The recent shareholder lawsuit against Entain, initiated after a bribery investigation, underscores a rising trend in corporate governance: shareholders increasingly leverage legal action taken by government agencies to hold companies accountable for alleged unethical practices. This case not only highlights the financial and reputational risks companies face when they fail to address corruption but also signals a broader movement where investors are becoming more proactive in enforcing corporate accountability. This article explores the driving factors behind this trend, the challenges claimants face in shareholder litigation, and the broader implications for companies under investigation for corruption.
Background: The Entain Bribery Probe
In December 2023, Entain, one of the world's largest gambling companies, entered into a Deferred Prosecution Agreement (DPA) with the UK Crown Prosecution Services (CPS), agreeing to pay £615m. The DPA followed an investigation by HM Revenue & Customs (HMRC) into activities of former employees and suppliers of Entain (formerly trading as GVC Holdings) within its Turkish-facing operations at a time when gambling was not yet legal in Turkey.1
In the aftermath, a group of shareholders initiated legal action against the company, claiming that Entain's management failed to disclose the risks and potential liabilities associated with the investigation and resulting DPA. It may serve as a crucial reminder to public companies of their obligation to disclose material risks and maintain high governance standards. As one legal advisor in the lawsuit stated, "This claim will offer institutional investors the opportunity to recover substantial losses but more importantly serve to improve transparency and governance within the UK's gambling sector, reminding public companies that they need to take their disclosure obligations seriously."2
The Rising Trend of Shareholder Action Over Corruption Allegations
The Entain case is part of a broader trend where shareholders are becoming more active in responding to corporate misconduct, particularly bribery and corruption. Several factors contribute to this increasing trend.
Global Crackdown on Corruption
There has been a global push towards greater transparency and stricter enforcement of anti-corruption laws, accompanied by an increase in collaboration across international enforcement agencies. This growing trend of enhanced cooperation is evidenced by notable cases against major corporations like Airbus SE, ABB Ltd, Glencore, and Ericsson. These cases demonstrate that coordinated investigations are making it increasingly difficult for companies to evade scrutiny, leading to an increased likelihood of legal repercussions.
The Rise of ESG Investment Considerations
Environmental, Social, and Governance (ESG) criteria have become a critical factor in investment decisions. Investors are scrutinizing companies not just for their financial performance but also for their adherence to ethical and governance standards. This shift is driven by the recognition that companies engaged in unethical practices pose significant financial and reputational risks.
MSCI Inc., a global provider of investment analysis tools, now includes an issuer's approach to managing bribery and corruption risk as part of its ESG ratings.3 Similarly, Institutional Shareholder Services (ISS) provides shareholder meeting research and voting recommendations, including guidelines to vote against directors in cases of significant governance failures, such as those involving bribery.4
Notably, pension funds are increasingly deploying exclusionary criteria, engagement, and active stewardship to align their portfolios with ESG factors. For instance, Norges Bank Investment Management, which manages the Norwegian Government Pension Fund Global, places investment companies under observation or excludes them due to conduct-based criteria, including gross corruption.5 Storebrand Asset Management, another leading Norwegian asset manager, similarly excludes companies from its investment portfolio for corruption and financial crimes.6
This trend underscores the growing importance of transparency and accuracy in ESG reporting. If investors can demonstrate that they relied on the company's governance disclosures and that these disclosures were misleading or incomplete, they may have grounds to commence litigation. Companies that fail to meet these heightened expectations not only risk damaging their reputations but also face the possibility of significant legal and financial consequences as investors become more proactive in holding them accountable for ethical governance failures.
Precedent and Legal Frameworks for Shareholder Litigation
The U.S. has long been considered a more litigious commercial environment with research indicating 3,225 securities class action lawsuits filed in the U.S. between 2012 and 2023.7 However, UK and European frameworks supporting shareholder litigation are becoming more robust, with courts increasingly willing to entertain these cases, increases in litigation funding and a rise of shareholder associations.8 Investors in the UK appear to be utilising s.90 and s.90A FSMA claims to pursue action against both Glencore and Petrofac in connection to their respective bribery cases;9 within the EU, nearly 1,500 cases have been filed against Volkswagen AG in connection with the "Dieselgate" scandal.10Further, significant class action settlements connected to ethics and governance failures, including the recent Petrobras securities litigation following their corruption case which settled with investors for $3 billion,11 reinforce the idea that shareholders can secure meaningful compensation for their losses.
Shareholder Lawsuits as Follow-on Litigation to Corruption Investigations
When shareholders turn to litigation, particularly in cases involving corruption, their actions are often driven by a combination of financial, ethical, and strategic considerations.
