a certain symmetry to my being there.

  I had other opportunities for long walks during my visit, including in particular as part of separate side trips to Richmond and to Hammersmith, two riverside towns west of London.  Both communities have pleasant riverside walkways (and on either side of the river, actually). One particularly fortunate attribute of the weather conditions that prevailed while I was in London was that it seemed to clear up and become sunny late in the afternoon each day. My late afternoon riverside walks in both cities were really enjoyable.

  Richmond Green, a roughly 12 acre open space at the center of the town of Richmond. A very pleasant place on a fall afternoon. Legend has it that in the Middle Ages jousting tournaments took place on Richmond Green.

  A view of the Thames River looking west from Richmond Bridge

  The riverside at Hammersmith, viewed from the south shore. Note that the river is at low tide.

  Hammersmith Bridge at dusk

  My London visit did involve more than just walking through parks and along the river. I did also work a couple of museum visits into the trip, in both cases going to museums that I had not previously visited, Tate Britain and the Imperial War Museum.

  Tate Britain exhibits British Art from the 15th to the 20th centuries. It has a particularly fine collection of paintings by J.M.W. Turner.

  The Imperial War Museum. I never made time in prior trips to visit, but I now see that that was a mistake. It is an excellent museum, with designed displays highlighting interesting historical artifacts. The new WWII exhibit is particularly well done.

  I also took advantage of being back in London to do some important shopping, basically replenishing critical supplies that had run short during the long travel interregnum.

  Fortnum & Mason, the Royal Grocer, on Piccadilly. During my visit there, I stocked up on indispensables such as tea, coffee, and chocolate.

  Just a few steps east of Fortnum & Mason on Piccadilly is Hatchard’s, the oldest book store in London. I spent the afternoon in the History Books section and came away with an armful of books (I brought a separate carry bag with me to London in anticipation of the need to transport books back home).

  Another famous London bookstore, Daunt Books, on Marylebone High Street. The store has an eccentric organization; it groups the books by country (with fiction and nonfiction arranged together). It as an interesting place with a lot of interesting books, in an interesting arrangement.

  The original Twinings tea, on The Strand (directly across the street from the Royal Courts of Justice). It was Britain’s first tea room when Thomas Twining opened it in 1706, and it as been operating on the site ever since.

  For most of my London visit, things seemed more or less normal, despite the pandemic. I was comfortable traveling on the London Underground. Most passengers on the Tube were wearing masks, as were most people in shops and stores. However, on the street and in pubs, few people wore masks. As is the case in the U.S., there seems to be a split in the U.K. about how to deal with the pandemic. On my final day in London, there was a protest march on Piccadilly against vaccine passports and vaccine mandates.

  Almost none of the marchers were wearing masks – and what could go wrong with tens of thousands of unvaccinated and unmasked marchers chanting, singing, and shouting? I kept my distance…

  Air travel felt more or less normal as well, although as a result of the cumulative requirements of the U.S. and U.K governments, I did wind up getting tested for COVID-19 three times in less than ten days. There was a fair amount of process involved as well; a great deal of uploading of documents, filling out online forms, presenting attestations, and so on. It all seemed pointless because I had to present the actual physical documents multiple times on both ends of the trip and all of the boxes had to be check all over again as well. In the end, the planes did fly and I did get where I wanted to go. Overall, based on my experience, it does seem like the time to start traveling again may have finally arrived.

  And it really was good to be back in London again.

  Green Park, the viridescent heart of London. My favorite place. It was good to be back.

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FTC Issues Dark Forecast for Dark Patterns in Subscription Auto-Renewal

With Halloween just days away, it is perhaps fitting that the FTC has issued a new enforcement policy statement warning companies not to employ dark patterns to trick customers into a subscription plan. As we covered previously, the FTC has identified dark patterns—or website design features used to deceive consumers—as a priority for both rulemaking and enforcement actions. The timing of the announcement is a bit curious as the FTC is in the middle of a rule making on negative option marketing. More below from Commissioner Wilson on that.

The enforcement policy statement in many ways reflects the requirements of the Restore Online Shoppers Confidence Act (ROSCA) and established FTC precedent regarding negative option marketing. The FTC has been active against companies who hide their subscription programs behind links, have made customers undergo several attempts to cancel their subscription, or companies who failed to disclose that the benefits of their subscription did not exist anymore.

In the policy statement, the FTC sets out three major requirements, similar to those found in ROSCA, for companies to abide by when offering anything on a subscription or auto-renew basis:

Clear and Conspicuous Disclosure: The material terms of their subscription program (i.e. the amount that will be charged, the frequency of these charges, and the cancellation policy) must be clearly and conspicuously disclosed to customers before they purchase it. The policy specifies how companies should disclose these terms.

Express Informed Consent: To enroll a customer in a subscription program, a company must obtain that customer’s express informed consent. To obtain this consent, the company must receive it separately from any other part of the transaction, meaning that the customer must specifically agree to the terms of the subscription program. This consent cannot include or contain any other information that would distract the customer from understanding the terms and the consent must be clear and unambiguous.

Easy Cancellation: Companies should create a clear and easy system whereby a customer can cancel their subscription. The customer should not have to call multiple times or hunt for a way to cancel—it should be clearly labeled and easy to accomplish, so that it is at least as easy to cancel as it was to sign up for the subscription.

The FTC voted to issue this enforcement policy 3-1, with Commissioner Christine S. Wilson dissenting stating that this enforcement policy merely gets in the way of an ongoing rulemaking process on negative option marketing. In concurring, Commissioner Phillips suggested that the policy statement might make the rule unnecessary.

How the FTC intends to use the policy statement in enforcement remains unclear. Perhaps the FTC will point to the policy statement as proof “a reasonable man would have known … [conduct] was dishonest or fraudulent” for purposes of a Section 19 follow-on proceeding after an administrative trial. The FTC can already pursue, without an administrative proceeding, ROSCA violations under Section 19 and negative option violations under the TSR in the same manner.

What is clear is that dark patterns remain a high priority for the agency. Stay tuned for updates on exactly what website design features and digital marketing methods the agency intends to target.

FTC Issues Dark Forecast for Dark Patterns in Subscription Auto-Renewal published first on http://simonconsultancypage.tumblr.com/

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How Formula E Plans to Overtake Formula 1

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Deep-Sea Mining Company Hit with SPAC-Related Securities Suit

A Canadian-based deep-sea mining company is the latest firm to be hit with a SPAC-related securities class action lawsuit. The company, which plans to mine the seabed for materials to be used in electric vehicles batteries, merged with a SPAC in September 2021. The company’s share price recently declined following news reports and a short-seller report questioning the company’s financing, licensing, and its claimed sustainability credentials. A copy of the October 28, 2021 complaint can be found here.

