The long-running Tesco Litigation (a securities class action brought by shareholders under section 90A Financial Services and Markets Act 2000 (FSMA)) has reached the Pre-Trial Review stage and there are a couple of snippets arising from the PTR judgment which will be of interest to those who follow the development of the class action landscape in the UK: Manning & Napier Fund, Inc & Anor v Tesco plc  EWHC 2106 (Ch).
First, it is apparent from the judgment that one of the claimant groups (the group of shareholders represented by Stewarts Law) have settled their claims (on confidential terms) with Tesco, leaving the Manning & Napier Fund and Exeter Trust Company claimants (represented by Morgan Lewis, the MLB Claimants) to continue alone. One potential reason for the difference in approach to settlement (at least for now) may be the difficulties which one of the MLB Claimants appears to have in establishing its reliance on the alleged disclosure defects, highlighting the critical importance of that battleground in these types of claim.
Second, the court’s decision brought into focus a key case management decision for securities class actions; whether the trial will be split and, if so, what the precise split of issues to be determined should be.
In this blog post, we consider the relevance of the different elements of the typical causes of action pursued in shareholder claims to parties’ preference for a split trial, and the approach the court has adopted to date in the key securities class actions which have progressed through the courts of England and Wales.
Key elements of shareholder claims
A securities class action brought under section 90A FSMA (as in the Tesco Litigation) or under common law (such as a negligent misstatement, as was the case in the Lloyds/HBOS Litigation) requires claimants to establish that:
- There was a defect in the disclosures made with the requisite degree of fault on the part of relevant officers of the company;
- The claimants relied on the alleged defect in their investment decision;
- The claimants suffered loss; and
- This loss was caused by the defect (i.e. but for the alleged breach by a defendant, the claimants would not have suffered that loss).
The enquiry into the existence of a defect and establishing the requisite knowledge and fault on the part of the company will inevitably focus principally on the position and conduct of the company, placing a heavy burden in the production of documentary and witness evidence squarely on the defendant(s) in a securities class action.
By contrast, the need for the claimants to prove reliance involves an enquiry into their investment decision-making and, as we have commented previously, courts have been clear that claimants will not be able to side-step the need to undertake an appropriate search for documents and produce witness evidence in support of their case on this issue (see our previous blog posts: The Lloyds/HBOS litigation: The first shareholder class action judgment in England & Wales and High Court orders claimants to provide disclosure to prove investment decisions were made in reliance on defective publications in the Tesco section 90A FSMA group litigation).
Claimants will also need to incur substantial time and expense in preparing the evidence which is required to establish causation and loss, a large part of which will be expert in nature but may also include (as is the case in the Tesco Litigation – see below) evidence about the alternative investments which the claimants may allege they would likely have made but for the defects.
Accordingly, it is natural for the question of a split trial to be a key case management battleground for parties seeking a strategic, as well as practical, advantage: claimants will often seek to defer the expenditure of the costs involved in establishing reliance, causation and loss to a later trial and have the focus of trial one solely on the defendants’ conduct.
Approaches to split trials in securities class actions to date
It is interesting, therefore, to compare the different approaches taken by the courts in the cases which have been pursued to date on this critical case management question:
- In the RBS Rights Issue Litigation, only questions of breach were going to be determined at the first trial. This was in large part because the defendants accepted that section 90 FSMA (which governs claims for prospectus liability) did not require the claimants to establish that they relied on any defects in the disclosures. Accordingly, the court was persuaded that, for reasons of efficiency, the difficult questions of causation and loss could be held over until a second trial (if that was necessary based on the finding in trial one). Given the breadth of the issues in the case and hence the number of permutations of potential findings on questions of breach, it was simply unworkable for issues of causation and loss to be prepared for a unitary trial (for example, involving expert reports) on the basis of assumptions as to what findings the court might make at trial on questions of breach. However, this had a clear strategic benefit for the claimants who were able to focus all of their resources on seeking to establish that there had been disclosure breaches. Indeed, in contrast to the enormous volume of documents which the defendants had to search for and ultimately disclose, the claimants were required to produce no disclosure whatsoever for the purposes of trial one.
- By way of contrast, in the Lloyds/HBOS Litigation, the defendants successfully resisted attempts by the claimants to seek a split trial. The question of whether the claimants relied on the alleged defects was an essential part of the liability question. Moreover, the evidence on causation and loss was bound up in the important question about the materiality of the information which was said to have been omitted (an essential element of establishing breach) since proving loss largely depended on the market reaction when the information was subsequently disclosed.
- In the Tesco Litigation, the claimants initially proposed a split trial along similar lines to the RBS Rights Issue Litigation so that the first trial focused only on the allegations of breach and all other issues (including reliance, causation and loss) would be dealt with at a second trial. However, at the first CMC the court ordered a single trial, reserving only the question of whether “quantum calculation issues” should be decided separately. Accordingly, issues of reliance and causation fell within the scope of the first trial (reflecting the centrality of those questions to any claim under section 90A FSMA). At the second CMC, the court ordered that “issues of quantum calculation shall be dealt with at a subsequent hearing, if necessary”. As a result (and borne out in the disclosure issues which have led to various case management judgments during the lead up to trial), the claimants have not been able to defer production of evidence on these issues and, at the upcoming trial, reliance and causation issues will no doubt feature heavily in the course of evidence and argument. Indeed one of the issues at the PTR was a specific disclosure application by Tesco for documents relating to whether the relationship between one of the MLB Claimants and its investment adviser was one of agency such that any reliance which the adviser placed on the defects when making investment decisions would meet the reliance requirement of section 90A. The judge made the order, noting that the issue was “an important one capable of being determinative”.
Cautionary note: the importance of precision in your case theory
One of the issues which arose at the PTR in the Tesco Litigation highlights the importance of precisely analysing the elements of a claim which parties need to establish at a trial. This need is particularly acute when a trial is split:
- The MLB Claimants’ primary loss claim is calculated by reference to the difference between the purchase price of the Tesco shares and the value of those shares on 23 October 2014 (when Tesco disclosed the “expected impact” of the £263 million overstatement in its previous profits guidance statements). In addition to this primary loss claim, the MLB Claimants are claiming for loss of profits they allege they would or might have made had their money not been invested in Tesco.
- Although the loss of profits claim requires a loss calculation, which will be determined (if necessary) in the second trial, it also gives rise to questions of reliance and causation, which are issues which were ordered to be dealt with at the first trial.
- It appears from the judgment that the MLB Claimants mistakenly assumed that all aspects of the loss of profits claim would be dealt with at the second trial and their witness evidence had not, therefore, addressed what alternative investments the MLB Claimants would have been made. Accordingly, in the absence of such evidence, the loss of profits claim would have to fail at trial.
- At the PTR, the MLB Claimants sought permission to rely on evidence in relation to the loss of profits claim, which had been adduced out of time. The court viewed the application as a question of relief from sanctions, rather than an application for permission out of time, and was critical of the MLB Claimants failing to appreciate that such an application was necessary much sooner.
- The court has given the MLB Claimants a short timeframe (until 14 August 2020) to provide relevant disclosure evidence in support of its loss of profits claim, but the application will be refused if the resulting extra work for Tesco in processing the disclosure is not fairly and proportionately manageable.
- The court was reluctant to make an order, given that it will likely deprive the MLB Claimants of the chance to obtain full recovery of its losses, but gave significant weight to Tesco’s objections that any substantial exercise would distract them from trial preparation.