High Court determines that reliance issues in context of a s.90A FSMA claim should be heard at first trial

At a recent case management conference where a split trial was proposed by the parties in relation to a section 90A Financial Services and Markets Act 2000 (FSMA) claim, the High Court has held that reliance issues should be heard at the first trial rather than held over to the second trial: Allianz Global Investors GmbH & 76 Ors v RSA Insurance Group plc [2021] EWHC 570 (Ch).

Trial structure tends to be a key case management battleground in securities class actions. For strategic and practical reasons, claimants often seek to postpone issues involving reliance, causation and quantum (i.e. issues which concern the conduct of the claimants) to the second trial and render issues surrounding the issuer’s alleged liability the sole focus of the first trial (see our banking litigation blog post on The Tesco Litigation: lessons learned from split trial orders in the context of securities class actions for further details).

The judgment therefore provides noteworthy and helpful guidance to issuers faced with securities claims in advocating for a trial structure with a fairer allocation of the burden of preparing for trial. The court referred to various factors which influenced its decision that reliance issues should be heard at the first trial. In summary, the court was of the view that an early determination on reliance may increase the chance of a settlement, and that since questions concerning reliance are primarily factual, these should be determined as early as possible during the trial process, particularly where the claimants had issued proceedings deep into the limitation period.

There are two particular points of note from the judgment:

  1. the court acknowledged the claimants’ argument that the inclusion of reliance issues could lead to a longer first trial; however, the court found that this was not a telling factor in a claim of this size and significance, and that the claimants who had brought the claim “must be ready to take part in it fully” especially as litigation funding had been arranged; and
  2. the allocation of the litigation burden between the parties was one of the factors which had a bearing on the court’s decision. The court noted that the claimants who brought the claim “should be prepared to undertake substantial work in ensuring the expeditious progress of the proceedings to resolution”.

The additional implication of these points is that further securities class actions may be more costly or practically burdensome for claimants to pursue, as they may need to invest more time and costs in anticipation of being required to participate more fully throughout the proceedings from the outset.

We consider the court’s decision in more detail below.

Background

In late 2013, RSA Insurance Group plc (RSA) made public announcements in respect of certain misconduct and accounting irregularities which had occurred in its Irish subsidiary (RSA Ireland) during the period of 2009-2013. Following the 2013 market announcements, a reduction was observed in RSA’s share price.

A claimant group of institutional investors subsequently brought proceedings under section 90A and Schedule 10A FSMA against RSA on the basis that:

  • the misconduct within RSA Ireland meant RSA’s published information during 2009-2013 contained alleged false/misleading statements and/or omissions, and/or RSA had dishonestly delayed the publication of relevant information; and
  • they had suffered loss as a result of acquiring/continuing to hold RSA shares during 2009-2013 in reasonable reliance on the alleged false/misleading statements and/or omissions and/or dishonest delay of relevant information.

RSA denies the allegations and is robustly defending the s.90A FSMA claim being brought against it.

One of the main issues the parties asked the court to consider during the case’s first CMC was how the trial should be structured. It was common ground that there should be a split trial; however, the parties disagreed as to where that spilt should lie.

The parties framed the debate by reference to an agreed list of issues. It was agreed between the parties that issues relating to whether RSA is liable under section 90A FSMA (the RSA Issues) and issues relating to quantum should be heard in the first and second trial respectively. The dispute arose in relation to issues relating to reliance and causation which are issues which concern the actions of the claimants (the Claimant Issues) and in which trial such issues should be heard.

The claimants submitted that the first trial should deal solely with the RSA Issues only, leaving the reliance and causation issues to the second trial; whereas RSA submitted that in addition to the RSA Issues, the court should also determine issues of reliance in the first trial, and that as an alternative fall-back position, the court might also determine causation issues in the first trial.