  Background

Sustainable Opportunities Acquisition Corp. (SOAC) is a special purposed acquisition company that completed its IPO on May 5, 2020. On March 4, 2021, SOAC announced its plan to merge with Deep Green, Inc. The two companies completed their business combination in September 2021. The combined company changed its name to TMC the metals company, Inc. (TMC). The shares of TMC began trading on Nasdaq on September 10, 2021. TMC is based in Canada and organized under the laws of the Cayman Islands.

  TMC is a deep-sea exploration and mining company, focused on mining the seabed in certain specified areas for metals nodules. The recovered metals are to be used in electric vehicle batteries with the least possible negative environmental and social impact.

  On September 13, 2021 (that is, just three days after the combined company’s shares began trading), Bloomberg published an article stating that two investors failed to supply $330 million needed to complete the private equity in public equity (PIPE) component of the transactions associated with the business combination that formed TMC. The Bloomberg article also questioned TMC’s “green credentials,” noting specific concern in the scientific community that TMC’s activities will damage sensitive ecosystems, accompanied by scientific calls for a moratorium on deep-sea mining. According to the subsequently filed securities complaint, the company’s shares fell 20% on this news.

  Then on October 6, 2021, Bonitas Research, a short-seller, published a report raising multiple questions concerning TMC, including whether the company had overpaid to insiders for the seabed mining rights; whether the company had inflated its exploration expenses in order to mislead investors about the scale of its operations; and whether the company had a history of associating with “bad actors.” According to the complaint, the company’s shares fell 7% on this news.

  The Complaint

On October 28, 2021, a plaintiff shareholder filed a securities class action lawsuit in the Eastern District of New York. The complaint names as defendants TMC; the CEO of Deep Green, who became the CEO of TMC following the merger; and the CEO of SOAC (the SPAC), who became a director of TMC following the merger. The complaint purports to be filed on behalf of a class of investors who purchased the shares of the SPAC prior to the merger and shares of TMC following the merger, between March 4, 2021 (the date the merger was announced) and October 5, 2021 (the trading day following the publication of the Bonitas Research Report). 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. The complaint seeks to recover damages on behalf of the plaintiff class.

  The complaint quotes extensively from the documents and public statements surrounding the merger announcement and the merger transaction. The complaint alleges that the defendants made false or misleading statements or failed to disclose that: “(1) the Company had significantly overpaid for [a seabed license] acquisition to undisclosed insiders; (2) the Company had artificially inflated its … exploration expenditures to give investors a false scale of its operations; (3) the company’s purported 100% interest in [the seabed license] was wholly owned by two Nauruan foundations and that all future income from [the license] would be used in Nauru; (4) Defendants had significantly downplayed the environmental risks of deep-sea mining polymetallic nodules and failed to adequately warn investors of the regulatory risks faced by the Company’s environmentally risky exploitation plans; (5) the Company’s PIPE financing was not fully committed and, therefore, the Company would not have the cash necessary for large scale commercial production; (6) as a result of the foregoing, the Company’s valuation was significantly less than Defendants disclosed to investors; and (7) as a result, Defendants’ public statements were materially false and/or misleading at all relevant times.”

  Discussion

By my count, this lawsuit is the 26th SPAC-related lawsuit to be filed this year. Like many of the prior lawsuits, this lawsuit involves a company acquired by a SPAC that stumbled right out of the gate as a public company. Like many of the prior SPAC-related suits, the lawsuit involves a company involved in the electric vehicle industry (although in this case, not actually in the electric vehicle industry).

  This lawsuit is also similar to many of the previously filed SPAC-related securities suits in that the lawsuit was filed after the company was the subject of a negative short-seller report. By my count, of the 26 SPAC-related securities lawsuits filed in 2021, ten have involved companies that were the subject of a negative short-seller report.

  Also like many of the previously filed SPAC-related securities suits, the defendants named in this suit involve a former officer of the SPAC. In addition, again like many of the previous suits, the individual defendants are sued in multiple capacities; the TMC CEO is also named in his capacity as the CEO of the predecessor private company; the former CEO of the SPAC is also sued in his capacity as a current director of TMC. The potential liabilities of these individuals potentially could trigger coverage under multiple different policies, including both the SPAC’s runoff policy and the go-forward policy for the merged company. The involvement of multiple policies could lead to the kind of “Tower vs. Tower” coverage conflict that Silicon Valley attorney Boris Feldman wrote about earlier this year.

  One final though. There are over 400 SPACs out there looking for merger candidates. As the time remaining the search period begins to decline, the possibilities for merging with a target company that is no more ready to become a public company than this one seems to increase.

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The Business Case for Diversity in Fashion | The Business of Fashion Show

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The Promise and Threat of China's Smart Cities

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Climate Change-Related Breach of Fiduciary Duty Lawsuits?

In a recent post in which I reviewed recent legal developments in Australia, I discussed the growing possibilities for future climate change-related D&O claims. A recent paper highlights the extent of these D&O claim risks in the United States. The October 2021 paper, published by the Commonwealth Climate and Law Initiative and entitled “Fiduciary Duties and Climate and entitled “Fiduciary Duties and Climate Change in the United States,” discusses how evolving understandings of climate change has “changed the relevance of climate change to the governance of corporations,” with important implications for the fiduciary duties of directors and officers. The paper discusses how in the current legal environment in the U.S. a board’s failure to adequately regard climate change-related issues could lead to potential litigation and liability. A copy of the full paper can be found here, and an executive summary of the paper can be found here.

  The paper opens with a review of the types of material risks that climate change poses for both the real economy and the financial system, across short, medium, and long-term horizons. The paper suggests that these risks at least three types of foreseeable risks: physical; economic transition; and legal liability. The physical risks involve natural environmental challenges arising from rising temperatures, increased drought, more frequent and higher intensity storms, and so on. Economic transition risks pertain to the challenges that changed climate conditions and regulatory environment may present. Legal liability pertains to risks from the litigation environment. In each case, the paper suggests, the risks have recently accelerated, including in particular during 2021.

  With these risk factors as a starting point, the paper suggests that the failure of corporate board to consider and address these risks could serve as the basis for liability for individual directors and officers for breach of their fiduciary duties. These kinds of liability claims could be presented either on the basis of either an alleged breach of the duty of loyalty or an alleged breach of the duty of care.

  In discussing the possibility of claims for an alleged breach of the duty of loyalty, the paper discusses the Caremark case and its recent progeny with stress that a loyal fiduciary  must exercise oversight of the organization on whose board the fiduciary. In discussing this duty of oversight, the paper discusses the Delaware Supreme Court’s 2019 decision in Marchand v. Barnhill, which held that boards must have systems in place allowing them to monitor mission critical operations and cannot disregard “red flags” that arise.

