The news that Volkswagen employed sophisticated
software-based “defeat devices” in order to permit a number of its diesel-engine
models to appear to meet U.S. emissions standards has dominated the headlines
in the business pages over the last few days. The news has already led to the resignation of its embattled CEO, Martin
Winterkorn. In addition to regulatory enforcement proceedings, the company faces
possible criminal action as well as a host of consumer lawsuits. In addition,
on September 25, 2015, plaintiff’s lawyers filed a securities class lawsuit in
the Eastern District of Virginia against VW, its U.S. operating divisions, and
certain of its directors and officers, on behalf of investors who purchased
VW’s American Depositary Receipts (ADRs) in the United States. As
discussed below, there are a number of interesting features to this new
securities lawsuit. In addition, as also discussed below, a Dutch investors’
association has separately initiated an effort under Dutch collective action
statutory provisions to pursue claims against VW, as well.
A copy of the plaintiffs’ attorneys’ September
25, 2015 press release about the U.S. lawsuit can be found here. A copy of the U.S.plaintiff’s complaint can be found here.
Background
On September 18, 2015, the U.S. Environmental
Protection Agency issued a press release (here) announcing it was serving a notice of violation on VW and its U.S.
operating units, alleging that in approximate 482,000 diesel-engine VW and Audi
vehicles the company had employed sophisticated software to circumvent EPA
admissions standards for air pollutants. The software detects when the vehicle
is undergoing an admissions test, triggering the operation of the vehicle’s
full emissions controls, greatly reducing the vehicle’s air pollution
emissions. This arrangement allowed the vehicles to meet emissions standards in
the laboratory, but during normal operation the vehicles nitrogen oxide
emissions were up to 40 times the standard. That same day, the California Air
Resources Board also issued an in-use compliance letter to the auto manufacturer.
On September 25, 2015, Germany’s transport minister reported that VW had rigged emissions tests on an
additional 2.8 million vehicles in Germany, nearly six times as many as the company
had admitted to falsifying in the U.S. That same day, after appointing a new
CEO, the company announced its Supervisory Board had authorized U.S. and German
lawyers to conduct an independent investigation of the actions within the
company that led to the installation of the emissions testing “defeat devices”
in the company’s vehicles.
All of these developments came just days after
the company’s September 11, 2015 press release in which the company announced that it was
the “world’s most sustainable automotive group,” citing an independent group’s
award of high marks to the company “in the areas of codes of conduct,
compliance and anti-corruption as well as innovation management, climate
strategy, and life cycle assessment” and for the company’s role as
benchmark-setting industry member for “supplier management and environmental
reporting.” That’s what you call ironic. (Hat to Chad Heminway of Advisen for identifying the company’s sustainability press release.)
Interestingly, the California environmental
enforcement agency said in its September 18, 2015 notice letter that VW had
admitted its use of a defeat device in its vehicles to regulators on September
3, 2015, several days before the
company’s self-congratulatory press release about its “sustainability”
achievements.
As might be expected, consumer lawsuits have
quickly followed the news about the environmental enforcement actions. Within
days of the news, Reuters was reporting (here) that there were already over two dozen consumer class action lawsuits in
the U.S. filed on behalf of car owners who had purchased the affected vehicles,
and NPR’s latest tally is that there are 34 lawsuits and maybe
more. These consumer claims are different in kind and character than
previous consumer class action lawsuits filed against automobile manufacturers,
in that these circumstances do not involve passenger deaths or even
accident-related vehicle damage. The plaintiffs’ lawyers apparently intend to
pursue damages claims on several different theories: first, that the vehicle
owners are entitled to compensation because the diesel-powered vehicles cost
several thousand dollars more than gasoline powered cars; second, because the
anticipated costs of operating these vehicles will be higher in the future; and
third, because the vehicles will have lower resale values. These claims are different
in kind and character than previous consumer class action lawsuits that have
been filed against automobile manufacturers, in that these circumstances do not
involve passenger deaths or even accident-related vehicle damage.
Several states attorneys general have announced that they are launching their own
investigations of the circumstances surrounding the emissions scandal.
The company faces the prospect of massive civil
penalties. The EPA can imposed fines of up to $37,000 for every vehicle for
Clear Air Act violation, which would equate to a total penalty of about $18
billion. The Clean Air Act also authorizes criminal prosecution for tampering with “any monitoring device
or method” required for tacking emissions. There are numerous press reports that the U.S. Department of Justice has
launched an investigation of the company. In addition, in a September 23, 2015
press release (here), Volkswagen reported that the Executive Committee of Volkswagen’s
Supervisory Board had authorized the company to submit a complaint to the State
Prosecutors’ office in Brunswick. Wayne State University Law Professor Peter
Henning has an interesting September 24, 2015 post on his New York Times White Collar Watchblog (here) analyzing the potential criminal consequences
for Volkswagen from the emissions scandal.
