Latest split trial decision in securities class action under s.90A FSMA

At a recent Case Management Conference (CMC), where a split trial was proposed by the claimants in a claim brought pursuant to Section 90A and Schedule 10A of the Financial Services and Markets Act (FSMA), the High Court has held that reliance issues should be heard at the second trial, with defendant liability issues to be heard in the first: Various Claimants v G4S Limited [2022] EWHC 1742 (Ch).

In securities class actions, claimants will often seek to postpone issues involving reliance, causation, quantum and limitation to a second trial. This has the double advantage of (a) enabling the claimants to postpone incurring a significant portion of their costs until after the question of liability has been determined; and (b) making the defendant’s conduct the sole focus of the first trial.

Defendants will generally seek to resist this split, noting the potential for unfairness in the allocation of the litigation burden, as well as the potential for the claimants’ witnesses to be influenced by the findings in respect of liability when preparing their evidence in relation to reliance. Furthermore, to the extent findings are made against the defendant in the first trial, the overall length of the process would likely be significantly longer than if there was no split.

Ultimately in this case, although the court held that there should be a split trial, and that reliance issues ought to be heard at the second trial (noting, in particular, the complexity of the claimants’ reliance cases), it acknowledged the potential unfairness to the defendant if disclosure and witness statements were not provided by the claimants in advance of the first trial. In order to seek to mitigate the potential unfairness, the court determined that:

  1. All claimants must provide the defendant with a minimum amount of information in relation to:
    1. Their reliance cases, including (a) whether it is said that particular named individuals reviewed the relevant published information and relied on it or whether, for example, the only evidence a particular claimant can provide in that respect is of a general practice; and (b) whether the claimant relies only upon the most recently published information, or also upon historic information;
    2. Their limitation arguments, such as whether it will be alleged that there is something particular to a specific claimant that means that they could not with reasonable diligence have discovered something, as compared to another claimant;
    3. Information about whether a claimant claims to have relied upon meetings with the defendant (noting that liability under section 90A and Schedule 10A is by reference to “published information” only and not to comments in meetings); and
    4. Disclosure, such as the document retention policies each claimant has in place.
  2. That information must be provided in order to ensure that the claimants’ reliance cases are properly particularised, and also to enable effective sampling to occur, so that the parties can minimise the risk that more than two trials will be required (as would be necessary, for example, if the sample selected did not fully reflect the characteristics of all claimants).
  3. Sample claimants, once selected, must give disclosure in advance of the first trial (including in relation to all aspects of their reliance case).
  4. A further CMC will be held after the claimants have provided the defendant with the further information outlined in (1) above, at which the court will determine which claimants will be required to provide witness evidence in relation to their reliance cases in advance of the first trial. The court indicated that this would be likely to include claimants bringing specific reliance claims.
  5. That CMC will also consider whether there are any further points of law which might sensibly be disposed of at the first trial.
  6. To the extent that any claimants wish to rely upon meetings with the defendant in relation to their claims, evidence in relation to those meetings must be provided in advance of, and will be heard at, the first trial.

Such an approach will help to balance the litigation burden, alleviate concerns over the influence that any findings from the first trial may have upon witness recollections, and will mean that, to the extent a second trial is required, it can be heard relatively soon after judgment is given in the first, mitigating the defendant’s timing concerns.

Chris Bushell
Chris Bushell
Partner
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Sarah Penfold
Sarah Penfold
Senior Associate
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ESG Updates – The Bank of England Climate Biennial Exploratory Scenario

The Bank of England (BoE) has published the results of the Climate Biennial Exploratory Scenario (CBES), which explores the financial risks posed by climate change for the largest banks and insurers operating in the UK. In line with the findings of other central bank stress tests across the globe, the CBES found that while the financial system might be adequately capitalised to absorb the shocks of climate change scenarios, the sector would suffer losses across each scenario, with the greatest quantifiable losses suffered in a No Action and Late Action scenario. This reaffirms the BoE’s drive to an early and orderly transition to a net-zero economy.

  • In June 2021 the BoE launched the CBES, seeking to explore and better understand the financial risks posed by climate change to the UK financial system, and to ensure that real change is effected to help with systemic resilience.
  • Following the submission of participants’ initial responses in October 2021, we looked at the CBES in the context of other central bank initiatives and stress tests across the globe, to understand the scope of the CBES as part of our November 2021 Global Banking Review, which focussed heavily on the issues facing financial institutions in connection with Climate Change.
  • Just over six months later the BoE has published the results of the CBES, and we consider here what it has learnt, where will the focus fall, and what will come next?