  In light of these legal theories and recent legal developments, a director, the paper suggests, may be alleged to have breached their duty of oversight within the duty of loyalty by failing to adequately consider or oversee the implementation of climate-related risk controls. These kinds of allegations might arise, for example, for a director’s failure to monitor mission-critical regulatory compliance or failure to monitor climate-change related business risks. The paper notes that information presented to the board about climate change risks related to the company’s operations and finances could be both mission-critical and could represent the kind of “red flags” that could trigger duty of oversight-related liability. Specific areas of regulatory compliance that could be relevant in this context include environmental laws; health and safety laws; and human rights laws.

  The paper goes on to suggest that the high-profile and economically significant issue of climate change also could impose duties on directors and give rise to potential liability based up on the duty of care. Under this duty, which required directors to make lawful, reasonably informed decisions, directors’ consideration of climate change issues is warranted – for example, consideration of risk assessment and management; strategy; supply chain integrity and resilience; asset valuation; financial planning. A “failure to consider the risks or opportunities presented by climate change for want of relevant knowledge – either in general, or in relation to material projects or acquisitions – appears to present ground for the review of the breach of the duty of care under Delaware law.”

  The paper acknowledges that these kinds of claims may be difficult to establish and claimants would face formidable challenges in showing that the relevant liability standard has been met (as well as other formidable defenses). However, “these barriers may not be impossible to overcome in a particular factual context.” Moreover, shareholders may use access to a corporation’s books and records, including board materials, to try to support fiduciary duty claims. While “it is rare for directors and officers to be found liable for breaches of their fiduciary duties, the potential for an action for breach of duty is credible.” Moreover, the number of climate change-related cases globally, and in particular in the US, has increased significantly in recent years.” The capacity of determined litigants to bring claims, “whether motivated by a desire to seek compensation for economic loss or to drive corporate ambition on climate action,” should “not be underestimated.”

  In order to try to reduce the risk of litigation and potential liability, the paper suggest a number of corporate governance steps that well-counseled boards and officers would be advised to adopt. The paper suggests a framework for analysis of potential climate change risk, which includes, for example, identifying climate change-related financial risks; the impact of climate change-related issues on strategy, competition, acquisitions and divestitures, and asset valuations; potential regulatory challenges, particularly across the various jurisdictions in which the company operates; and a wide variety of other issues.

  Discussion

In my view, the paper provides a comprehensive overview of the potential for climate change-related issues to give rise to breach of fiduciary duty claims against corporate boards. Recent developments involving breach of the duty of oversight claims in Delaware (discussed for example here) suggest the possibilities for these types of claims against corporate boards. These and the other kinds of possible claims the paper discusses are unquestionably challenging to sustain. However, motivated claimants, particularly activists seeking to use litigation to drive a climate change-related agenda, may push these kinds of claims, as even unsuccessful claims could advance their agenda.

  The paper is expressly focused on the potential for climate change-related breach of fiduciary duty claims, and therefore does not discuss at length the possibilities for other types of climate change-related D&O claims, such as securities class action lawsuit based on climate change related disclosures or omissions. However, the risk of climate change-related securities litigation is another significant D&O claim risk for corporate boards. In that regard, the paper’s analysis of the corporate governance steps well-advised boards should take is very valuable.

  All of that said, I do think it is important to note that I have been writing about the potential risk of climate change-related D&O claims for nearly 15 years, and during that time, there have been very few claims that can be described as climate change related that have been filed. I don’t think this is likely to change any time soon; that is, I don’t think there is going to be some kind of rush of climate change claims. Rather, I think there will be a few cases filed, many of them as test cases in which claimants seek to test procedural approaches and substantive theories as they try to find approaches that will be successful – with “success” measured not only by success in the litigation, but also success in advancing a climate change agenda.

Climate Change-Related Breach of Fiduciary Duty Lawsuits? published first on http://simonconsultancypage.tumblr.com/

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Sunday Arts: Wagnerism

I have always felt an aversion to the works of Richard Wagner; his massive and melodramatic style, his well-known antisemitism, and the association of many of his operas with Nazi culture, have always seemed reasons enough to avoid his music. It was with some surprise then that, after hearing a fascinating radio interview of The New Yorker’s music critic Alex Ross, I found myself reading with interest and even enthusiasm Ross’s thought-provoking recent book, Wagnerism: Art and Politics in the Shadow of Music. In his book, Ross makes the convincing case that Wagner was and is one of the most important and influential artists of the modern Western era, even if many of his legacies and the use to which his art has been put are malignant. In this vast, intelligent book, Ross demonstrates that the works of a vast array of artists and writers reflect Wagner’s influence. Along the way, Ross also makes the case that, regardless of how your feel about Wagner, he cannot simply be ignored.

  Wagner of course wrote several operas in the mid to late 19th century, including, among others, Tannhäuser, Lohengrin, Die Meistersinger, Parsifal, and perhaps most famously, The Ring cycle. Along the way, he also originated several musical techniques and ideas that have now become standard, such as the use of leitmotifs to express a psychological state or to set a mood. He introduced the idea of the Gesamtkunstwerk (total artwork), that is, a work of art that makes use of a variety of art forms. His work draws heavily on ancient sources, such as Arthurian legends, Norse sagas, and Greek myths. The characters in many of his stories are architypes, and he mines the elemental sources to invoke deep human urges and motivations. Audiences then and now have responded deeply to Wagner’s work. Many describe their experience of listening to Wagner (especially the Ring cycle) as “hypnotism,” “intoxication,” or “seduction.”

  However, Ross’s book is not about Wagner or his work as such; instead, it is about the impact that Wagner’s music and ideas have had on subsequent artists, musicians, artists, and scholars – that is, the spread and diffusion of what came to be known as “Wagnerism.”

  Ross describes Wagnerism as a “chaotic posthumous cult” that “traversed the entire sphere of the arts – poetry, the novel, painting, theatre, dance, architecture, film.” It also “breached the realm of politics” as both the Bolsheviks in Russia and the Nazis in Germany “used Wagner’s music as a soundtrack for their attempted re-engineerings of humanity.” The composer’s work, Ross writes, “came to represent the cultural-political unconscious of modernity – an aesthetic war zone in which the Western world struggled with its raging contradictions, its longings for creation and destruction, its inclinations toward beauty and violence.” The expression “Wagnerism” itself encompasses a multiplicity of meanings – it may mean modern art grounded in myth; it may mean involving multiple genres in pursuit of artistic expression; it may mean the incorporation of a theme, character, or scene from one of Wagner’s works into a novel, painting, or film.