Decision

The court found in favour of RSA and held that it was appropriate that issues of reliance should be included in the first trial for the reasons set out below:

  1. Settlement – The court noted that it was preferable, on balance, for more issues rather than fewer to be tried at the first trial, and that a determination on both the RSA Issues as well as the reliance issues at that juncture was more likely to bring about a settlement of the remaining issues.
  2. Timing for the determination of the reliance issues – The court was of the view that the timeline produced by RSA’s proposed split would lead to a faster determination of the factual issues concerning reliance. The potential difference between the parties’ suggested timelines amounted to approximately a year. The court was not persuaded by the claimants’ submission that such a difference was marginal and that a year or so of delay should be avoided if possible. The court agreed with RSA that the claimants had chosen to bring the claim late in the limitation period, and the more time which passed, the more difficult it would be for the parties and the court to establish what had happened on a true factual basis.
  3. First trial length – The court noted that there was some force in the claimants’ argument that their proposed spilt would lead to a shorter first trial. However, the court commented that in a case of this scale and importance, this ought not to be a particularly telling factor. The claimants who brought this claim “must be ready to take part in it fully”, even if it resulted in a longer first trial. The court further noted that it did not think a trial of 25-30 court days to be excessively onerous for parties who were as well funded as the claimants (who had secured litigation funding).
  4. Overlap between causation and reliance – Whilst the court recognised that there was some force in the claimants’ argument concerning the potential overlap between reliance and causation issues, and noted that in an ideal world it would be preferable to have a spilt trial structure which cleanly separated the Claimant Issues from the RSA Issues; however, the court did not deem such a division to be pragmatic in the present case. It further noted that it did not consider it likely for the potential overlap in reliance and causation evidence to lead to a serious risk of inconsistencies in the evidence or the court’s findings. The court acknowledged it may be unsatisfactory for the same witness to be called to provide evidence twice (once in the first trial for reliance, and another time in the second trial for causation); however, it was of the view that the process of taking causation evidence should be fairly short and self-contained in the second trial.
  5. Expert evidence – The court agreed with RSA that it was possible that no expert evidence would be required for issues of reliance. The proposition advanced by the claimants was that the price of securities on the London Stock Exchange was influenced by published information. The court’s initial view was that such an argument was self-evident and required no expert evidence. Nonetheless, the court noted that should expert evidence be required, it did not expect the process to be a long one.
  6. Possibility of appeals – Overall, the court noted that there was some force in RSA’s argument that if there were to be appeals following the first trial, it would be better for the appellate court to hear as many issues as possible at the same time. The court also regarded there to be a real risk that the determination of reliance issues could be further postponed, in the scenario where such issues are put off to the second trial and an appeal occurs after the first trial. As per the reasons above, the court deemed this to be unsatisfactory since reliance questions are essentially factual and should be dealt with sooner rather than later.
  7. Litigation burden – On the allocation of the litigation burden between the parties, the court agreed with RSA that the claimants’ proposed split effectively meant that the claimants’ burden would be postponed to the second trial and almost all the work for the first trial would rest solely with RSA. The court noted that both parties should be entitled to scrutinise each other’s case, and that there may be times where the litigation burden between the parties is lopsided by the nature of the litigation; however, that was not the case here – as such an imbalance would be created by the claimants’ proposals for a split trial. In its consideration, the court also underlined that the claimants, having brought the claim, “should be prepared to undertake substantial work in ensuring the expeditious progress of the proceedings to resolution”. This includes providing disclosure, preparing witness statements and being prepared to provide evidence at trial. The court was of the view that RSA’s proposal represented a fairer allocation of the litigation burden between the parties, which although not a determining factor by itself did however have some bearing.

Herbert Smith Freehills LLP acts for the defendant, RSA, in this matter. 

Ceri Morgan
Ceri Morgan
Professional Support Consultant
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Karen Wu
Karen Wu
Associate
+44 20 7466 2369

Climate-related disclosures for issuers: further steps towards mandatory requirements?

In November 2020, the UK Joint Government Regulator TCFD Taskforce published its “roadmap towards mandatory climate-related disclosures”, which set out a vision for the next five years. As an initial step towards fulfilling that vision, in January 2021, the new Listing Rule 9.8.6(8) (LR) came into force. The LR requires premium-listed issuers, in their periodic reporting, to publish disclosures in line with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations on a ‘comply or explain’ basis. However, the Financial Conduct Authority (FCA) has recognised that some issuers may need more time to deal with modelling, analytical, metric or data-based challenges.

This flexibility in the new LR’s compliance basis reflects the challenges and evolving experiences with working on data and metrics in the context of climate risk. Key stakeholders should now be redoubling their efforts to meet the challenges and with the promise of further TCFD guidance on data and metrics later this year and the recent launch of a Department for Business, Energy and Industrial Strategy (BEIS) consultation seeking views on proposals to mandate climate-related financial disclosures in line with the TCFD recommendations from 6 April 2022, the step to a mandatory climate-related disclosure regime may be closer than initially envisaged.