Summary of key findings – Banks

The climate risks captured in the CBES scenarios are likely to create a drag on the profitability of both UK banks and insurers. Loss projections varied across participating firms and the three different climate scenarios but equated to an annual drag on profits of around 10-15% on average. Projections suggested (unsurprisingly) that the overall costs will be lowest in scenarios with early, well-managed actions to transition to a net-zero economy.

However, the CBES found that there was substantial uncertainty as to the magnitude of climate risks. The figures identified in the BoE report were heavily caveated to allow for various acknowledged limitations, with this, its first CBES, including:

  • The banks’ projections were focused on credit risk, and did not yet fully take into account possible impacts resulting from market risk;
  • The data used to populate responses from firms was incomplete and inconsistent in its approach – for example, loss estimates on the same corporate customers differed substantially in participating firms’ responses;
  • The ‘No Action’ scenario would likely incur losses past the time horizon selected for the CBES projections, and as such projections for this scenario were likely partial; and
  • The BoE acknowledged the limitations of the fixed balance sheet approach adopted for the CBES.

Despite these, and other limitations, the CBES included a number of interesting observations for market participants:

Quantitative findings – calculating the risk

  • Projected climate risk impacts were highest for banks’ wholesale and mortgage exposures, and projected climate-related consumer credit losses were relatively low.
  • Institutions which relied upon third-party modelling and data without sufficient internal capability to challenge and scrutinise often gave rise to materially lower loss projections than those institutions which had invested in and developed their own internal models. The development of internal models was more established in the insurance than the banking sector.
  • Limitations caused by data gaps and inconsistent data provision from third parties such as clients and counterparties were again noted. In particular, the lack of available data regarding corporates’ current value chain emissions and future transition plans was a common issue affecting firms. The BoE also recommends that banks act to encourage remediation of data limitations and gaps to help firms meet the PRA’s supervisory expectations, as set out in SS3/19. Firms’ efforts in this area will be supported by initiatives currently in train to resolve some of these data gaps.

Qualitative findings – planning ahead

  • Responses to the qualitative secondary part of the CBES, which focused on transition planning, suggested that some banks, in particular, were not considering their transition plans holistically: they were failing to take into account the likelihood of similar management actions from competitors or adjusting for different macro scenarios.
  • Transition plans suggest that banks intend to divest from energy-intensive sectors. The BoE sounded a note of caution in relation to these suggestions and to the idea that capital requirements could be used to target investment towards “green” sectors and away from energy-intensive sectors. The BoE noted the systemic risk inherent in depriving energy-intensive sectors from the funding they would need to transition towards net-zero, and also the economic repercussions of mass divestment from providing finance to carbon-intensive sectors ahead of the expansion of renewable energy supply.
  • Capital adequacy remains at the forefront of the BoE’s mind, but in the context of developing (along with other central banks) Solvency II to better accommodate the nuances of climate change risk, rather than using the BoE’s prudential regulation as a pseudo-governmental arm seeking to drive policy change.
  • While participating firms were making good progress in some aspects of climate risk management, they all had more work to do to improve their climate risk management capabilities.

Climate Litigation Risk 

As part of the CBES, the BoE engaged with members of the London Insurance Market to understand the extent to which existing policies would cover climate-related litigation. Following the trend of increasing climate-related litigation (particularly in the United States, which is ahead of many European jurisdictions in this regard), the BoE wanted to look at the impact of this development in the contentious landscape. The BoE identified seven ‘types’ of climate-related litigation, these are set out in full below:

  • Direct causal contribution: a corporate is found liable for its representative contribution to manmade climate change.
  • Violation of fundamental rights resulting in cessation or reduction of operations: a corporate is prevented from practising carbon-intensive activities that violate fundamental human and dignity rights, this has a significant impact on financial revenues.
  • Greenwashing: a corporate is found to be misleading customers (e.g. false advertising, mislabelling as ‘environmentally friendly’, underreporting disclosures) and must pay out compensation to customers/investors.
  • Misreading the transition: a corporate is sued on the basis that it continued to sell a carbon-intensive product while in knowledge it would become redundant due to government net-zero policy, they must refund and compensate customers.
  • Indirect casual contribution (related to exposure to Utilities sector only): utilities are sued for their indirect contribution to climate change which amplifies physical risks due to inadequate or negligent preparation.
  • Directors’ breach of fiduciary duties (related to cover against asset managers only): investors of an asset manager allege that the entity’s directors have understated the physical and/or transition risk to their assets in their disclosures. Investors seek payment for damages from the directors’ breach of fiduciary duty.
  • Indirect causal contribution (financing): a case is brought against financiers of carbon-intensive activities, as they have contributed indirectly to manmade climate change through financing activities of carbon majors.