  The transformation of Wagner’s works and ideas into an artistic or philosophical approach began during Wagner’s own lifetime. One of Wagner’s earliest acolytes was the German philosopher and critic, Friedrich Nietzsche, who was an early exponent of Wagner’s music and philosophy. Although the two men ultimately had a falling out, Nietzsche’s continuing reflections on Wagner’s use of myth and story influenced some of Nietzsche’s best-known philosophical works. Nietzsche may also have been among the first to see the danger in the seductive power of Wagner’s works. In his late work, The Case of Wagner, Nietzsche recanted his earlier praise for Wagner, now characterizing his music as “decadent,” noting in particular its effect on German youth, saying of their response to Wagner that it “It was not with his music that Wagner conquered them, it was with the ‘idea’—it is the enigmatic character of his art, its playing hide-and-seek behind a hundred symbols, its polychromy of the ideal that leads and lures these youths to Wagner; it is Wagner’s genius for shaping clouds, his whirling, hurling, and twirling through the air, his everywhere and nowhere.”

  One thing that is clear from the outset is that Wagner had an enormous impact on other artists, particularly writers. One of the strengths of Ross’s book, and one of the many features of the book that makes it worth reading, is the sheer number and range of artists and authors whom Ross convincingly shows Wagner influenced. The list is long and diverse. It includes the English novelist George Eliot; the novelist of the American prairie, Willa Cather; a host of modernist writers, including James Joyce, Marcel Proust, T.S. Eliot, Virginia Wolff; and even the German author of bourgeois decline, Thomas Mann. (Ross says of Mann this his “entire oeuvre is a kind of aftermath of Wagner.”)

  Ross’s comprehensively approach finds deep marks of Wagner in some truly unexpected places, such as in W.E.B. Du Bois’s 1903 work The Souls of Black Folk, one of the founding texts of the African-American Civil Rights Movement. Du Bois, Ross writes, “took Wagnerian myth as a model for a heroic new African-American spirit, one that would make use of its own legends.” (It is probably important to note here that Du Bois spent two years studying at Fredrich Wilhelm University in Berlin.) Ross also shows that Theodor Herzl, the early prophet of Zionism, was a confirmed Wagner devotee. Herzl, Ross writes, looked to Tannhäuser to “fortify his Zionist vision.”

  One interesting Wagnerian detour in Ross’s book is his exploration of the influence of Wagner on late 19th and early 20th century American urban architecture. A number of architects in the Chicago school – including in particular John Wellborn Root and Louis Sullivan — embraced Wagner and sought to embody in their work ancient values that were “rhythmic, deep, and eternal.” In an essay Root advocated an architectural aesthetic comparable to the nuances of musical language, in pursuit of the “complete unification of the arts for which Wagner labored.” Frank Lloyd Wright, one of Sullivan’s pupils, was to record, that Sullivan filled his studio with the strains of Wagner’s music. Similarly, architects in fin de Siècle Vienna sought to “translate Wagner’s idea of the total work of art” into a model for the future of the city itself. The artistic renegades within the Viennese Succession movement similarly sought to realize a “lived-in Gesamtkunswerk.”

  Ross exhaustively documents the extent of Wagner’s artistic influence, but he also plumbs the depths of Wagner’s dark sides. Ross devotes a significant section of his book trying to understand Wagner’s vehement anti-Semitism. Professional jealousy bordering on paranoia was one source. Wagner apparently believed that Felix Mendelsohn and Giacomo Meyerbeer, Europe’s preeminent composers of Jewish descent, were “plotting to get him.” But notwithstanding these seemingly explanatory threads, Ross concludes that the ferocity of Wagner’s anti-Jewish rancor “welled up from deep in his psyche.” It culminated in Wagner’s 1850 essay, “Jewishness in Music,” written in language of “still shocking crudity.” Wagner initially published the essay anonymously, but in 1869 he republished it under his own name. His ruminations that tend toward an “as yet uncodified theory or ‘science’ of race” were to reach their most obscene manifestation in the “race” theories associated with Nazi culture.

  The link drawn between Wagnerism and Nazism continues to cast a dark shadow over Wagner’s historical reputation. As early as 1939, commentators were asserting that Wagner was “perhaps the most important single fountainhead of Nazi ideology.” Hitler reportedly even claimed that an early youthful encounter with Wagner’s opera Rienzi “propelled him toward a career in politics.” Later historians later doubted the extent of Wagner’s influence; one modern historian wrote that “the composer’s influence on Hitler has often been exaggerated.” However, there is no doubt, as Ross writes, that “the cultural-political apparatus of the Nazi state drew liberally on Wagnerian mythology,” adapting Wagner’s mythological themes and symbols as party iconography. Wagner’s music featured prominently in the Nazi rallies at Nuremberg and other party events.  However, Wagner was not as popular with the masses as he was with Hitler, and Wagner’s prominence in the Nazi repertoire faded after the early years, especially because not all of Wagner’s legacy could easily be reconciled with Nazi ideology.

  Since the end of World War II, Wagner’s reputation and cultural place has gone through several successive re-assessments. The question Wagner’s legacy faced after the war was whether he still had something important to say to a culture prepared to reject him on both aesthetic and political grounds. The straightforward answer is that his work continues to be performed (except notably in Israel), and to be incorporated into films and other art forms. Wagnerian themes have permeated some forms of cinema, including in particular such fantasy and sci-fi epics as The Lord of the Rings, Star Wars, and The Matrix, which Ross refers to as “updated Wagnerian tropes.” (The Darth Vader theme is a universally recognized use of a Wagnerian leitmotif.) The story of Wagnerism goes on.

  Ross sums up the vast terrain he has covered by saying that “In the story of Wagner and Wagnerism, we see both the highest and lowest impulses of humanity entangled. It is the triumph of art over reality and the triumph of reality over art.” Of Wagner’s complex historical record, Ross notes that “To blame Wagner for the horrors committed in his wake is an inadequate response to historical complexity; to exonerate him is to ignore his insidious ramifications.” Upon inspection, the “cult of genius” that surrounded Wagner “comes undone,” and he becomes something “more unstable, fragile, and mutable.” Incomplete in himself, “he requires the most active and critical kind of listening.” Through his art, we may think we have caught a glimpse of some higher, more glimmering realm, but it is only a shadow; “the vision fades, the curtain falls, and we shuffle back in silence to the world as it is.”

  I recommend this book for anyone who wants to confront long-held beliefs, to encounter new thoughts and new perspectives – and to learn something new. This book is an entire curriculum in art, music, and culture. Having now read the book twice, I am thoroughly convinced that it is literally impossible to talk about Western art and culture in the late 19th and early 20th century without taking Wagner into account. Ross also shows that Wagner’s influence continues to this day. Ross’s successful execution of his effort to understand and explain Wagner’s influence is an astonishing, even dazzling accomplishment.

