An adidas shareholder is pushing back against an attempt by the German sportswear giant to have a securities fraud lawsuit waged against it over its now-defunct Yeezy partnership dismissed. On the heels of adidas filing a motion to dismiss the second amended complaint waged against it by HRSA-ILA Funds, the adidas shareholder reiterates its allegations, including that adidas ran afoul of the Securities Exchange Act by “misrepresent[ing] and fail[ing] to disclose … adverse facts pertaining to the company’s business,” namely, the risks associated with its once-very-lucrative deal with Ye – formerly Kanye West – thereby, artificially inflating adidas’ stock price.
At a high level, HRSA-ILA contends that it has adequately pled that adidas AG, its chief financial officer Harm Ohlmeyer, and former chief executive officer Kasper Rorsted (collectively, the “defendants” or “adidas”) made misrepresentations and/or omissions of material facts about the Yeezy deal and Ye’s enduring misconduct. At the same time, it also claims that based on “particularized allegations from confidential witnesses and a plethora of credible news reports,” it pled that the defendants were “fully aware of West’s misconduct and the risk it posed to the company,” thereby, meet the necessary element of scienter.
Despite a “steady stream of complaints from employees and recommendations from managers,” HRSA-ILA claims that the defendants “refused to confront West, [and] instead, actively concealed West’s misconduct.” This makes clear, according to HRSA-ILA, that “the only compelling inference” to be made here is that adidas and co. “never believed their professed commitment to social sustainability [and that their] only commitment was to making as much money as possible from the Yeezy partnership before it inevitably blew up.”
In short: HRSA-ILA asserts that adidas and co. were “fully aware of West’s misconduct throughout the class period,” and yet, they never confronted him over his alleged misconduct and never disclosed his misconduct to investors, thereby, “misrepresent[ing] … adverse facts pertaining to the company’s business.” As a result, they inflated adidas’ stock price, in violation of the Securities Exchange Act, per HRSA-ILA, which argues that the court should reject adidas’ motion to dismiss and enable the case to proceed.
adidas’ Non-Financial Reporting
One of the most interesting aspects of HRSA-ILA’s case against adidas comes by way of its allegations that adidas had a duty to reveal Ye’s misconduct in accordance with the European Union’s Non-Financial Reporting Directive (“NFRD”) – which requires large entities to publicly disclose non-financial ESG information – and the Global Reporting Initiative (“GRI”), a reporting framework that companies can use to comply with the NFRD’s disclosure requirements.
The parties clash with regard to adidas’ obligations under the NFRD (and the voluntary GRI by extension) …
> Adidas argues in its motion to dismiss that HRSA-ILA “asserts – incorrectly – that the NFRD and the GRI’s guidelines impose a duty [on it] to disclose Ye’s prior incidents of misconduct.” In particular, adidas contends that “no court has held that the provisions cited by [HRSA-ILA],” namely, Article 29, “give rise to disclosure obligations that are actionable under the federal securities laws.” And, in any event, “neither framework requires adherents to identify specific incidents of misconduct, by business partners or otherwise.”
Even still, adidas claims that its annual reports “easily satisfied the NFRD requirements and GRI guidelines by providing detailed explanations of various risk categories, and the steps taken to mitigate each of those risks … in their ‘Risk and Opportunity’ sections (and elsewhere throughout each annual report).” In fact, adidas asserts that its “robust disclosures … cautioned investors about numerous risks that could impact [its] performance, including Personnel Risk, Media and Stakeholder Risk, and Business Partner Risk,” with the latter disclosures “warn[ing] investors of precisely the type of occurrence that [HRSA-ILA] alleges regarding Ye.”
> Meanwhile, in its recent opposition, HRSA-ILA maintains that both the NFRD and GRI required adidas to disclose risks related to the company’s “social impact,” and that adidas do not go far enough with its disclosures when it failed to spell out “West’s misconduct, the risks it posed to [adidas], and the company’s inappropriate handling of it,” all of which is “material” under the NFRD and GRI standards. In terms of applicability of these standards, HRSA-ILA argues that adidas’ motion to dismiss “does not – and cannot – dispute that the NFRD imposed affirmative reporting obligations” on the company, just as it does not deny that it “voluntarily imposed GRI reporting obligations upon itself” when it opted to use that framework and “assured investors [in its annual reports] that its non-financial disclosures complied with the core requirements of the GRI.”
Looking specifically at the NFRD, HRSA-ILA argues that the EU directive “required Adidas to disclose information” about its business model, policies, risks, risk management, etc., as well as “key performance indicators relating to social and employee issues.” It also mandates that companies “provide adequate information” about matters that “stand out as being most likely to bring about the materialization of principal risks of severe impacts, along with those that have already materialized.” And not limited to adidas, itself, the NFRD’s required risk disclosures “explicitly extend to the company’s ‘business relationships,’” according to HRSA-ILA.
The issue, HRSA-ILA argues, is that throughout the class period (from May 3, 2018 to February 21, 2023), adidas’s annual reports “misled investors … by omitting all negative information concerning West’s misconduct, the company’s failure to address the misconduct, and the risk the misconduct posed to the company and the Yeezy partnership.”
The GRI is also relevant, per HSRA-ILA, as adidas’ 2018 to 2021 annual reports “assured investors that its non-financial disclosures complied with the GRI’s core requirements,” including that adidas provide “a detailed, complete, and balanced description of the risks the company faced and estimates of the potential impact of those risks.” Adidas fell short here, HRSA-ILA claims, because its “social impact disclosures … failed to provide any information” concerning Ye’s “routine mistreat[ment] of Yeezy and adidas employees by subjecting them to anti-Semitic comments and other workplace misconduct.” Adidas also failed to alert investors about the defendants’ alleged awareness of such situations and their knowledge and discussions about how these situations – and a potential fallout with Ye – “posed a material risk to the company’s finances.”
The bottom line, according to HRSA-ILA: “West’s misconduct, the risks it posed to [adidas], and the company’s inappropriate handling of it were material under the NFRD and GRI standards,” and that by failing to disclose such information in accordance with these standards, adidas ran afoul of the law and damaged its shareholders.
THE BIGGER PICTURE: The parties’ clash over disclosures under the NFRD and GRI is the latest demonstration of the complexities that come with companies’ ESG-centric statements (or lack thereof), including those made in connection with both mandatory reporting schemes and voluntarily ones. From a litigation perspective, clashes over companies’ ESG statements, including those made on their websites, in marketing campaigns, and on products, themselves, as well as in company reports/roadmaps, have largely resulted in false advertising lawsuits. The adidas, Yeezy lawsuit indicates that the bases for ESG litigation could extend further to include stock-drop lawsuits in the event that companies (allegedly) fail to make accurate/complete statements in response to necessary and/or voluntary reporting schemes and the value of the company’s stock later falls as a result of information that the company failed to warn investors about. It is worth noting, of course, that adidas argues that the NFRD’s disclosure obligations are not actionable under federal securities laws.
Either way, the landscape is actively in flux, and the stakes could get higher – from a reporting standpoint and a litigation perspective, as well – thanks to the existence of the Corporate Sustainability Reporting Directive, which entered into force in January 2023, and expands the scope of the ESG-related non-financial reporting requirements beyond those called for by the NFRD.
The case is HRSA-ILA Funds v. adidas AG, et. al., 3:23-cv-00629 (D. Or.)
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