                                                  Taken from Table 1 of Box C of the CBES Results

Following engagement with members of the insurance market, the BoE identified that (in aggregate) just under half of the D&O insurance policies currently in place would cover these types of litigation risk; while approximately a quarter of the professional indemnity policies would cover climate related litigation. The respondents noted that this figure may not reflect coverage of the defendant’s own legal costs, which could often be high, particularly where the claims were investor-led.

While the focus of these questions was on the impact to the insurance industry of the developing trend, the analysis should focus the minds of banks and asset managers: have they sufficiently considered their litigation risk? Have they considered whether their policy coverage is adequate? As we move forward, have they budgeted for the increasing cost of Profin and D&O insurance which may arise from developing trends in this area?

What next

  • The BoE’s work on climate scenario analysis, including that done as part of the CBES, provides a key tool supporting firms and policymakers as they navigate uncertainty over future climate policy and climate change, enabling assessment against a range of possible outcomes.
  • As set out in the PRA’s October 2021 Climate Change Adaptation Report, the PRA and the BoE are undertaking further analysis to determine whether changes need to be made to the design, use, or calibration of the regulatory capital frameworks.
  • To support this work on the capital framework, the BoE will host a research conference on the interaction between climate change and capital in Q4 2022, and has already put out a ‘Call for Papers’. The BoE will publish follow-up material on the use of capital, including on the role of any future scenario exercises, informed by the conference and the findings of the CBES.
  • While no future CBES has been announced, it is clear that more work is needed before the BoE and market participants understand the stress that they may soon be under as a result of climate risks.
Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750
Eleanor Dole Sheaf
Eleanor Dole Sheaf
Associate
+44 20 7466 7612

Herbert Smith Freehills contributes chapter to The Securities Litigation Review (8th Edition)

Herbert Smith Freehills have contributed the England and Wales chapter of The Securities Litigation Review. Now in its eighth edition, The Securities Litigation Review is a guided introduction to the class action regimes for securities claims in the key jurisdictions across the globe, providing a valuable resource for corporates and financial institutions who might face such claims.

Download chapter

Reproduced with permission from Law Business Research Ltd. This article was first published in May 2022. For further information please contact Nick.Barette@thelawreviews.co.uk.

Previous Editions:

7th edition 2021

6th edition 2020

5th edition, 2019

4th edition, 2018

3rd edition, 2017

Harry Edwards
Harry Edwards
Partner
+61 3 9288 1821
Jon Ford
Jon Ford
Senior Associate
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How to navigate the Autonomy judgment: guidance for corporate issuers defending Section 90A / Schedule 10A FSMA shareholder claims

The High Court has handed down its long-awaited judgment in the US$5 billion civil fraud action brought by the Hewlett Packard group in connection with its acquisition of the UK software company Autonomy Corporation Limited in 2012: ACL Netherlands BV & Ors v Lynch & Ors [2022] EWHC 1178 (Ch).

The judgment follows a previously published Summary of Conclusions, in which the High Court confirmed that the claimants “substantially succeeded” in their claims against two former Autonomy executives (see this post on our Civil Fraud and Asset Tracing Notes blog, which sets out the background facts to the dispute and summarises the outcome).

The successful claims were brought under s.90A of the Financial Services and Markets Act 2000 (FSMA), common law misrepresentation and deceit, and the Misrepresentation Act 1967, as well as claims for breach of the defendants’ management duties.

The 1657-page judgment is significant, not only because the case is one of the longest and most complex in English legal history, but also because it is the first s.90A FSMA case to come to trial in this jurisdiction.

As a reminder, s.90A (and its successor, Schedule 10A FSMA) is the statutory regime imposing civil liability for inaccurate statements in information disclosed by listed issuers to the market. It imposes liability on the issuers of securities for misleading statements or omissions in certain publications, but only in circumstances where a person discharging managerial responsibilities at the issuer (a PDMR) knew that, or was reckless as to whether, the statement was untrue or misleading, or knew the omission to be a dishonest concealment of a material fact. The issuer is liable to pay compensation to anyone who has acquired securities in reliance on the information contained in the publication, for any losses suffered as a result of the untrue or misleading statement or omission, but only where the reliance was reasonable.

