UK - Shareholders - Boohoo Investors Seek Damages Following Share Price Decline Over ESG Disclosures Relating To Factory Workers (2024)

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A group of institutional investors have brought a claim againstBoohoo Group plc (Boohoo) asserting breaches of the FinancialServices and Markets Act 2000 (FSMA).

The claim focuses on Boohoo's alleged failure to discloseinformation relating to the daily wages paid to workers at supplierfactories in Leicester. It is alleged that when the informationbecame publicly available, it caused a significant decline inBoohoo's share price, resulting in losses to investors.

Background

Fast fashion retailers, which replicate high-fashion designs andmass produce them at a low cost to meet retail demand, have doubledthe size of the fashion industry in the last 15 years. The demandfor fast fashion from retailers like Boohoo, which defines itselfas "a leading online fashion group", drives analready labour-dependent industry. Concerns have been expressed inthe global press about the fast fashion industry'ssustainability and the treatment of workers in the supplychain.

In July 2020 and November 2022, The Sunday Times, andsubsequently the BBC's Panorama later in 2023, publishedfindings that one of Boohoo's suppliers' factories inLeicester was paying workers as little as £3.50 an hour. Thiscontrasts with the national minimum wage rate, which at£10.42 in 2023, was almost three times higher. Following thepublication of these reports, Boohoo's share price declined andgenerated market value losses of £1.5 billion, resulting inlosses to investors.

The claim

The claimants comprise 49 institutional investors, including theCalifornia State Teachers' Retirement Fund, which has assetstotalling £332.5bn. Their lawyers report that the claimantsare seeking more than £100m in damages (plus interests andcosts) from Boohoo on the basis that investors who purchased theirshares in the years leading up to the first report in The SundayTimes suffered loss because of the decline in share price andsuffered further losses following the subsequent reports.

The claimants' case uses the statutory liability imposed bys.90 and s.90A FSMA (explained below). The claim against Boohoo isthat it made untrue or misleading statements in its relevantpublished materials, or that it failed to make statements, ordelayed their disclosure, in relation to the wages paid to itsLeicester factory workers.

ss.90 and 90A FSMA

S.90 FSMA provides that a person responsible for listingparticulars, supplementary listing particulars, prospectuses orsupplementary prospectuses (which includes the issuer of securitiesand each of the directors at the time the particulars weresubmitted to the FCA) will be liable to pay compensation to aperson who has: (1) acquired relevant securities (here shares inBoohoo); and (2) suffered loss in respect of them as a result ofany untrue or misleading statement in the particulars, or anyomission of information required to be included which was not.

There is no express requirement for investors to prove that theyrelied on the alleged misstatements or omissions. The onlycausative link required is that the misleading information oromission caused the loss. However, there is an exemption fromliability if the issuer/directors reasonably believed (having madesuch enquiries, if any, as were reasonable) that the statement wastrue and not misleading and continued in this belief until the timewhen the securities were acquired.

S.90A and Schedule 10A of FSMA impose liability on the issuer ofsecurities to a person who: (1) acquires, continues to hold, ordisposes of securities in reasonable reliance on publishedinformation; and (2) suffers loss in respect of the relevantsecurities as a result of any untrue or misleading statement inthat published information, or any omission from the publishedinformation which was required to be included.

A claim under s.90A FSMA requires the person dischargingmanagerial responsibilities at the issuer (which includesdirectors) to know, or be reckless as to whether, the statement wasuntrue or misleading, or knew the omission to be a dishonestconcealment of a material fact or to have dishonestly delayedmaking a market announcement. In addition, to succeed in a s.90Aclaim, the investor must have reasonably relied on thestatement.

Use of FSMA as an ESG related cause of action

The claim against Boohoo is a first of its kind securitiesdispute, focussing on issues relevant to the "S" in ESG.Claims under s.90 and s.90A FSMA have historically not been commonin the English courts (and most claims have settled before trial),but they are now on the rise. There are several challenges tobringing these claims, including difficulties in establishing thecausal link between a false or misleading statement and a declinein share price and the challenge of identifying a specific persondischarging managerial responsibility who had the requisiteknowledge to sustain a s.90A claim.

For some time now, it has been anticipated that securitieslitigation might be used for ESG-related claims. As the worldbecomes more conscious of ESG issues, the risk that reports ofunfavourable behaviours will impact share price has increased.Investors have become more wary about companies' environmentaland human rights credentials.

While the claim against Boohoo will be closely watched asbreaking new ground, it is therefore thought that more such claimswill emerge soon. This can be attributed to several factors,including the following.

1. Litigation funding
   The cost of defending climate actions is increasing, as is thequantum of damages sought. This has resulted in a rise ofthird-party litigation funding specifically for climate litigationand/or ESG claims. As more ESG disclosures and reportingobligations are established for listed companies, the risk ofclaims increases.

   Litigation funders have shown interest in supporting other largeESG actions. For example, the group action inMunicipio de Mariana v BHP Group UK Ltd and Ors (which isreported to have already cost £70m) is being funded bylitigation investors including Prisma Capital and North WallCapital. It would seem a natural progression for litigation fundersto take an interest in backing group securities litigation based onESG disputes.

2. Shareholder activism
   Shareholder activism is increasing among holders of listedsecurities. Many listed companies now have a broad shareholderbase, often comprised of at least one activist shareholder, such asClientEarth holding 27 shares in Shell. Shareholder activism inrelation to ESG related matters is increasing and expected tocontinue as an ESG litigation trend.

   Section 90 and 90A FSMA claims are an important tool in theactivist shareholder's toolbox and while they are not withouttheir challenges, they may result in more positive legal outcomesthan pursuing common law claims (the difficulties with which weredemonstrated in ClientEarth vShell).

3. Increased ESG disclosures
   Domestic litigation relating to climate disclosures is likely toincrease amidst the increase in climate reporting and disclosureobligations introduced by instruments such as the SustainabilityRelated Financial Disclosures, the Taskforce on Climate RelatedFinancial Disclosures, and the new Taskforce on Nature RelatedFinancial Disclosures.

   Furthermore, the introduction of the Corporate Sustainability DueDiligence Directive, which will apply to both EU and non-EUcompanies with at least 1,000 employees and a net EU turnover ofEUR 450m or more, will lead to further reporting and disclosurerequirements for many listed companies with operations in the EUwhich will be scrutinised by investors.

Conclusion

It will remain to be seen how Boohoo responds to the claimbrought by the institutional investors and the defences that willbe raised. What is clear though is that this is a landmark casewhich will test the frameworks of securities litigation in relationto ESG disputes and may generate further claims under FSMA againstother issuers where investors claim to have suffered losses arisingfrom ESG related matters.

this is a landmark case whichwill test the frameworks of securities litigation in relation toESG disputes.

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