The fires that have raged throughout northern California have not only caused direct injury to those in the paths of the fires, but, if PG&E, the utility company that many now allege is to blame for the fires, is found to have caused or led to the cause of the fires, such events could threaten to seriously jeopardize the investments of many individuals who hold equity in PG&E. PG&E is one of only a handful of publicly traded utility company in the United States and, if found to be at fault, could face not only legal challenges from injured property owners, but also legal challenges from its shareholders in the form of shareholder derivative lawsuits.

Such shareholder lawsuits are not unprecedented, and have resulted from PG&E’s actions (or inactions) that led to deadly fires. Early in 2017, for example, PG&E settled a shareholder class action lawsuit for $90 million stemming from a destructive fire leaving eight people dead after a PG&E pipeline ruptured under a residential neighborhood. This settlement suggests that, in the Wine Country fires, even those individuals who may not have been implicated directly by the destruction of the fires may have a means of recovery against PG&E in the form of a shareholder class action lawsuit.

How does a shareholder lawsuit work?

How does a shareholder suit against a corporation work? In California, shareholders of corporations have two options to obtain recourse from corporations: a so-called shareholder “direct” action, and a shareholder “derivative” action. A shareholder direct action compels a corporation to do something, and is a shareholder lawsuit to enforce a right against the corporate entity that the shareholder possesses as an individual. For example, a shareholder direct suit could force a corporation to compel the declaration of a dividend, or to pay out such a dividend. In contrast, a “derivative” action is a suit by a shareholder against a corporation to redress an injury to the corporation that the corporation has failed to pursue on its own behalf. The action is called “derivative” because it is the corporation, as opposed to the individual shareholder, who is harmed (even though the value of the shareholder’s stock might have, indirectly, be substantially impacted by the corporation’s injury).

In the case of a potential class action shareholder lawsuit against PG&E resulting from the Wine Country fires, shareholders would lodge a shareholder derivative lawsuit. The process of filing such a lawsuit is complicated. In order to bring a derivative suit, a shareholder must make a demand of the Board of Directors of the company (in this case, PG&E) to take on their claim in litigation. That is, they must ask the Board of Directors to sue the company to address whatever grievance the shareholders have identified. If the Board of Directors fails to take action on this claim then, depending on the number of shareholders bringing suit, the shareholders can bind together and bring a derivative suit on behalf of the company. This derivative suit would be in the name of the corporation, but could be (and frequently is) against individuals involved in the operation of the company, like its directors, officers, or employees.

Shareholders would most likely sue under a theory that the directors and officers of PG&E have breached their duties. Under California law, directors and officers of corporations have so-called fiduciary duties, which means duties to protect the interests of the corporation’s shareholders. Under the previously mentioned 2017 settlement against PG&E, for example, shareholders alleged that the directors and officers of PG&E gross mismanaged the company: primarily by failing to adequately inspect and maintain the pipeline in question. As a result of the officers’ and directors’ actions or inactions, this pipeline ruptured, causing immense damage to the value of PG&E as a corporate entity (PG&E was forced to pay substantial settlements to the injured and killed, repair homes, pay fines, and so on). Because the directors and officers of PG&E owed a duty to the shareholders of the company to preserve the shareholders’ best interests (such as by not causing the company to become devalued), they breached their duty and, because the directors of PG&E failed to remedy this issue (by suing the corporate officers), the shareholders of the company were entitled to bring suit.

How does this pertain to the Wine Country fires?

In the Wine Country fires, a class action shareholder derivative lawsuit would likely look very similar. Aggrieved plaintiffs—that is, shareholders of PG&E who have seen the value of their investment in PG&E decrease as a result of PG&E’s payouts for damages, fines, or generally poor reputation stemming from its involvement the fires—would allege that its directors and officers failed to properly manage the company. These plaintiffs might argue that the officers and directors owed a duty to shareholders to properly inspect and maintain power lines and transformers, and that these actions and inactions led to the fires. Such failure led to a diminution of the value of the company, and, therefore, injury to the shareholders.

The success of this potential shareholder lawsuit would depend on numerous factors. First, and primarily, the value of the plaintiff’s investment/stock in PG&E would have to decrease as a result of the fires. For example, if PG&E were to be required to pay out millions of dollars in lawsuit judgments, settlements, and fines resulting from its actions or inactions, this would likely have a starkly negative effect on PG&E’s stock price. Moreover, if, as some California legislators have suggested, PG&E is no longer entitled to be the sole supplier of gas and energy to the area (some legislators have suggested that a state-owned utility company should, instead, provide such services, because such a company could be overseen more directly by the state), such a loss might destroy PG&E entirely, leading to massive losses for the shareholders of the company.

Class action shareholder derivative lawsuits are, however, difficult to prove, mostly because the price and value of equity in a publicly traded company is not necessarily correlated to the company’s balance sheet. However, many companies (PG&E included) have generous insurance policies intended to protect against such shareholder lawsuits, and will therefore likely attempt to settle (as happened earlier in 2017 after the pipeline class action derivative shareholder action).

Related: Is PG&E Responsible for the Camp Fire?

Thompson Law Office Can Help With Your Shareholder Lawsuit

The process of both bringing a shareholder derivative lawsuit, and, ultimately, succeeding on it at trial or via settlement, is an enormously complex area of corporate law, requiring the expert supervision of attorneys trained and familiar with this challenging area of law, but presents itself as an opportunity for injured shareholders to recover what might be hundreds of millions of dollars of lost value in PG&E as a result of their actions or inactions in the recent California fires.

Thompson Law Office has the experience to help you with your shareholder lawsuit. If you need help protecting your legal rights as an shareholder, please contact Thompson Law Office for a free consultation about a PG&E shareholder lawsuit.

January 14, 2018 UPDATE: Read our comprehensive blog post “A Perfect Firestorm – PG&E’s Saga of Negligence and the 2017 California Wildfires” for more information regarding our analysis of PG&E’s responsibility in these wildfires.