In recent years, there has been a noticeable uptick in securities litigation in the UK, in particular in claims brought under s.90A/Sch 10A FSMA. The purpose of this blog post is to distil the key legal takeaways on s.90A FSMA arising from the judgment, which may be relevant to such claims.

Scope of s.90A / Sch 10A FSMA

The court accepted the defendants’ “general admonition” that the court should not interpret and apply s.90A/Sch 10A FSMA in a way which exposes public companies and their shareholders to unreasonably wide liability.

It emphasised that, in considering the scope of these provisions (and in particular in considering the nature of reliance which must be shown and the measure of damages), the history of the s.90A regime is relevant. The court highlighted the following background to the provisions of FSMA, in particular:

  • Prior to s.90A, English law did not provide any remedy (statutory or under the common law) for investors acquiring shares on the basis of inaccuracies in a company’s financial statements (in contrast to the long-established statutory scheme of liability for misstatements contained in prospectuses). The rationale for the different treatment of liability for misstatements in prospectuses and those in other disclosures was because an untrue statement in a prospectus can lead to payments being made to the company on a false basis, but the same cannot be said of an untrue statement contained in an annual report, for example.
  • The ultimate catalyst for the introduction of a scheme of liability was the Transparency Directive (Council Directive 2004/1209/EC), which included enhanced disclosure obligations and the requirement for a disclosure statement. This gave rise to concerns that the English law’s restrictive approach to issuer liability would be disturbed and that issuers (and directors and auditors) might be made liable for merely negligent errors contained in narrative reports or financial statements.
  • The regime for issuer liability was introduced in this jurisdiction in a piecemeal fashion, recognising the historical tendency against liability. The government was aware that the scheme would involve a balance between: (a) the desire to encourage proper disclosure and affording recourse to a defrauded investor in its absence; and (b) the need to protect existing and longer-term investors who, subject to any claim against relevant directors (who may not be good for the money), may indirectly bear the brunt of any award against the issuer.
  • The original s.90A provisions introduced by the government were subsequently extended with effect from 1 October 2010 as follows: (a) to issuers with securities admitted to trading on a greater variety of trading facilities; (b) to relevant information disclosed by an issuer through a UK recognised information service; (c) to permit sellers, as well as buyers, of securities to recover losses incurred through reliance on fraudulent misstatements or omissions; and (d) to permit recovery for losses resulting from dishonest delay in disclosure. However, liability continued to be based on fraud and no change was suggested or made to the limitations that: (i) liability is restricted to issuers; and (ii) liability can only be established through imputation of knowledge or recklessness on the part of PDMRs of the issuer. Further, no specific provisions to determine the basis for the assessment of damages were introduced.

Two-stage test for liability under s.90A /Sch 10A FSMA

The court confirmed that the provisions of s.90A / Sch 10A FSMA make clear that there is an objective and a subjective test, both of which must be satisfied to establish liability:

  • Objective test: the relevant information must be demonstrated to be “untrue or misleading” or the omissions a matter “required to be included”.
  • Subjective test: a PDMR must know that the statement was untrue or misleading, or know such omission to be a “dishonest concealment of a material fact” (referred to in the judgment as “guilty knowledge”).

Each of these tests is considered separately below.

The objective test (untrue or misleading statement or omission)

The court said that the objective meaning of the impugned statement, is “the meaning which would be ascribed to it by the intended readership, having regard to the circumstances at that time”, endorsing the guidance provided in Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland plc [2010] EWHC 1392 (Comm).

The court gave some further guidance as to how to establish the objective meaning of a statement for the purpose of a s.90A/Sch 10A FSMA claim, including the following:

  • The content of the published information covered by s.90A/Sch 10A will often be governed by certain accounting standards, provisions and rules, which involve the exercise of accounting judgement where there may be a range of permissible views. The court confirmed that a statement is not to be regarded as false or misleading where it can be justified by reference to that range of views.
  • Where the meaning of a statement is open to two or more legitimate interpretations, it is not the function of the court to determine the more likely meaning. Unless it is shown that the ambiguity was artful or contrived by the defendant, the claim may not satisfy the objective test.
  • The claimant must prove that they understood the statement in the sense ascribed to it by the court.