  All of that said, I must add that this book is not for everyone. Not everyone is going to want to travel with Ross to try to find Wagner in the work of the Pre-Raphaelites or the Symbolists. Though I found Ross’s extensive plot summarize of various works of literature fascinating, I can easily imagine that some readers might not.

  However, if you are the kind of reader that is interesting in being educated while being entertained, then I cannot recommend this book highly enough for you. This book raises important and though-provoking questions, such as: can we separate the music from its creator? Is it possible to admire the work of a despicable person? Can an artistic legacy be separated from the uses to which the art has been put? And finally — what is the purpose of art: merely to entertain, to uplift, or to inspire, enflame, enrage? A lot of questions for one book to raise…

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The Business Case for Investing in Women’s Sports

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Australian Bond Climate Change-Related Disclosure Class Action to Proceed

An Australian Federal Court class action lawsuit alleging that the Australian Federal Government failed to disclose to investors the climate change risks associated with the government’s sovereign bonds has survived in part an attempt by the government to have the action dismissed. In an October 8, 2021 Judgment (here), a Federal Court of Australia Judge “declined to strike-out” the applicant’s claim based on allegations of misleading or deceptive conduct, while agreeing with the government to “strike-out” others of the applicant’s claims, as discussed below. The court’s rulings in this case arguably represent something of a milestone in the development of climate change-related litigation.

  Background

As discussed in detail here, in July 2020, Kathleen O’Donnell, a then-23 year-old student, filed an action in the Victoria Registry of the Federal Court of Australia on her own behalf and as representative for investors who purchased certain designated exchange-traded Australian Government Bonds at any time since July 7, 2020. O’Donnell, the applicant, named as respondents the Australian Government and two government officials.

  The lawsuit asserts three claims based on allegations that the bonds face material climate-change related risks that the applicant asserts should have been disclosed in the bond offering documents: first, a “misleading or deceptive conduct claim” against the government, based on alleged violations of Section 12DA(1) of the Australian Securities and Investments Commission Act of 2001; second, a “disclosure duty claim” against the government, based on the allegation that the respondents violated their fiduciary duty of utmost candor and honesty to investors; and third, a claim against the two government officials alleging that they violated their duties under the Public Governance, Performance and Accountability Act of 2013 (PGPA).

  The climate change risks the applicant claims the government should have disclosed in the bond offering documents include the existence, nature, and extent of physical risks (such as increased temperature, droughts, and bushfires); of transition risks (such as increased exposure to stranded assets and legal action); and of risks of sovereign response to climate change (such as for example treaty requirements). These various omissions, the applicant asserts, were material to investors’ decisions to purchase or trade in the bonds.

  Acting in a representative capacity, the applicant seeks judicial declarations that between July 7, 2020 and August 6, 2021 the government breached its disclosure duties through its failure to disclose material climate change information; and that the two government officials violated their duties under the PGPA. Acting in an individual capacity, the applicant sees to enjoin the government and the two officials from further promoting the bonds or issuing further bonds until the government provides disclosure in such form as the court deems necessary to inform the applicant and investors concerning material climate change information.

  The government filed an application to the court seeking orders to strike-out the applicant’s Amended Statement of Claim and to refuse leave to the applicant to file a proposed further Amended Statement of Claim.

  The October 8, 2021 Judgment

In a very October 8, 2021 Judgment, Federal Court of Australia Judge Bernard Murphy issued three rulings; first, he refused the respondents’ application for an order that the proceeding not proceed as a representative proceeding; second, he granted the application for an order to strike-out the disclosure duty and PGPA Act claims, on the grounds that the applicant has no standing to bring them; and third, he declined to strike-out the misleading or deceptive conduct claim.

  As a result of Judge Murphy’s determination, the proceeding will not go forward as to the two government officials the applicant had named as respondents, but the proceeding will go forward as to the government itself – but only with respect to the applicant’s misleading or deceptive conduct claim, not as to the other claims that the applicant had sought to assert.

  With respect to the misleading conduct claim, Judge Murphy did say that the pleading “will require improvement as the proceeding progresses,” commenting further that he “consider it sufficient for the case to go forward at this stage,” as it “meets the primary purpose of a pleading by putting them on notice of the case they must meet.” The applicant, Judge Murphy said, “will be directed to put on a revised pleading after discovery.”

  Discussion

Even though Judge Murphy granted the respondents’ application to strike two of the applicant’s substantive claims, the applicant’s third claim for misleading or deceptive conduct will go forward as to the government. For even just the one claim to survive the initial pleading hurdle is a very significant development, and not just for purposes of the immediate proceeding. This development could have significant implications both in Australia itself and in other jurisdictions as well with respect to climate change related disclosures in connection with government-issued sovereign bonds.

  A law firm memo published when the applicant first filed her proceeding noted that her action was “the first-of-its kind worldwide” in that it represents a climate change disclosure action against a sovereign government. The applicant’s success in surviving the initial pleading hurdle, if only in part, may hearten activists and prospective claimants elsewhere, as they seek to use legal claims and liability actions to advance climate change-related agenda.

  The applicant’s proceeding is of course based on Australian law, and the bases of the claims may not translate into the applicable laws of other jurisdictions. In addition, the claims against the government officials did not survive, which may cast doubt on the viability of pursuing climate change-related disclosure claims directly against government officials.

  Nevertheless, the survival of even just one of the applicant’s claims in this action arguably is a milestone event. Climate change activists around the world have been experimenting with different type of claims and different types of legal theories to try to identify approaches that might permit them to use legal proceedings to leverage action on climate change-related issues. The survival of this lawsuit may suggest ways that activists can put pressure on governments for further climate change-related disclosure in connection with their sovereign bond offerings. Further, the possibility of this type of lawsuit could pressure governments to proactively address climate change issues in their bond offering documents.

  Another potential implication of this case that has to be considered is its potential significance for climate change litigation against companies. The transferability of the determinations in this action to corporate climate change related litigation may be limited. However, the court’s ruling here could be a sort of a steppingstone on the path toward further climate change related litigation. If nothing else, the determinations in this case show that there is value for activists in continuing to experiment to try to find ways to use the courts to advance their climate change agenda; testing legal theories and procedural approaches could eventually identify means to press these kinds of issues in court.

  One final note about the developments in this Australian proceeding, and that is that this case is one more piece of evidence that climate change issues increasingly are moving to the top of the priorities list. The prospect of further litigation is only one factor; the likelihood of regulatory action (for example through ESG disclosure reforms of the type that are actively being considered by the SEC under Gary Gensler). If climate change activists are to be believed, pressure could also come in more immediate form – such as through floods, hurricanes, droughts, wildfires, rising temperatures, coastal flooding, and other manifestations.