The U.S. Securities Class Action Lawsuit
A local police pension fund has now launched a
securities class action lawsuit in the Eastern District of Virginia against the
company, its U.S. operating units and seven of the company’s current and former
directors and officers. The lawsuit, which was filed on behalf of investors who
purchased the company’s sponsored ADRs in the United States between November
19, 2010 and September 21, 2015, seeks to recover damages for alleged
violations of the Securities Exchange Act of 1934.
According to the plaintiff’s lawyer’s press
release, the complaint alleges that the defendants “misled investors by failing
to disclose that the Company had utilized a ‘defeat device’ in certain of its
diesel cars that allowed such cars to temporarily reduce emissions during
testing, while achieving higher performance and fuel economy, as well as
discharging dramatically higher emissions, when testing was not being conducted.
The use of this device allowed Volkswagen to market its diesel vehicles to
environmentally conscious consumers, increasing its sale of diesel cars
in the United States and abroad and, as a result, its profitability.”
Discussion
The plaintiff’s lawyers chose to file their
securities lawsuit in the Eastern District of Virginia because that is where
VW’s U.S. unit is headquartered. However, not uncoincidentally, the Eastern
District of Virginia also happens to be the so-called Rocket
Docket court, which has the shortest average time from filing to resolution of civil
actions of any U.S. district court. In other words, we are not going to have to
wait long to see how this case will turn out.
Assuming for the sake of discussion that the
case survives a motion to dismiss, it will be interesting to see how valuable
this U.S.-based securities case turns out to be for the plaintiff class.
Although VW’s market cap is over $50 billion (even after the recent 30% drop in
the company’s share price), only a small fraction of its securities trade as
ADRs in the U.S. Indeed, only a very small fraction of its overall shares are
held by private investors. Over half of the company’s shares are owned by the Porsche
family, another twenty percent is owned by the state of Lower Saxony, and
seventeen percent is held by the sovereign wealth fund of Qatar. The investing
public holds only about 12 percent of the company, of which the U.S. ADRs
represent only a small fraction.
Because of the restrictions described by the
U.S. Supreme Court in its 2010 decision inMorrison v. National Australia
Bank, the U.S. securities laws apply only to investors who purchased
their shares on U.S. exchanges and to domestic transactions in other securities
– which explains why the plaintiff’s lawyers here filed the lawsuit only on
behalf of U.S. ADR investors.
The interesting thing about that is that the VW
ADRs trade only over the counter (OTC), not on an exchange. The fact that the ADRs
only trade over the counter wouldn’t seem to matter because the investors’
purchase of the ADRs would still seem to meetMorrison’s second
prong, referring to domestic transactions in other securities.
However, the extent of applicability of the U.S.
securities laws to unlisted ADR transactions is one of those interesting
questions that has continued to trail along after the U.S. Supreme Court’s Morrison decision. At least one federal judge has
held in light of Morrison that the U.S.
securities laws do not apply to unlisted ADR transactions (refer here for a discussion of Judge Berman’s September 2010 decision in the
Société Générale case). This same issue has come up in a number of other recent
U.S. securities suits involving non-U.S. companies whose unlisted ADRs trade
over the counter in the U.S., including in particular in connection with the U.S. securities suit filed against Tesco and certain of its directors and officers.
This is an issue that will have to be sorted out in this case as well.
In light of these concerns and in light of the
fact that a significantly greater portion of the company’s share ownership is
held as a result of transactions on the Frankfurt stock exchange, it will be
interesting to see if investors seek to pursue securities claims against the
company and its directors and officers in German courts, under German law.
However, claimants seeking to pursue securities law claims under German law
using the procedures detailed in the KapMuG statutory
provisions have not enjoyed noteworthy success.
Of perhaps greater interest for a different
set of VW investors is the initiative of the Netherlands-based investors’
association VEB, which on September 25, 2015 announced (here) that it has initiated a liability claim under Dutch law on behalf of
VW shareholders who purchased their shares through a Dutch bank or
broker. The group said in its announcement that it issued the liability claim
“in order to be able to represent Dutch and European investors who acted
through a Dutch bank or broker in a possible lawsuit.” VEB also said that it
has “invited Volkswagen to discuss possible compensation for the losses
incurred by these investors.” As discussed here, in 2012, the Amsterdam Court of Appeals approved of a collective
settlement of securities claims against Converium and held that the settlement
was binding even though the company involved was not based in the Netherlands
and the shares represented in the collective action settlement had not been
purchased on a Netherlands exchange. As discussed here, a group of Tesco shareholders is attempting to organize a similar
action in the Netherlands against the UK-based grocery store chain (which is
distinct from the separate effort to organize a collective action in the UK).