The subjective test (guilty knowledge)

As in the common law of deceit, it must be proven that a PDMR “knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading”; or alternatively, that they knew that the omission of matters required to be included was the dishonest concealment of a material fact. The court noted that for both s.90A and Sch 10A, the language used shows that there is a requirement for actual knowledge.

The court clarified several key legal questions as to what will amount to “guilty knowledge” for the purpose of the subjective test, including the following:

  • Timing of knowledge. In the context of an allegedly untrue/misleading statement, a party will be liable only if the facts rendering the statement untrue were present in the mind of the PDMR at the moment the statement was made. In the case of an omission, the PDMR must have applied their mind to the omission at the time the information was published and appreciated that a material fact was being concealed (i.e. that it was required to be included, but was being deliberately left out).
  • Recklessness. In the context of s.90A/Sch 10A FSMA, recklessness bears the meaning laid down in Derry v Peek (1889) 14 App. Cas. 337, i.e. not caring about the truth of the statement, such as to lack an honest belief in its truth.
  • Dishonesty
    • Even on the civil burden of proof, there is a general presumption of innocent incompetence over dishonest design and fraud, and the more serious the allegation, the more cogent the evidence required to prove dishonesty.
    • For deliberate concealment by omission, dishonesty has a special definition under Sch 10A (although s.90A contained no such special definition), which represents a statutory codification of the common law test for dishonesty laid down in R v Ghosh [1982] 1 QB 1053 (although in a common law context, that test has been revised by Ivey v Genting Casinos (UK) Ltd [2018] AC 391). Under the Sch 10A definition, a person’s conduct is regarded as dishonest only if:

“(a) it is regarded as dishonest by persons who regularly trade on the securities market in question, and (b) the person was aware (or must be taken to have been aware) that it was so regarded.”

    • Any advice given to the company and its directors from professionals will be relevant to the question of dishonesty (see below).
  • Impact of advice given by professionals on the subjective test
    • The court emphasised that, where a PDMR receives guidance from the company’s auditors that a certain fact does not need to be included in the company’s published information, then the omission of that fact on the basis of the advice is unlikely to amount to a dishonest concealment of a material fact (even if the disclosure was in fact required).
    • Similarly, where a PDMR has been advised by auditors that a particular statement included in the accounts was a fair description (as required by the relevant accountancy standards), it may be unlikely that the PDMR had knowledge that the statement was untrue/misleading or was reckless as to its truth (unless the auditor was misled).
    • However, in the court’s view, directors are likely to be (and should be) in a better position than an auditor to assess the likely impact on their shareholders of what is reported, and (for example) to assess what shareholders will make of possibly ambiguous statements. Accordingly, the court said “on matters within the directors’ proper province, the view of the company’s auditors cannot be regarded as a litmus test nor a ‘safe harbour’: auditors may prompt but they cannot keep the directors’ conscience”.
    • Accordingly, narrative “front-end” reports and presentations of business activities cannot be delegated by directors, as their purpose/objective is to reflect the directors’ (not the auditors’) view of the business and require directors to provide an accurate account according to their own conscience and understanding.
  • Subjective test to be applied in respect of each false statement. The court confirmed that liability is only engaged in respect of statements known to be untrue. If a company’s annual report contains ten misstatements, each of them relied on by a person acquiring the company, but it can only be shown that a PDMR knew about one of those misstatements, the company will only be liable in respect of that one, not the other nine.

Reliance

Reasonable reliance is another necessary precondition to liability under s.90A and Sch 10A, although the precise requirements of reliance are not defined in those provisions. In the Autonomy judgment, the court considered the question of reliance in further detail, providing the following guidance:

