A group of institutional investors have brought a claim against Boohoo Group plc (Boohoo) asserting breaches of the Financial Services and Markets Act 2000 (FSMA).
The claim focuses on Boohoo's alleged failure to disclose information relating to the daily wages paid to workers at supplier factories in Leicester. It is alleged that when the information became publicly available, it caused a significant decline in Boohoo's share price, resulting in losses to investors.
Background
Fast fashion retailers, which replicate high-fashion designs and mass produce them at a low cost to meet retail demand, have doubled the size of the fashion industry in the last 15 years. The demand for fast fashion from retailers like Boohoo, which defines itself as "a leading online fashion group", drives an already labour-dependent industry. Concerns have been expressed in the global press about the fast fashion industry's sustainability and the treatment of workers in the supply chain.
In July 2020 and November 2022, The Sunday Times, and subsequently the BBC's Panorama later in 2023, published findings that one of Boohoo's suppliers' factories in Leicester was paying workers as little as £3.50 an hour. This contrasts with the national minimum wage rate, which at £10.42 in 2023, was almost three times higher. Following the publication of these reports, Boohoo's share price declined and generated market value losses of £1.5 billion, resulting in losses to investors.
The claim
The claimants comprise 49 institutional investors, including the California State Teachers' Retirement Fund, which has assets totalling £332.5bn. Their lawyers report that the claimants are seeking more than £100m in damages (plus interests and costs) from Boohoo on the basis that investors who purchased their shares in the years leading up to the first report in The Sunday Times suffered loss because of the decline in share price and suffered further losses following the subsequent reports.
The claimants' case uses the statutory liability imposed by s.90 and s.90A FSMA (explained below). The claim against Boohoo is that it made untrue or misleading statements in its relevant published materials, or that it failed to make statements, or delayed their disclosure, in relation to the wages paid to its Leicester factory workers.
ss.90 and 90A FSMA
S.90 FSMA provides that a person responsible for listing particulars, supplementary listing particulars, prospectuses or supplementary prospectuses (which includes the issuer of securities and each of the directors at the time the particulars were submitted to the FCA) will be liable to pay compensation to a person who has: (1) acquired relevant securities (here shares in Boohoo); and (2) suffered loss in respect of them as a result of any untrue or misleading statement in the particulars, or any omission of information required to be included which was not.
There is no express requirement for investors to prove that they relied on the alleged misstatements or omissions. The only causative link required is that the misleading information or omission caused the loss. However, there is an exemption from liability if the issuer/directors reasonably believed (having made such enquiries, if any, as were reasonable) that the statement was true and not misleading and continued in this belief until the time when the securities were acquired.
S.90A and Schedule 10A of FSMA impose liability on the issuer of securities to a person who: (1) acquires, continues to hold, or disposes of securities in reasonable reliance on published information; and (2) suffers loss in respect of the relevant securities as a result of any untrue or misleading statement in that published information, or any omission from the published information which was required to be included.
A claim under s.90A FSMA requires the person discharging managerial responsibilities at the issuer (which includes directors) to know, or be reckless as to whether, the statement was untrue or misleading, or knew the omission to be a dishonest concealment of a material fact or to have dishonestly delayed making a market announcement. In addition, to succeed in a s.90A claim, the investor must have reasonably relied on the statement.
Use of FSMA as an ESG related cause of action
The claim against Boohoo is a first of its kind securities dispute, focussing on issues relevant to the "S" in ESG. Claims under s.90 and s.90A FSMA have historically not been common in the English courts (and most claims have settled before trial), but they are now on the rise. There are several challenges to bringing these claims, including difficulties in establishing the causal link between a false or misleading statement and a decline in share price and the challenge of identifying a specific person discharging managerial responsibility who had the requisite knowledge to sustain a s.90A claim.
For some time now, it has been anticipated that securities litigation might be used for ESG-related claims. As the world becomes more conscious of ESG issues, the risk that reports of unfavourable behaviours will impact share price has increased. Investors have become more wary about companies' environmental and human rights credentials.
While the claim against Boohoo will be closely watched as breaking new ground, it is therefore thought that more such claims will emerge soon. This can be attributed to several factors, including the following.
- Litigation funding
The cost of defending climate actions is increasing, as is the quantum of damages sought. This has resulted in a rise of third-party litigation funding specifically for climate litigation and/or ESG claims. As more ESG disclosures and reporting obligations are established for listed companies, the risk of claims increases.
Litigation funders have shown interest in supporting other large ESG actions. For example, the group action in Municipio de Mariana v BHP Group UK Ltd and Ors (which is reported to have already cost £70m) is being funded by litigation investors including Prisma Capital and North Wall Capital. It would seem a natural progression for litigation funders to take an interest in backing group securities litigation based on ESG disputes.
- Shareholder activism
Shareholder activism is increasing among holders of listed securities. Many listed companies now have a broad shareholder base, often comprised of at least one activist shareholder, such as ClientEarth holding 27 shares in Shell. Shareholder activism in relation to ESG related matters is increasing and expected to continue as an ESG litigation trend.
Section 90 and 90A FSMA claims are an important tool in the activist shareholder's toolbox and while they are not without their challenges, they may result in more positive legal outcomes than pursuing common law claims (the difficulties with which were demonstrated in ClientEarth v Shell).
- Increased ESG disclosures
Domestic litigation relating to climate disclosures is likely to increase amidst the increase in climate reporting and disclosure obligations introduced by instruments such as the Sustainability Related Financial Disclosures, the Taskforce on Climate Related Financial Disclosures, and the new Taskforce on Nature Related Financial Disclosures.
Furthermore, the introduction of the Corporate Sustainability Due Diligence Directive, which will apply to both EU and non-EU companies with at least 1,000 employees and a net EU turnover of EUR 450m or more, will lead to further reporting and disclosure requirements for many listed companies with operations in the EU which will be scrutinised by investors.
Conclusion
It will remain to be seen how Boohoo responds to the claim brought by the institutional investors and the defences that will be raised. What is clear though is that this is a landmark case which will test the frameworks of securities litigation in relation to ESG disputes and may generate further claims under FSMA against other issuers where investors claim to have suffered losses arising from ESG related matters.
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