In light of the ever-evolving regulatory landscape, it is important issuers continue to monitor the impact of any changes to their disclosure requirements and to consider what, if any, litigation risks may arise (particularly, under s90 FSMA, s90A FSMA, or in common law or equity) in connection with their climate-related disclosures.

The key developments on data and metrics, as well as the key proposals from the BEIS consultation, are examined below. We also consider what these developments and proposals mean for issuers in terms of regulatory reporting requirements.

Climate Financial Risk Forum

Following its fifth quarterly meeting in November 2020, the Climate Financial Risk Forum (CFRF) noted the importance of progress in the development and understanding of climate data and metrics. In light of this, the CFRF announced that all of its working groups will focus on climate data and metrics in the next phase of work. This is a shift from the CFRF’s previous approach of allocating different focus areas to its working groups.

TCFD Financial Metrics Consultation

The TCFD has this month published a summary of the responses to its ‘Forward-looking Financial Metrics’ Consultation, which was conducted between October 2020 and January 2021. The consultation aimed to collect feedback on decision-useful, forward-looking metrics to be disclosed by financial institutions. The TCFD solicited feedback on specific metrics and views on the shift to, and usefulness of, forward-looking metrics more broadly.

46% of the 209 respondents were financial services firms from around the world, and over half of the respondents were EMEA based, with just over a quarter from North America.

These findings will inform the work on metrics and targets which the TCFD plans to tackle in 2021. The TCFD announced that it will publish broader, additional draft guidance for market review and consideration later this year.

BEIS Consultation

BEIS launched a consultation this month on mandating climate-related disclosures by publicly quoted companies, large private companies and LLPs. The consultation proposes that, for financial periods starting on or after 6 April 2022, certain UK companies with more than 500 employees (including premium-listed companies) be required to report climate-related financial disclosures in the non-financial information statement which forms part of the Strategic Report. Such disclosures are required to be in line with the four overarching pillars of the TCFD recommendations (Governance, Strategy, Risk Management, Metrics & Targets).

BEIS has stated that the proposed rules are intended to be complementary to the FCA’s requirement that premium-listed companies make disclosures in line with the four pillars and 11 recommended disclosures of the TCFD. BEIS proposes to introduce the new rules via secondary legislation which will amend the Companies Act 2006.

The Financial Reporting Council will be responsible for monitoring and enforcing the proposed rules, while the FCA will supervise and enforce disclosures within the scope of the LR.

The consultation is open until 5 May 2021.

Regulatory reporting requirements

The new TCFD guidance, once published, is likely to feed into the LR requirements. The new LR expressly refers to the TCFD Guidance on Risk Management Integration and Disclosure and the TCFD Guidance on Scenario Analysis for Non-Financial Companies published in October 2020. Additionally, the FCA’s Policy Statement dated December 2020, which accompanied the new LR, stated that the FCA would be considering how best to include references to any further TCFD guidance in the FCA Handbook Guidance. This is likely to be achieved through the use of the FCA Quarterly Consultation Papers.

The new LR is not a mandatory disclosure requirement and the new rules proposed by the BEIS consultation are yet to have legislative force. However, we are getting a clearer picture of the likely disclosure regime in the UK and in particular: the regulatory guidance around the compliance basis; the clear anticipated milestones this year relating to data and metrics guidance and best practice; and the forthcoming Consultation Paper by the FCA on the scope expansion (including compliance basis) of the new LR. That picture suggests the transition to mandatory climate-related disclosure requirements may well be a small step, rather than a giant leap.

Simon Clarke
Simon Clarke
Partner
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Nihar Lovell
Nihar Lovell
Professional Support Lawyer
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Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

High Court strikes out s.90A FSMA claims for failure to comply with pre-service joinder rules following expiration of arguable limitation period

The High Court has struck out certain of the claims brought against G4S under section 90A Financial Services and Markets Act 2000 (FSMA), in a judgment which emphasises the risks inherent in issuing complex group litigation shortly before the expiry of an arguable limitation period: Various Claimants v G4S plc [2021] EWHC 524 (Ch). The decision brings into sharp relief the need for claimants to balance the tension between the crucial practice of book-building and awaiting regulatory investigations on the one hand and limitation periods on the other. Ultimately, in this case, the court had little sympathy for claimants who had failed to get theirducks in a pen, let alone in a row” prior to the expiry of the limitation period.