  • Reliance by whom? The court held that reliance must be by the person acquiring the securities, and not by some other person.
  • Individual statements vs published information. The court held that reliance must be upon a statement or omission, rather than, in some generalised sense, on a piece of published information (e.g. the annual report for a given year).
  • Express statements vs impression. The court suggested that statements and omissions may in combination create an impression which no single one imparts and, if that impression is false, that may found a claim (subject to the “awareness” requirement below).
  • Awareness requirement. The court held that, in order to demonstrate reliance upon a statement or omission, a claimant will have to demonstrate that they were consciously aware of the statement or omission in question, and that it induced them to enter into the transaction. The requirement for reliance upon a piece of information will not be satisfied if the claimant cannot demonstrate that they reviewed or considered the information: “it cannot have been intended to give an acquirer of shares a cause of action based on a misstatement that he never even looked at, merely because it is contained, for example, in an annual report, some other part of which he relied on”. Further, the relevant statement “must have been present to the claimant’s mind at the time he took the action on which he bases his claim”, i.e. made his investment decision.
  • Standard of reliance. The court held that a claimant must show that the fraudulent representation had an “impact on their mind” or an “influence on their judgement” in relation to the investment decision.
  • Presumption of inducement. The court held that the so-called “presumption of inducement” applies in the context of a FSMA claim to the same extent as it does in other cases of deceit. This is a presumption that the claimant was induced by a fraudulent misrepresentation to act in a certain way, which will assist the claimant when proving reliance. The presumption is an inference of fact which is rebuttable on the facts. In addition, for the purposes of s.90A and Sch 10A, any reliance must be “reasonable”, and that reasonableness requirement mitigates the effect of the presumption by introducing an additional test for the claimant to satisfy. The court also made clear that the presumption of inducement is subject to the “awareness” requirement above, i.e. the presumption of inducement will not arise if the claimant was not consciously aware of the representation.
  • When is reliance reasonable? The court held that “the test of reasonableness is not further defined, but is plainly to be applied by reference to the conditions at the time when the representee claimant relied on it. Circumstances, caveats or conditions which qualify the apparent reliability of the statement relied on by the claimant are all to be taken into account. The question of when reliance is reasonable is fact-sensitive.”

Loss in the context of FSMA claims

The court expressed its provisional view on some “novel and difficult issues” in the context of loss. In particular, it said that it is for the court to decide, and not for the defrauded party to make an election, as to whether “inflation” damages (i.e. if the truth had been known the claimant would have acquired the shares at a lower price) or “no transaction” damages (i.e. if the truth had been known, the claimant would not have purchased the shares in question) are available. The court will return to this question when addressing issues of quantum (the present judgment considered liability only).

Future use of s.90A / Sch 10A claims in M&A disputes

In the present case, the alleged liability of Autonomy under s.90A/Sch 10A was used as a stepping-stone to a claim against the defendants. This was described by the court as a “dog leg claim” because Autonomy (now under the control of HP) accepted full liability to its shareholder, and Autonomy sought to recover in turn from the defendants as PDMRs of Autonomy at the relevant time. The court said that there was no conceptual impediment to this, but that it was right to bear in mind that in interpreting the provisions and conditions of liability, the relevant question was whether the issuer itself should be liable.

This may open the door for future M&A disputes to be brought by way of a s.90A FSMA claim by disgruntled purchasers against the target company in order – ultimately – to pursue a claim against former directors of the target company (i.e. the vendors), based on breach of their duties owed to the target company.

Simon Clarke
Simon Clarke
Partner
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Ceri Morgan
Ceri Morgan
Professional Support Consultant
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Rupert Lewis
Rupert Lewis
Partner
+44 20 7466 2517
Chris Bushell
Chris Bushell
Partner
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High Court clarifies meaning of “PDMR” in s.90A FSMA claims

The High Court has clarified what is meant by “person discharging managerial responsibilities” (PDMR) in the context of Section 90A and Schedule 10A of the Financial Services and Markets Act 2000 (FSMA), a key element of the test for statutory liability for statements made by UK listed companies in periodic publications: Various Investors v G4S Limited (formerly known as G4S plc) [2022] EWHC 1081 (Ch).

The statutory regime

Pursuant to Schedule 10A FSMA, paragraph 3(1), an issuer will be liable to pay compensation to a person who acquires, continues to hold or disposes of securities in reliance upon published information and suffers loss as a result of any untrue or misleading statement in (or omission of a “matter required to be included” from) that published information. An issuer will also be liable to pay compensation to a person who acquires, continues to hold or disposes of the securities and suffers loss in respect of the securities as a result of delay by the issuer in publishing information (paragraph 5(1)).

An issuer will only, however, be liable in the following circumstances:

  • in respect of an untrue or misleading statement, if a PDMR within the issuer knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading (paragraph 3(2));
  • in respect of omissions, if a PDMR within the issuer knew the omission to be a dishonest concealment of a material fact (paragraph 3(3)); and
  • in respect of delays, if a PDMR within the issuer acted dishonestly in delaying the publication of the information (paragraph 5(2)).