Financial Loss Recovery
The primary motivation for shareholder litigation is the recovery of financial losses. Shareholders typically sue to recover losses in share value that they believe are directly attributable to management's failure to disclose material information. For example, in the shareholder litigation against Brazilian oil giant Petrobras following the exposure of a bribery and corruption scheme, shareholders claimed substantial financial losses due to the company's failure to disclose the corruption. Investors felt this failure misled them about Petrobras's financial health and governance practices, leading to a sharp decline in the company's stock price.12
Corporate Governance and Accountability
Beyond financial recovery, shareholder lawsuits serve as a tool to enforce corporate governance standards and hold executives accountable for misconduct. By pursuing legal action, shareholders aim to deter future wrongdoing and promote ethical business practices. Notable examples include the lawsuits against Boeing following the crashes of two 737 Max planes, where shareholders accused the company's executives of failing to address known safety issues,13and the lawsuits against Wells Fargo executives in the wake of the fake accounts scandal.14
What Do Claimants Need to Prove in Shareholder Lawsuits?
Shareholder litigation over corporate misconduct, particularly in corruption cases, must prove several key elements. While most securities cases are settled or dismissed before a jury verdict, notable settlements show how claimants successfully address these elements. Such outcomes suggest companies often recognize that the claims would be costly or difficult to challenge in court.
- Material Misrepresentation or Omission: Claimants must demonstrate that the company made material misstatements or omissions regarding the alleged misconduct and, in some jurisdictions, that there was reliance on the company's statements. In the aftermath of the "Dieselgate" scandal, U.S. investors alleged that Volkswagen had made material misrepresentations regarding its compliance with emissions regulations by installing software in its diesel vehicles to cheat emissions tests, presenting these vehicles as environmentally friendly when they were not. The complaint alleged that the failure to disclose this fraudulent practice was a material omission that misled investors, leading to a significant drop in Volkswagen's stock price when the scandal was revealed. Volkswagen ultimately settled the claims for $48m. Volkswagen faces a number of related class actions in other jurisdictions.15 Current ongoing class actions in the UK under s.90 and s90A FSMA against Glencore and Petrofac assert similar claims by shareholders in that key corporate reporting and investment materials failed to disclose and misrepresented information about corrupt activity.16
- Causation: Shareholders must establish a direct link between the misrepresentation or omission and their financial losses. In practice one element they need to prove is the disclosure of the bribery allegations caused the company's stock price to drop, resulting in the financial harm they suffered. In a shareholder litigation against Walmart in connection to a bribery scheme at Walmart's Mexico subsidiary, claimants alleged that Walmart issued materially false and misleading statements regarding unlawful or unethical conduct and that as a result, Walmart's stock traded at artificially inflated prices. When journalists reported the alleged bribery, Walmart's stock price fell dramatically, resulting in a 5% loss from their Class period high. Walmart ultimately settled for $160m.17
- Knowledge of Wrongdoing: To succeed in a claim for fraudulent misrepresentation, claimants must also show that the company's executives knew about the misconduct or were reckless in not knowing. This is often the most challenging element to prove, as it requires evidence that senior management was aware of the illegal activities or deliberately turned a blind eye. In the shareholder lawsuit following the Wells Fargo scandal, plaintiffs successfully demonstrated this by showing that top executives, including former CEO John Stumpf, were aware of the widespread creation of unauthorized accounts by employees. The court found that letters to the board from employees, whistleblower hotline reports, and various regulatory investigations meant that the Board had personal awareness or were reckless not to have known about the misconduct.18
Shaping Investigations with Shareholder Action in Mind
Effective investigations into corruption allegations must be both responsive to the evolving facts and proportionate in their scope. While shareholder action may not always be the primary focus during such investigations, there are key principles that investigators should consider, particularly when the findings could draw significant interest from shareholders.
Identifying Themes and Red Flags
A crucial element of a robust investigation is the ability to identify and connect recurring themes or red flags across multiple sources. Failing to recognize these warning signs can severely undermine the company's defence if shareholders later claim that executives knew or should have known about the misconduct. This issue was central in the Wells Fargo case, where shareholders successfully argued that executives ignored numerous red flags, such as whistleblower reports and internal complaints, related to the unauthorized creation of accounts. To avoid similar pitfalls, management, and internal investigation teams must ensure that their investigative processes are thorough in surfacing reports of misconduct, even those that may bypass traditional channels. Additionally, investigations should aim to uncover root causes and detect patterns that could reveal deeper systemic issues within the company.