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China's Race for AI Supremacy

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Guest Post: 20 Years Later: Why the Enron Scandal Still Matters to Investors

Jeffrey Lubitz

In the following guest post, Jeffrey Lubitz, Executive Director of ISS Securities Class Action Services, reflects on the 20th anniversary of the Enron scandal and considers the meaning of Enron for institutional investors. A version of this article was also published on the ISS Securities Class Action Services website. I would like to thank Jeff for allowing me to publish his article as a guest post on this site. I welcome guest post submissions from responsible authors on topics of interest to this blog’s readers. Please contact me directly if you would like to submit a guest post. Here is Jeff’s article.

  ************************

  In what is still regarded as the largest U.S. corporate fraud in history, the Enron scandal “celebrates” its 20th anniversary this month.

  It was October 16, 2001 when Enron announced a $638 million third quarter loss, confirming a handful of whispers on Wall Street from those who were skeptical of Enron’s growth. This same day, the company first disclosed it would require a restatement of its earnings from a four-year period, 1997 to 2000, to correct accounting violations. And just six days later, on October 22nd, Enron acknowledged a U.S. Securities and Exchange Commission inquiry into its accounting practices. Simultaneously, shareholders alleged massive fraud with the filing of their first complaint in the United States District Court for the Southern District of Texas. Years later, the investor class action led to more than $7.2 billion in settlements – across various defendants including its directors, investment banks, law firm, and auditor.

    Moreover, the SEC created a $450 million Fair Fund to further compensate wronged shareholders, showcasing that the fraud was so prevalent and damaging that they had to step in to redress the wrongs above what the individual settlements already compensated.

  The provision of creating a “Fair Fund” was the result of the Sarbanes-Oxley Act of 2002. One could say that if any good came of the accounting scandals from Enron and WorldCom, it was the creation of Sarbanes-Oxley. The Sarbanes-Oxley Act allows the distribution of a company’s wrongful profits (disgorgements), penalties, and fines back to defrauded investors. In an attempt to mitigate future scandals, in addition to the “Fair Fund” creation noted above, “SOX” also included the creation of the Public Company Accounting Oversight Board. This Board established – in part – accounting standards, restricted auditors from providing non-audit services, and added provisions for audit committee members to be independent.

  Another positive result from the Enron case, one can also argue is that this highly publicized scandal truly opened the eyes of investors as it relates to the importance of participating in shareholder class actions. It became an important settlement for so many reasons – the high dollar value, awareness across the media and industry due to the incredible pain and losses suffered by investors, and the accountability of multiple Enron partners across multiple parties.

  Prior to the Enron settlement, many institutional investors failed to participate in the claims filing process of a class action… believing the complicated process was not worth the likely small recovery amounts. In fact, an academic paper from 2002 by professors from Duke University and Vanderbilt University focused on investors failing to participate in the claims filing process. The paper touched upon, in part, both the fiduciary and legal obligations of participation in shareholder class actions by institutional investors. The paper concluded that “institutional investors have a duty to file claims in settlements, except (in)… rare instances where their cost-benefit calculations show filing to be unjustified.”

  And while shareholder class actions can, at times, be difficult to navigate – settlements such as Enron, WorldCom, AOL Time Warner, and many others can bring meaningful recoveries and offset a large percentage of previous losses. As such, it is critically important for institutional investors to have a policy in place and / or partner with a firm who can successfully monitor all litigation and file claims, where eligible.

  To this day, Enron remains the poster child for corporate scandal, as well as the largest investor-related class action settlement.

    In the 20 years since the Enron scandal came to light, shareholders and their attorneys have negotiated settlements totaling $140 billion[1] from investor related cases. This is truly an astonishing amount and there are significant examples of mutual funds, pension funds, and other asset management firms experiencing a positive NAV from recoveries.

  With large recoveries available each year, the Enron case provided institutional investors with the necessary wake-up call as to why it is important to, at the least, monitor litigation. While the claims filing process may be challenging, where else can individuals or firms recover lost assets without the requirement of hiring an attorney and participating in court proceedings?  The claims filing process may be difficult at times, but navigating a litigation through the Court is an even more complex procedure with fewer guarantees of recovery.

  And while accounting scandals and other types of corporate fraud clearly did not end with Enron – there will always be individuals trying to skirt the system – it is a relief for institutional investors to have a remedy of recovering lost assets.

  The failure of investors to participate in shareholder class actions, where eligible, is clearly “leaving money on the table.”

_______________________________ 

[1]This figure represents worldwide shareholder-related settlements during the last 20 years (class actions, group actions, and investor-related antitrust cases)

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You Asked, We Answered – Consumer Product Safety and Warranties

With the complexity of product safety requirements, the changing regulatory environment, and the ferocious plaintiffs’ bar, it is more important than ever for importers, manufacturers, and retailers to understand their obligation to comply with product safety laws and standards. In this recent webinar, Melissa L. Steinman, a partner in Venable’s Advertising and Marketing practice, explored current developments in product safety and warranty laws and examined common issues and pitfalls that organizations need to be aware of relating to product standards and safety. She also addressed some follow-up questions.

Q: How does the Consumer Product Safety Commission enforce its product safety standards?

A: The Consumer Product Safety Commission (CPSC) has created a public database to report consumer incidents, which can be found at www.saferproducts.gov. We generally recommend that any company that makes consumer products should register on that website. That way, the company can get reports or notices when an incident has been reported, and the company will have an opportunity to respond and have its say. That database is also searched by plaintiff’s counsel or the like, and its contents are public, so by being registered companies can also see who has filed complaints and so on. The CPSC has the authority to pursue recalls and even ban products that they think are very dangerous, and to impose significant civil monetary penalties on companies that fail to report safety incidents, product defects, and other violations in a timely manner. So, we do recommend that clients pay attention to the reporting activity on this database.

Q: What types of violations are typically reported, and is reporting mandatory?

A: Section 15(b) of the Consumer Product Safety Act (CPSA) requires mandatory reporting upon receipt of information that reasonably supports the conclusion that any product over which the agency has jurisdiction fails to comply with a product safety rule, regulation, standard, or ban; has a substantial risk of injury to consumers; or creates an unreasonable risk of serious injury or death. There are a few specific triggers or statutory violations, such as death from choking on toys or the presence of poisons or hazardous substances. So, any violation that indicates the product may be defective, or the occurrence of an injury caused by the product, may trigger that duty to report.

Q: Who has the duty to report, and what are the penalties for failure to comply?