The successful application will have a significant impact on the proceedings, with approximately 90% of the quantum of the claims being struck out.

The claims were primarily struck out on the basis that new claimants cannot be added to an existing claim form using CPR 17.1, which allows a party to amend its statement of case before it has been served. The Court also held that, in order for new claimants to be properly added to an existing claim form, a separate document recording their written consent must be filed with the court pursuant to CPR 19.4(4). The filing of an amended claim form, signed by the claimants’ solicitor, does not constitute such consent.

The Court further considered whether to grant the claimants permission to amend the claimants’ names where certain claimants were incorrectly identified on the claim form. The judgment provides a helpful reiteration of the legal principles which apply when the Court is considering whether to exercise its discretion to amend party names following the expiry of a limitation period.

Herbert Smith Freehills acts for the defendant, G4S, in this matter.

Background

The applications arose in the claims brought by shareholders in G4S under section 90A and schedule 10A FSMA in relation to allegedly false and misleading statements or omissions made by G4S regarding its billing practices between 2011 and 2013.

The claim form was issued on 10 July 2019 and was subsequently amended 6 times to add or remove claimants before it was served on 30 April 2020. The claimants added on or after 11 July 2019 (the Additional Claimants) were purportedly added pursuant to CPR 17.1, which provides that “A party may amend his statement of case at any time before it has been served on any other party”.

93 claimants were listed on the claim form which was served on 30 April 2020, of which 64 were Additional Claimants. In addition, a number of the claimants (including some original claimants) listed on the claim form did not appear to be legal persons capable of bringing a claim (the Unidentified Claimants).

G4S applied for the claims of the Additional Claimants to be struck out on the basis that:

  1. CPR 17.1 does not permit the addition of claimants before service either generally or where there is said to be an arguable limitation defence; and/or
  2. Under CPR 19.4(4) a party cannot be added as a claimant unless it consents in writing and the consent is filed with the court. The requirements of CPR 19.4(4) had not been met and therefore the claimants had not been validly added.

G4S also applied for the claims of the Unidentified Claimants to be struck out on the basis that they were not properly identified on the claim form and / or were not legal entities with appropriate capacity to sue.

The claimants applied for permission to amend the names of the Unidentified Claimants. The amendments sought ranged from the correction of typos to the substitution of claimants for other entities.

G4S also sought to have claims relating to publications by G4S from 2006 to 2011 struck out of the Particulars of Claim on the basis that the claim form limited the relevant time period to publications made from 2011 onwards.

The decision

The High Court (Mann J) struck out the claims of the Additional Claimants, which accounted for approximately 90% of the quantum of the claims, and refused the Claimants’ amendment application (save for a correction to the name of one claimant).

Addition of claimants pursuant to CPR 17.1

Mann J considered whether the Additional Claimants could be joined to the claim form prior to service without the Court’s permission under CPR 17.1, and whether G4S was right to bring a challenge to the addition of those claimants under CPR 3.4.

G4S argued that CPR 17.1, on its true construction, applies only to an existing party amending their own statement of case, and therefore an amendment which seeks to introduce a new claimant does not fall within this rule.

Mann J agreed, noting that the natural meaning of “his statement of case” does not include an amendment to plead another claimant’s entirely separate case. Instead, this is bringing in a new party with a distinct claim. In such circumstances, rather than seeking to amend the original claim form, the Additional Claimants should commence their own separate proceedings and later apply for the claims to be consolidated. The claims of the Additional Claimants therefore fell outside the scope of CPR 17.1 and had not been validly added to the claim form.

Given the above, Mann J considered G4S’s decision to challenge the amendments via a strike out application under CPR 3.4 to be the correct approach. However, he also dealt with the case in the alternative, assuming he was wrong in respect of the use of CPR 17.1. In doing so he held that, if the amendments to the claim form in order to add the Additional Claimants had been validly made under CPR 17.1, any challenge to the addition of the Additional Claimants would need to be made under CPR 17.2 within 14 days of service of the claim form. In this case, G4S’s strike out application could stand as an application under CPR 17.2, but the fact that it was issued outside the 14 day period meant relief from sanctions would be required.

