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August 01, 2010

Environmental Mishap Leads to Unwelcome Derivative Claim

Canadian Lawyer, INHOUSE, August 2010
by Marc McAree

From a terrorist attack to an oil well blowout to a serious workplace accident, threats to a company's financial viability come in many guises. Directors and officers have a fiduciary duty to anticipate problems, assess risks, devise an appropriate response strategy, and implement safeguards. Miscalculating the risks or ignoring a potential threat altogether simply fuels future litigation. And sometimes those legal challenges come from an unexpected quarter - a company’s own shareholders.

Several recent environmental disasters provide compelling object lessons.

The Exxon Valdez spawned more than two decades of litigation. Exxon paid billions of dollars to clean up the spill and compensate fishermen for actual damages. Litigation led to another $383.4 million paid in damages. But the legal fight about interest on damages continued. Not surprisingly, the Deepwater Horizon oil rig explosion on April 20, and the ensuing environmental disaster in the Gulf of Mexico, has also spawned litigation. Just in the two immediate weeks after the incident, more than 70 lawsuits were filed in United States Federal Court against BP plc companies, Transocean Ltd. companies, Halliburton, and Cameron International; 59 were class actions. By mid-June, the number of lawsuits filed had ballooned to more than 6,000.

Many of the early claims came from commercial fishermen, fish processors, seafood wholesalers and retailers, and charter boat and ferry boat operators. There have also been hundreds of claims by local and state governments, environmental groups, hotel owners, restaurants real estate firms, and property owners to cover current and future business and tourism-related losses, cleanup costs, and environmental damages.

On May 7, an interesting complaint was issued in Louisiana in Firpo v. Hayward. Katherine Firpo's claim is a verified shareholder derivative complaint, a suit brought by a shareholder on behalf of a corporation against a third party, often an insider of the corporation itself. The Firpo claim is filed in the name of and on behalf of nominal defendant BP with action brought against certain directors and officers of BP and other defendants.

The plaintiff is a "current shareholder of BP, having held American Depositary Receipts of BP since March 7, 2007.” Firpo pleads in common law and derivatively against certain directors and officers of BP for breach of fiduciary duties of trust, due care, oversight, good faith, candor, and loyalty, and waste of corporate assets. Firpo also pleads negligence, default, breach of duty, and/or breach of trust.

The upshot of Firpo's complaint is that certain BP directors and officers ". . . have unreasonably and unnecessarily caused BP to expend billions of dollars of corporate assets, and have subjected the company to additional liability in the untold billions of dollars, to the extreme detriment of the company.”

It is conceivable that in Canada the failure to evaluate, calculate, and mitigate risks that result in an environmental disaster could lead to the issuance of a Firpo-type claim. Under the Canada Business Corporations Act, s. 239, company shareholders may commence derivative actions. Derivative actions are also available under provincial laws including the Ontario Business Corporations Act, s. 246. Under the CBCA, the complainant may apply to the court for leave to bring an action in the name of the corporation. The complainant must give advance notice to the corporation's directors and act in good faith. The prosecution of such claim must "appear to be in the interests of the corporation."

The fact that derivative actions are statutorily available in Canada provides a strong incentive for directing minds of Canadian companies to diligently assess environmental and other risks of business operations.

Corporate counsel has a role here. The risk of derivative actions for bad corporate behaviour can and should be brought to the attention of company directors and officers. Corporate counsel should explain what a derivative action is and how daunting it is for the corporation and its directing minds, personally.

Identification, assessment, and mitigation of environmental risk should not be deferred on the board of directors' meeting agenda. Firpo and similar suits deliver an unyielding reminder that corporate directors and officers are exposed to personal risk of environmental liability. Corporate counsel ought to send a strong message to the board - preferably before disaster strikes.

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