
Sarah Baldys
Senior Vice President, FINPRO Power & Renewables Leader
-
United States
Companies spearheading the worldwide shift towards renewable and lower-carbon energy sources have made significant advances. In 2024 alone, global investments in the energy transition surpassed $2 trillion, more than doubling since 2020. Improvements in technology, scalability, and cost control will likely continue to attract significant investment in this sector, despite market and political headwinds.
However, rapid advancements bring with them heightened liability risks, particularly from shareholder lawsuits that can arise when setbacks occur. This means that companies on the front lines of the energy transition must remain vigilant to reduce the directors and officers (D&O) liability risks posed by shareholder, class, and derivative lawsuits that often follow investor losses.
These risks to your directors and officers are not merely theoretical, and they apply to private and public companies alike. Companies in the solar, wind, nuclear, electric vehicle, biofuel, clean electrification, and alternative power generation industries have faced multiple shareholder suits in the past years.
These lawsuits provide valuable lessons for companies seeking to minimize their D&O liability exposure. Insurance underwriters are closely scrutinizing companies’ potential exposure to shareholder litigation when designing and pricing D&O insurance policies for businesses involved in the energy transition. Ultimately, robust disclosure and governance practices are essential to prevent material misstatements and ensure appropriate board-level oversight of key corporate risks.
Shareholder plaintiffs have initiated various D&O claims against companies involved in the energy transition. Many of these claims fall under the “overpromise and underdeliver” category, where optimistic statements about new technologies, business relationships, or market potential collide with disappointing outcomes. For example, shareholders have filed suit after optimistic projections about customer demand, new contracts, or project development benchmarks failed to materialize. Other cases have focused on the alleged concealment of operational setbacks, delays, cost overruns, and other challenges that companies face when commercializing new technologies or completing large-scale energy projects.
Several shareholder suits emerged following negative “research reports” by short sellers questioning the commercial viability of a company’s technology or business model. Companies developing new technologies or pursuing emerging markets are particularly susceptible to “short attacks,” especially when they have not yet achieved tangible commercial success and are relying on subscriber growth or other nonmonetary benchmarks, which may be easier for a short seller to question. Shareholder plaintiffs often leverage short sellers’ allegations to file securities class action claims against the company for allegedly misleading the market.
While innovative technologies being developed for the energy transition present tremendous opportunities, companies must anticipate potential short-seller actions and avoid making public statements that could be perceived as misleading.
A number of types of statements or disclosures may be perceived as misleading and can significantly increase your exposure to D&O liability. These include:
Shareholder plaintiffs frequently criticize companies for providing overly optimistic budgets and schedules while omitting information about cost overruns and delays. For instance, plaintiffs argued that a nuclear power company’s published “guaranteed substantial completion dates” and “total gross construction cost” figures were misleading due to an internal report indicating the need for longer time and higher costs. Companies must ensure that published timeline and budget information are reasonably achievable.
Plaintiffs have attacked risk disclosures by alleging they misleadingly depict already-materialized risks as being hypothetical. For example, statements indicating that “delays or cost overruns may be incurred” by a nuclear project were challenged when plaintiffs alleged that these issues had already occurred. Future-tense risk disclosures are a frequent target of shareholder suits across numerous industries, underscoring the importance for companies to assess whether disclosures create a misleading impression that an already-materialized risk has not yet occurred.
Companies have faced scrutiny for making allegedly misleading statements about potential funding commitments. For example, plaintiffs challenged a solar company’s statements that “we have secured project funding from a number of major institutions” and had “entered into a mandate” to construct a significant project, which were disputed after funding shortfalls occurred. As the energy transition often involves capital-intensive projects, it is important that companies do not oversell potential funding arrangements in their public disclosures and do not omit information about funding setbacks that would make their funding-related statements misleading.
Energy transition companies must exercise caution when discussing commercial viability, as these statements attract scrutiny from both plaintiff lawyers and short sellers. In one case, an electric vehicle company was sued for stating that it had a substantial number of purchase orders that allegedly had not materialized. A nuclear services company was sued for suggesting it had the opportunity to obtain business from entities that were later said to allegedly have no interest in its services. In a third case, another nuclear power company was sued after a short seller publicly questioned its ability to meet subscription targets or generate power at commercially viable prices. Short sellers often target statements about nonmonetary metrics, like subscriber growth, underscoring the importance of not overpromising or making statements that can be attacked as misleading.
Energy transition-related businesses have been accused of touting major contracts without disclosing key terms or contingencies. For example, plaintiffs alleged that a biofuel company’s statements about a sale agreement were misleading because they failed to disclose a refund provision that allowed the buyer to rescind the transaction if certain benchmarks were not achieved. Companies must make sure that contracts, sales, and other business achievements are disclosed accurately and do not omit contingencies that could significantly impact a reasonable investor’s view of the transaction.
Plaintiffs frequently challenge “policy compliance” statements. For example, multiple suits have challenged statements about compliance with environmental regulations, campaign finance laws, or internal policies. Companies should be careful when definitively stating that they “comply with” all applicable regulations and should consider whether a statement of “substantial” rather than absolute compliance would be more prudent. Statements that companies conduct regular inspections or take other specified precautionary actions can also be targeted if the actual steps are not as robust as described.
Companies at the forefront of the energy transition should adopt vigilant disclosure and governance practices to protect their directors and officers and maximize the prospects for early suit dismissal. The following actions can help reduce risks.
As the energy transition continues, companies can proactively minimize D&O liability risks by implementing strong disclosure practices, maintaining transparency, and ensuring regulatory compliance. This structured approach not only mitigates potential legal challenges, but may also position companies for sustainable growth in a rapidly evolving market.
Senior Vice President, FINPRO Power & Renewables Leader
United States