A: Manufacturers, importers, distributors, and retailers – basically, anyone in the distribution chain – has a legal obligation to report. It may be that a manufacturer has more information and a higher duty to report that information, but even retailers that receive information that indicates a problem with the product they have sold have the legal obligation to report. The language of the CPSA says that you must report “immediately” upon receiving information that reasonably supports the conclusion that there’s a failure to comply with product safety standards. “Immediately” is defined as within 24 hours of obtaining reportable information, so that’s a pretty strict standard. But the affected party does get a reasonable time to investigate the claim and determine whether the information is valid and should be reported (generally 7-10 days). That said, failure to report in a timely manner may lead to a claim by the CPSC for significant civil monetary penalties, as well as increased compliance requirements.

Q: In terms of recalls on online marketplaces, is there any specific guidance on online marketplaces and distributors?

A: The thing to keep in mind with online marketplaces is that the retailers also have a duty to report under the CPSA. There are two ways that the retailer can fulfill the duty to report. The first is to actually file a section 15(b) report. The second is to write a letter to the manufacturer or importer, with a copy to the CPSC, saying it has received these reports of product incidents or defects and they need to be addressed.

Q: What are manufacturers’ and retailers’ obligations regarding warranties?

A: The Magnuson-Moss Warranty Act (the Act) applies to consumer products or combination sales of products or services and provides specific requirements that warrantors must meet when providing a written warranty. There are three essential rules or requirements to keep in mind under the Act. The first is the Disclosure Rule, which says that all consumer product warranties must be titled “full” or “limited,” and limited warranties must be made available in a single, clear, easy-to-read document. The second is the Presale Availability Rule, which stipulates that the warrantor and the seller must ensure that warranties are available wherever consumer products are sold – with the exception of products that retail for $15.00 or less. The third is the rule on Informal Dispute Resolution Procedures, which essentially makes it easier for consumers to take companies to court. The Magnuson-Moss Rule also prohibits specific types of conduct; for instance, you’re not allowed to disclaim or modify implied warranties (such as the warranty of merchantability) during the term of your express warranty or condition warranty service on registration or return of a warranty card. Moreover, the Act prohibits “tying” warranty coverage to use of the warrantor’s parts or service providers.

Q: Do warranty requirements vary by state?

A: Some states have warranty laws that apply only to specific types of products, such as cars or recreational vehicles, and are meant to provide additional protections to purchasers of those products. Other states have laws that specifically apply to extended warranties or service contracts, which really aren’t warranties at all, but rather are a form of insurance. California’s Song-Beverly Act is the strictest state warranty law in the country and has numerous specific requirements.

Guidance surrounding consumer product safety and warranties is ever evolving. For more information, watch the full webinar, or contact our panelist, Melissa L. Steinman, to learn more about our Advertising and Marketing services.

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Electric Vehicle Company Hit with Post-SPAC-Merger Securities Suit

In the latest SPAC-related securities class action lawsuit filing, a plaintiff shareholder has filed a securities class action suit against electric vehicle company Lightning eMotors and certain of its directors and officers, after the company disappointed investors in its first post-SPAC-merger financial release. As discussed below, the Lightning eMotors SPAC-merger transaction was already the subject of a separate, prior Delaware Chancery Court action. A copy of the new federal court securities class action lawsuit complaint can be found here.

  Background

GigCapital 3 was a special purpose acquisition company (SPAC). GigCapital 3 completed its IPO on May 18, 2020. On December 10, 2020, GigCapital entered business combination agreement with Lightning eMotors, pursuant to which the two companies would merge and Lightning eMotors was to be the surviving company. The business combination closed on May 6, 2021 and the merged company’s shares began trading on the NYSE on May 7, 2021.

  On August 16, 2021, the Company announced its financial results for the second quarter of 2021. The financial results included a quarterly net loss per share of $0.79 compared to a loss of $0.10 in the second quarter of 2020. The company also pulled its full year financial guidance for the remainder of 2021. According to the subsequently filed securities class action lawsuit complaint, the company’s share price declined about 17% on the news.

  The Lawsuit

On October 15, 2021, a plaintiff shareholder filed a securities class action lawsuit in District of Colorado against Lightning eMotors; its CEO; and its CFO. The new class action complaint does not name any of the former executives of the SPAC as defendants. The complaint purports to be filed on behalf of a class of investors who purchased Lightning eMotors between May 7, 2021 (the date the merged company’s shares began trading on the NYSE) and August 16, 2021 (the date of the second quarter financial release). 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. The complaint seeks to recover damages on behalf of the class.

  The complaint alleges that during the class period the defendants made false or misleading statements or failed to disclose that: “(i) the Company would record a substantially greater net loss per share in the second quarter of 2021 compared to the second quarter of 2020 and would pull its full year guidance for the remainder of 2021; (ii) accordingly the Company materially overstated its financial position and/or prospects; and (iii) as a result, the Company’s public statements were materially false and misleading at all relevant times.”

  Discussion

By my count, this lawsuit is the 25th SPAC-related securities class action lawsuit to be filed this year. It is also one of many SPAC-related securities suits that have been filed against companies in the electric vehicle industry and it is one of many in which the post-SPAC merged company disappointed investors in its first post-merger earnings release.

  If the names of the SPAC, GigCapital 3, and of the SPAC target company, Lightning eMotors, seem familiar, it is because the transaction in which the two merged is already the subject of pending litigation. As I discussed in a blog post at the time (here), on August 4, 2021, a plaintiff shareholder filed a state law breach of fiduciary duty lawsuit in Delaware Chancery Court against the SPAC’s sponsor, GigAcquisitions3; the SPAC’s CEO Avi Katz; and five other former directors of the SPAC. The Delaware Chancery Court action does not name Lightning eMotors as a defendant, nor does it name any Lightning eMotors executives as defendants. The complaint alleges that the sponsor and directors had conflicts of interest and had financial incentives to enter into the merger; the complaint also alleges that pre-merger redemptions of SPAC shareholders meant that the cash value of the merged company was substantially less than the merger valuation, and that the valuation was supported only through the provision of inflated revenue projections for the target company. The Delaware lawsuit purports to be filed on behalf of a class of investors who held shares of the SPAC between the record date and the closing date.

  The relationship between these two lawsuits is interesting. Though they both ultimately relate to the same transaction, they do not overlap at all. The defendants named in the two lawsuits are completely different; none of the defendants named in the Delaware lawsuit are named in the new federal court lawsuit and vice versa. Similarly, the purported classes do not overlap at all either; the end date of the Delaware lawsuit class is the day before the beginning date of the new federal court lawsuit class.

  The lack of overlap between these two lawsuits means that the lawsuits trigger different towers of insurance. The Delaware lawsuit would trigger the former SPAC’s runoff D&O insurance policy, while the new federal court lawsuit would trigger the go-forward D&O insurance put in place for the merged company. This unusual set of circumstances may mean that this litigation could avoid the type of “Tower vs. Tower” insurance coverage disputes that overlapping claims could create (as discussed here).