Documentation and Transparency
Meticulous documentation and transparent communication are essential components of a successful investigation. Investigators must carefully record their findings at every stage, especially when making critical decisions such as whether to communicate or self-report misconduct. Bearing in mind important considerations of privilege and confidentiality, thorough documentation not only ensures best practices are followed but also serves as a safeguard against potential future litigation. Inconsistent reporting, omissions, or gaps in the investigation process could be exploited by shareholders as evidence of the company's failure to disclose material information. Such failures can significantly exacerbate legal and financial risks, as seen in numerous high-profile cases. Moreover, clear documentation and transparency help build trust with stakeholders, demonstrating that the company is committed to addressing and rectifying misconduct.
Risk Management and Communication
In the face of ongoing investigations, companies must carefully balance the need for transparency with the risk of triggering lawsuits. In some situations, proactive communication with shareholders about potential risks can be a valuable tool in managing expectations and reducing the shock of future revelations. By providing early, controlled disclosures, companies can demonstrate their commitment to transparency and ethical governance, which may mitigate the impact of negative information that emerges later. However, this approach must be handled with precision; overly cautious disclosures can lead to accusations of withholding information, while too much transparency can prematurely escalate legal risks. Therefore, investigators must work closely with legal and corporate communications teams to craft messages that are both informative and legally sound, ensuring that the company maintains control over the narrative and reduces the likelihood of shareholder disputes.
Coordination with Regulatory Bodies
Finally, coordination with regulatory bodies is common for companies under investigation for corruption. During this process, companies often must respond to enforcement agencies and share potentially damaging information, which could later be used against them in shareholder lawsuits. For instance, admissions of wrongdoing in Deferred Prosecution Agreements (DPAs) or other settlements can be leveraged as evidence in shareholder litigation, increasing the company's legal and financial vulnerabilities.
To mitigate these risks, legal teams working on the investigation work closely with regulatory bodies to carefully negotiate the terms and language of such agreements. This includes crafting statements that satisfy regulatory requirements without unnecessarily broadening the scope of potential liability in future shareholder actions.
Conclusion
The shareholder action against Entain following the Turkish bribery probe underscores the shifting dynamics in corporate governance, where investors are increasingly leveraging legal measures to enforce accountability. This evolving landscape highlights the critical importance of ethical practices, transparency, and proactive communication in protecting shareholder interests.
As seen in the Entain case, companies under investigation for corruption must not only address the immediate legal challenges but also anticipate the potential for subsequent shareholder litigation. To mitigate these risks, companies need to implement robust compliance measures and ensure that their investigative processes are thorough, well-documented, and capable of identifying systemic issues. Effective coordination with regulatory bodies, careful management of public disclosures, and early engagement with shareholders about potential risks are essential strategies in navigating this complex environment.
The rise of shareholder activism, particularly in response to ethical and governance failures, signals that companies can no longer afford to overlook the implications of their actions—or inactions. By taking corruption allegations seriously and responding with transparency and accountability, companies can better manage the legal, regulatory, and reputational risks that increasingly define the modern corporate landscape.
Footnotes
1. https://www.cps.gov.uk/cps/news/first-ever-cps-deferred-prosecution-agreement-ps615-million
3. MSCI ESG Ratings FAQs for Issuers
4. https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf?v=1
5. https://www.nbim.no/en/responsible-investment/ethical-exclusions/exclusion-of-companies/
8. The Growth of Collective Shareholder Actions in Europe - Skadden, Arps, Slate, Meagher & Flom LLP: https://www.skadden.com/-/media/files/publications/2017/07/nycollectiveshareholderactionsineuropetakeaway0628.pdf
10. Germany: The EU Directive on representative actions- DWF LLP: https://www.lexology.com/library/detail.aspx?g=69f0bc0d-b433-44db-af64-b58845e6e3ab
11. https://www.issgovernance.com/petrobras-a-2-95-billion-tentative-settlement/
12. U.S. District Court — Southern District of New York Docket No. 14–cv–9662 (JSR).,14–cv–9662 (JSR).
14. https://www.wellsfargosecuritieslitigation.com/Content/Documents/Notice.pdf
15. https://www.issgovernance.com/volkswagen-agrees-to-48-million-settlement-with-u-s-investors/
16. Subject Matter of s.90/s.90A FSMA Claims; Debevoise & Plimpton May 2024
17. https://www.issgovernance.com/walmarts-first-ever-securities-settlement-totals-160-million/
18. https://corpgov.law.harvard.edu/2017/12/15/analysis-of-wells-fargo-shareholder-litigation/
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