The proposed Dutch action that VEB is organizing
will be of interest to some VW shareholders, but as framed by VEB, the
potential benefit of the action would be limited to those who purchased their
shares through a Dutch bank or broker, which would obviously omit from any
collective settlement the bulk of VW investors.
In thinking about potential liability issues
involved here, it is important to note that in the wake of the emissions
scandal, there has been a great deal of criticism of VW’s supervisory board, as
evidenced, for example in the September 25, 2015 New York Times article entitled “Problems at VW
Start at the Boardroom” (here). As the article details, the company’s supervisory board is dominated by
the Porsche family and otherwise populated by representatives of the other
large shareholders, the state of Lower Saxony and the Qatar sovereign wealth
fund. This composition would seem to make it unlikely that the supervisory
board would pursue a breach of fiduciary duty claim against the company’s
management board, under the procedures contemplated in the company’s corporate
laws defining the country’s dual-board governance standard.
There is a possible approach based on a prior
German corporate scandal that might allow the company to achieve the same
outcome as a lawsuit might permit but without the need for the supervisory
board to actually pursue claims against the members of the management board. As
discussed here, in 2009, Siemens reached a 100 million euro settlement with its D&O
insurers, in resolution of potential corruption-related claims the company’s
supervisory board could have filed against the company’s management board. The
settlement was the result of negotiations between Siemens and its D&O
insurers and reflected the parties’ compromise of the D&O insurers’
potential coverage defenses. In connection with the settlement, several
individual former Siemens directors and officers agreed to make substantial
settlement contributions out of their personal assets. The Siemens case provides
a possible template for an approach that the VW supervisory board might try to
take with respect to any arguable claims that the supervisory board might
otherwise pursue against the company’s management board.
The company’s D&O insurer’s willingness to entertain
the discussion of a settlement of this kind would likely be substantially
affected by the extent of the success of the U.S. securities lawsuit, as well
as the extent to which the policy’s proceeds are called upon for purposes of
provide individuals with a defense to the prospective criminal proceedings.
Another issue that potentially could affect the
availability of D&O insurance coverage is the fact that the company has
admitted that it used the defeat devices to rig the emissions tests. But though
the company has admitted wrongdoing, so far all of the company’s senior
officials have denied knowledge of the emissions testing misconduct. In
addition, a D&O insurance policy’s fraudulent or criminal misconduct
exclusion typically is only triggered if there has been an adjudication or
judicial determination that the precluded conduct took place, so all else equal
the fact that the company has publicly admitted the emissions testing
wrongdoing would not necessarily affect the availability of coverage under the
company’s D&O insurance policies. In addition, even if the prospective
criminal proceedings result in convictions against one or more company
officials, the verdict or guilty plea likely would only affect the availability
of insurance for the convicted individual.
Where things could get interesting would be if
VW were, as General Motors recently did in connection with the U.S. auto
manufacturer’s ignition switch scandal, to enter into a plea agreement with
prosecutors in which the company admits to wrongdoing. Were that to happen, the
company could, depending on how the plea agreement or other case resolution was
framed, result in the preclusion of coverage under the policy for the company
itself.
In any event, the new U.S. securities lawsuit
filed against VW and certain of its directors and officers does reflect a
number of recent securities class action lawsuit filing trends.
For starters, it represents yet another example
of a securities lawsuit filed against a company in the wake of environment
enforcement-related problems at the defendant company. As I noted in a recent
post (here), during the financial crisis, environmentally-related securities lawsuits
fell off the radar screen for a while, and more recently attention-grabbing
D&O lawsuits like claims relating to cyber security issues have attracted
all of the attention, but environmentally-related issues have been and remain
an area of focus for plaintiffs’ attorneys.
In addition, the lawsuit against VW also
represents the latest U.S. securities class action lawsuit filed against a
non-U.S. company. Securities suit against foreign companies have been and
remain a significant component of all securities suits filed in the U.S. In
2014, suits against non-U.S. companies represented 19% of all U.S. securities
suit filings during the year. This trend has continued in 2015, as the 28
lawsuits filed so far against non-U.S. companies represent 19.5% of all
securities class action lawsuits filed this year. Non-U.S. companies represent
only about 16% of all companies listed on U.S. exchanges, so the involvement of
non-U.S. companies in U.S. securities class action litigation is
disproportionately greater than their representation on the U.S. exchanges.
The lawsuit against VW is also the latest
example of a case in which a prominent non-U.S. company caught up in a
high-profile scandal has become ensnared in U.S. securities litigation. Other
prominent recent examples include Tesco, Toshiba and Petrobras. In each case,
the vast proportion of shares of the companies involved trade outside of the
U.S., making it much more difficult for the bulk of affected investors to seek
to pursue damages for their losses. In many of these cases, the investors who
purchased their securities in the U.S. will likely be able to recover on their
losses, while the investors who purchased their shares on exchanges in the
countries’ home countries may go empty-handed.
No comments:
Post a Comment