Paragraph 8(5) defines PDMR for the purposes of Schedule 10A as follows:

  1. any director of the issuer (or person occupying the position of director, by whatever name called);
  2. in the case of an issuer whose affairs are managed by its members, any member of the issuer;
  3. in the case of an issuer that has no persons within paragraph (a) or (b), any senior executive of the issuer having responsibilities in relation to the information in question or its publication.

The meaning of “director”

In the case of G4S, which is a company with directors, it was common ground that the relevant paragraph was 8(5)(a), and that only directors of G4S would constitute PDMRs. However, the parties differed in relation to what was meant by “director”.

The claimants contended that terms such as “director” take colour from their context and that the term should be interpreted broadly for the purposes of paragraph 8(5)(a). They highlighted the use of the term PDMR in EU market abuse legislation, and the broader definition that applies there:

“…a person within an issuer…who is (a) a member of the administrative, management or supervisory body of that entity; or (b) a senior executive who is not a member of the bodies referred to in point (a), who has regular access to inside information relating directly or indirectly to that entity and power to take managerial decisions affecting the future developments and business prospects of that entity”.

The claimants suggested that the term “director” in paragraph 8(5)(a) ought to be interpreted so as to align the Schedule 10A definition with the market abuse definition, extending the concept of “director” beyond the three currently recognised categories in English law (i.e. de jure, de facto and shadow directors), to also include “senior executives with control over substantial business units, or who were responsible for managerial decisions affecting the future developments and business prospects of the issuer and/or those business units”.

By way of contrast, the defendant contended that the statutory definition of PDMR in Schedule 10A was clear and unambiguous. The term “director” is well-known and established in UK law. The drafter used recognised concepts of domestic company law and there is no reason to adopt another meaning.

The court rejected the claimants’ argument, holding that Schedule 10A clearly stipulates that where an issuer has directors the PDMRs are the directors (including persons occupying the position of director, by whatever name called), and that the term “director” in that context should be given its usual, well-established legal meaning.

De facto directors

For the purposes of this application, the defendant did not contest the claimants’ position that a de facto director might constitute a PDMR for the purposes of paragraph 8(5)(a). The defendant did, however, contest that, if de facto directors can be PDMRs for the purposes of paragraph 8(5)(a), this had been properly pleaded by the claimants. Mr Justice Miles held that the claimants had pleaded that the individuals they alleged to be PDMRs were de facto directors of G4S. However, he encouraged the claimants to do so more fully, holding that “it is to my mind undesirable for the pleadings to be left in their somewhat ambiguous and uncertain state.”

Chris Bushell
Chris Bushell
Partner
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Sarah Penfold
Sarah Penfold
Senior Associate
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Holly McCann
Holly McCann
Associate
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Reform of the UK prospectus regime – update on securities litigation risk

HM Treasury (HMT) has published a response setting out its policy approach to reforming the UK’s prospectus regime, in the biggest shake up since 2005. The response follows the initial consultation published in July 2021.

HMT’s intention is to proceed with the reforms broadly as proposed in its initial consultation. The next step is for HMT to make the necessary legislative changes to the Financial Services and Markets Act 2000 (FSMA), to create the framework for the new regime when parliamentary time allows.

The idea behind these changes is to simplify regulation in this area, as well as facilitating wider participation in the ownership of public companies and improving the quality of information investors receive. As part of this, HMT will delegate a greater degree of responsibility to the Financial Conduct Authority (FCA) to set out the detail of the new regime through rules. The full suite of reforms will take effect after the FCA has consulted on, and is ready to implement, new rules under its expanded responsibilities. HMT is keen to return responsibility for designing and implementing financial services regulatory requirements to regulators. For more information on the reforms themselves, please see this detailed briefing produced by our Capital Markets team.

From a securities litigation perspective, in light of the ever-evolving statutory and regulatory landscape, it is important issuers continue to monitor the impact of any changes to their disclosure requirements. HMT’s reforms of the UK’s prospectus regime are likely to have a potential impact on claims under s.90 FSMA for liability for prospectuses and listing particulars. For more information on this impact, please see our previous blog post: HMT reform of prospectus regime: the potential impact on securities litigation.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529

High Court decision in first s.90A FSMA claim to reach trial

The High Court has published a summary of its findings on liability in the long-running USD$5 billion civil fraud action brought by the Hewlett Packard group in connection with its acquisition of the UK software company Autonomy Corporation Limited in 2012. The claimants have “substantially succeeded” in their claims against two former Autonomy executives: ACL Netherlands BV, Hewlett Packard The Hague BV and others v Lynch and Shushovan [HC-2015-001324].