  The accumulation of lawsuits relating to this one SPAC transaction does show how SPAC activity can lead to the proliferation of litigation, as there are different groups of potentially aggrieved persons and different groups of potential litigation targets, as well as different categories of alleged wrongful acts. While each set of circumstances of course has its own particular aspects, the common characteristics of the circumstances surrounding many SPAC transactions does suggest that we will continue to see many more SPAC-related lawsuits in the future – particularly for company’s the stumble out of the gates post-merger – even if the merged company is not in the electric vehicle industry.

Electric Vehicle Company Hit with Post-SPAC-Merger Securities Suit published first on http://simonconsultancypage.tumblr.com/

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Australian Bond Climate Change-Related Disclosure Class Action to Proceed

An Australian Federal Court class action lawsuit alleging that the Australian Federal Government failed to disclose to investors the climate change risks associated with the government’s sovereign bonds has survived in part an attempt by the government to have the action dismissed. In an October 8, 2021 Judgment (here), a Federal Court of Australia Judge “declined to strike-out” the applicant’s claim based on allegations of misleading or deceptive conduct, while agreeing with the government to “strike-out” others of the applicant’s claims, as discussed below. The court’s rulings in this case arguably represent something of a milestone in the development of climate change-related litigation.

  Background

As discussed in detail here, in July 2020, Kathleen O’Donnell, a then-23 year-old student, filed an action in the Victoria Registry of the Federal Court of Australia on her own behalf and as representative for investors who purchased certain designated exchange-traded Australian Government Bonds at any time since July 7, 2020. O’Donnell, the applicant, named as respondents the Australian Government and two government officials.

  The lawsuit asserts three claims based on allegations that the bonds face material climate-change related risks that the applicant asserts should have been disclosed in the bond offering documents: first, a “misleading or deceptive conduct claim” against the government, based on alleged violations of Section 12DA(1) of the Australian Securities and Investments Commission Act of 2001; second, a “disclosure duty claim” against the government, based on the allegation that the respondents violated their fiduciary duty of utmost candor and honesty to investors; and third, a claim against the two government officials alleging that they violated their duties under the Public Governance, Performance and Accountability Act of 2013 (PGPA).

  The climate change risks the applicant claims the government should have disclosed in the bond offering documents include the existence, nature, and extent of physical risks (such as increased temperature, droughts, and bushfires); of transition risks (such as increased exposure to stranded assets and legal action); and of risks of sovereign response to climate change (such as for example treaty requirements). These various omissions, the applicant asserts, were material to investors’ decisions to purchase or trade in the bonds.

  Acting in a representative capacity, the applicant seeks judicial declarations that between July 7, 2020 and August 6, 2021 the government breached its disclosure duties through its failure to disclose material climate change information; and that the two government officials violated their duties under the PGPA. Acting in an individual capacity, the applicant sees to enjoin the government and the two officials from further promoting the bonds or issuing further bonds until the government provides disclosure in such form as the court deems necessary to inform the applicant and investors concerning material climate change information.

  The government filed an application to the court seeking orders to strike-out the applicant’s Amended Statement of Claim and to refuse leave to the applicant to file a proposed further Amended Statement of Claim.

  The October 8, 2021 Judgment

In a very October 8, 2021 Judgment, Federal Court of Australia Judge Bernard Murphy issued three rulings; first, he refused the respondents’ application for an order that the proceeding not proceed as a representative proceeding; second, he granted the application for an order to strike-out the disclosure duty and PGPA Act claims, on the grounds that the applicant has no standing to bring them; and third, he declined to strike-out the misleading or deceptive conduct claim.

  As a result of Judge Murphy’s determination, the proceeding will not go forward as to the two government officials the applicant had named as respondents, but the proceeding will go forward as to the government itself – but only with respect to the applicant’s misleading or deceptive conduct claim, not as to the other claims that the applicant had sought to assert.

  With respect to the misleading conduct claim, Judge Murphy did say that the pleading “will require improvement as the proceeding progresses,” commenting further that he “consider it sufficient for the case to go forward at this stage,” as it “meets the primary purpose of a pleading by putting them on notice of the case they must meet.” The applicant, Judge Murphy said, “will be directed to put on a revised pleading after discovery.”

  Discussion

Even though Judge Murphy granted the respondents’ application to strike two of the applicant’s substantive claims, the applicant’s third claim for misleading or deceptive conduct will go forward as to the government. For even just the one claim to survive the initial pleading hurdle is a very significant development, and not just for purposes of the immediate proceeding. This development could have significant implications both in Australia itself and in other jurisdictions as well with respect to climate change related disclosures in connection with government-issued sovereign bonds.

  A law firm memo published when the applicant first filed her proceeding noted that her action was “the first-of-its kind worldwide” in that it represents a climate change disclosure action against a sovereign government. The applicant’s success in surviving the initial pleading hurdle, if only in part, may hearten activists and prospective claimants elsewhere, as they seek to use legal claims and liability actions to advance climate change-related agenda.

  The applicant’s proceeding is of course based on Australian law, and the bases of the claims may not translate into the applicable laws of other jurisdictions. In addition, the claims against the government officials did not survive, which may cast doubt on the viability of pursuing climate change-related disclosure claims directly against government officials.

  Nevertheless, the survival of even just one of the applicant’s claims in this action arguably is a milestone event. Climate change activists around the world have been experimenting with different type of claims and different types of legal theories to try to identify approaches that might permit them to use legal proceedings to leverage action on climate change-related issues. The survival of this lawsuit may suggest ways that activists can put pressure on governments for further climate change-related disclosure in connection with their sovereign bond offerings. Further, the possibility of this type of lawsuit could pressure governments to proactively address climate change issues in their bond offering documents.

  Another potential implication of this case that has to be considered is its potential significance for climate change litigation against companies. The transferability of the determinations in this action to corporate climate change related litigation may be limited. However, the court’s ruling here could be a sort of a steppingstone on the path toward further climate change related litigation. If nothing else, the determinations in this case show that there is value for activists in continuing to experiment to try to find ways to use the courts to advance their climate change agenda; testing legal theories and procedural approaches could eventually identify means to press these kinds of issues in court.

  One final note about the developments in this Australian proceeding, and that is that this case is one more piece of evidence that climate change issues increasingly are moving to the top of the priorities list. The prospect of further litigation is only one factor; the likelihood of regulatory action (for example through ESG disclosure reforms of the type that are actively being considered by the SEC under Gary Gensler). If climate change activists are to be believed, pressure could also come in more immediate form – such as through floods, hurricanes, droughts, wildfires, rising temperatures, coastal flooding, and other manifestations.

Australian Bond Climate Change-Related Disclosure Class Action to Proceed published first on http://simonconsultancypage.tumblr.com/

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