The issues first arose in 2020 when findings were first published that (among other matters) workers in one of Boohoo’s supplier’s factories in Leicester were being paid just £3.50 per hour (a fraction of the national minimum wage). After reports of labour rights violations were published, Boohoo’s share price dropped significantly, with £1.5 billion in market value losses.
In May this year, 49 institutional investors commenced a claim against the company, seeking compensation for allegedly misleading disclosures in relation to ESG responsibilities, in breach of the Financial Services & Markets Act 2000 (FSMA).
In the same month, reportedly under pressure from its shareholders, Boohoo backtracked on its proposals to pay one-off bonuses to three of its top executives, which had been put forward even though the company had missed sales and profits targets, and its environmental and IT aims.
Claims under sections 90 and 90A of FSMA
Sections 90 and 90A of FSMA provide statutory routes for shareholders of listed companies to seek compensation for loss suffered as a result of untrue, incomplete or misleading statements contained in prospectuses, listing particulars, and other published information.
In summary, they provide that a person responsible for listing particulars and prospectuses (section 90), and/or the issuer of certain other published information (section 90A, now superseded by Schedule 10A), is liable to pay compensation to a shareholder who has acquired those shares and suffered loss as a result of any untrue or misleading statement about them or, in certain circumstances, an omission.
There are differentiating factors between the two types of claim. For example, claims under section 90A may only be made against the issuer and involve the additional hurdles of establishing that the shareholder relied on the untrue or misleading statement. Also, that a person discharging managerial responsibility (PDMR) at the issuer either knew that the statement was untrue or misleading (or was at least reckless to that matter). On the other hand, section 90A applies to a potentially wide range of published information, as opposed to section 90, which only concerns listing particulars and prospectuses.
There have been a number of high-profile cases in recent years utilising both of these provisions, including:
- RBS Rights Issue Litigation: A claim under section 90 brought by 9,000 investors in respect of alleged misstatements in RBS’s prospectus about its financial health.
- Autonomy case: A claim under section 90A relating to allegations that the directors of Autonomy misrepresented the financial performance of the company so as to inflate its purchase price.
- G4S and Tesco cases: Both also pursued under section 90A.
The Boohoo litigation now represents an opportunity to consider FSMA claims in the context of ESG-related disputes.
What next?
While very little is currently known about the claim or how Boohoo will respond to it, this case will be watched closely both by listed companies and by their shareholders. With ESG-related issues and associated shareholder activism on the rise, the Boohoo litigation may be key in determining the path for other similar claims.
In the meantime, companies should take note. This case and the background to it underlines how critical it is to ensure that effective ESG governance and compliance is at the top of companies’ agendas, specifically the importance of transparency through supply chains.