Mr Justice Hildyard in the Chancery Division outlined his findings in a detailed Summary of Conclusions, in advance of his full judgment which is currently embargoed. The successful claims were brought under s.90A of the Financial Services and Markets Act 2000 (FSMA), common law misrepresentation and deceit, and the Misrepresentation Act 1967, as well as claims for breach of the defendants’ management duties.

The findings are limited to the issue of liability, with a separate judgment on the quantum of damages to be delivered at a later date. The court indicated that although “substantial”, damages are anticipated to be “considerably less than claimed”.

This decision represents a significant development, as the first claim brought under s.90A FSMA to be considered at full trial. However, the s.90A FSMA claim was brought in the very different context of a post-closing M&A dispute, rather than the more classic securities class action brought on behalf of a large group of institutional investors. That said, there may be some helpful guidance on key elements of s.90A when the full decision becomes available, which we will consider in due course when it becomes public.

For more information see this post on our Civil Fraud and Asset Tracing Notes blog.

Global Bank Review: Greenwashing Litigation Podcast

Join Mark Smyth, Jojo Fan, Benjamin Rubinstein and Sousan Gorji as they discuss global greenwashing issues in the banking sector. You can read more insights in our Global Bank Review.

You can also listen on Apple, Spotify and SoundCloud.

Please subscribe to our Financial Services Disputes & Regulation podcast channel here to listen to our regular bite-sized broadcasts covering both litigation and regulatory developments for banks and other financial institutions.

Jojo Fan
Jojo Fan
Partner
+852 21014254
Benjamin Rubinstein
Benjamin Rubinstein
Partner
+1 917 542 7818
Mark Smyth
Mark Smyth
Partner
+61 2 9225 5440
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

SPACs in the City: the emerging litigation and regulatory risks in England & Wales

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the litigation and regulatory risks for special purpose acquisition companies (SPACs) in England & Wales.

SPACs scorched the US stock markets last year, with the UK left out in the cold. While the recent crackdown by the Securities and Exchange Commission (SEC) is cooling investor interest in the US, the UK regulators are hoping that changes to the regulatory framework will bring some SPAC sunshine to this side of the Atlantic.

Given the limited number of London-listed SPACs to date, the litigation and regulatory risks for SPACs in the UK remain broadly untested. However, some cautionary tales are emerging from the US, where increasingly SPACs are the subject of litigation and regulatory scrutiny.

The article considers the changes to the UK’s regulatory framework applying to SPACs, before exploring some of the key anticipated regulatory and litigation risks for SPACs in this jurisdiction.

The article can be found here: SPACs in the City: the emerging litigation and regulatory risks in England & Wales. This article first appeared in the October 2021 edition of JIBFL.

Karen Anderson
Karen Anderson
Partner
+44 20 7466 2404
Emma Deas
Emma Deas
Partner
+44 20 7466 2613
Sarah Hawes
Sarah Hawes
Head of Corporate Knowledge, UK
+44 20 7466 2953
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Eleanor Dole Sheaf
Eleanor Dole Sheaf
Associate
+44 20 7466 7612

COVID-19 market disclosures and managing the associated litigation risks

Herbert Smith Freehills have published an article in the Journal of International Banking Law and Regulation: COVID-19 market disclosures and managing the associated litigation risks.

Since the start of the pandemic many listed companies have sought to strengthen their balance sheet by raising additional capital from shareholders. This article considers the types of disclosures relating to COVID-19 that have been made to the market when doing so, the potential litigation risks that may be faced in the context of increased securities class actions activity in this jurisdiction, and how those risks may be appropriately managed.

The article can be found here: COVID-19 market disclosures and managing the associated litigation risks. This material was first published by Thomson Reuters, trading as Sweet & Maxwell, 5 Canada Square, Canary Wharf, London, E14 5AQ, in the September 2021 edition of JIBLR and is reproduced by agreement with the publishers.

Alternatively, please contact Nihar Lovell if you would like to request a copy of the full article.

Rupert Lewis
Rupert Lewis
Partner, Head of Banking Litigation
+44 20 7466 2517
Michael Jacobs
Michael Jacobs
Partner
+44 20 7466 2463
Daniel May
Daniel May
Senior Associate
+44 20 7466 7608
Sarah Ries-Coward
Sarah Ries-Coward
Senior Associate
+44 20 7466 2268