In applying the three stage test from Denton v White and other appeals [2014] EWCA Civ 906 in respect of the relief from sanctions application, Mann J found the 8 week delay between service of the claim form and issuing G4S’s application to be significant. However, Mann J did not consider that G4S’s failure to invoke CPR 17.2 was deliberate.

The most significant factor in this case was proportionality; if relief were refused, and the amendments allowed, the Additional Claimants would be deemed to have brought their claims on the date of issue of the original claim form. G4S argued this was the last day of the limitation period, and it would therefore be deprived of the benefits of the Limitation Act 1980. This was considered to outweigh any prejudice that may be caused to the claimants if relief were granted. Mann J noted that the matters in issue had come about due to “an apparent failure to get all the claimant’s ducks in a pen, let alone in a row”. Accordingly, relief from sanctions was granted.

Mann J then went on to find that, in reliance upon Chandra v Brooke North [2013] EWCA Civ 1559, in circumstances where there is an arguable limitation point in relation to the Additional Claimants, the challenge under CPR 17.2 would succeed. This is because of the finding in Chandra that, if on an amendment application it appeared that there was an arguable limitation point, then the appropriate course was not to decide it but to refuse permission and leave it to the claimant to issue fresh proceedings in which the limitation point could be tried.

Additional Claimants – consent under CPR 19.4(4)

CPR 19.4(4) provides that:

“Nobody may be added or substituted as a claimant unless –

(a)        he has given his consent in writing; and

(b)        that consent has been filed with the court.”

The Claimants’ submitted that (i) CPR 19.4(4) did not apply to the joinder of the Additional Claimants pre-service, and (ii) in any event, filing an amended claim form signed by a solicitor as agent for the claimants constituted such consent. Mann J considered it impossible to think of a reason why this rule should apply post-service and not pre-service, and found therefore that it plainly did apply to addition of the Additional Claimants. Further, applying Court of Appeal authority Kay v Dowzall [1993] WL 13726011, Mann J held that consent impliedly expressed by a solicitor signing a claim form on behalf of the claimants cannot count as a consent under CPR 19.4(4). The rule requires a separate document from the sort of pleading the claimant (or someone on their behalf) would have to sign anyway, and this separate document would need to be filed before the addition of a party which takes effect via an amended claim form. The claims of the Additional Claimants were therefore not properly added to the claim form.

“Unidentified” Claimants

Parties can apply to amend a claim form to correct the name of a claimant or defendant under 17.4(3) if there has been a genuine mistake as to the name of that party which would not cause reasonable doubt as to the identity of the proper party. Alternatively, if a limitation period has expired, a party can be added or substituted under CPR 19.5 if the limitation period was current when the proceedings started and the amendment is necessary. An amendment will be “necessary” under CPR 19.5 if (a) the original party was named in the claim form by mistake, or (b) the claim cannot be carried on without the new party.

In considering these provisions, Mann J applied the following principles:

  1. Under both CPR 17.4 and CPR 19.5, the mistake must be as to name and not identity.
  2. CPR 19.5 refers in terms to a substitution. However, in reality CPR 17.4(3) has also been interpreted so as to allow what is, in fact (and law) a substitution.
  3. That is because the concept of a “mistake as to name” is interpreted generously.
  4. Generosity is achieved by looking to the description of the claimant or defendant (as the case may be) in the claim form (and perhaps Particulars of Claim if served with it). If the correct claimant or defendant matches the description in the claim form, the mistake may constitute a mistake as to name, rather than identity.
  5. If a description is to be relied on as saving a misdescribed party it must be sufficiently specific to allow identification in the circumstances. A successful amendment will very often be a case where there is an intention to sue in a certain capacity (for example, landlord, tenant, shipowner).
  6. The true identity must be apparent to the litigation counterparty under 17.4(3), where it is a requirement that the mistake would not have caused reasonable doubt as to the identity of the party intending to sue. While there is no “reasonable doubt” requirement under CPR 19.5, it may be a significant factor to the Court when exercising its discretion.

The “reasonable doubt” test is an objective one, and such doubt could not be removed by the possibility that the identity of the proper claimant might be apparent from G4S’s share register or other transactional information shared by the claimants’ solicitors after the date of the mistake – the “resolving of any doubt…should not depend on the defendant having to put together a jigsaw out of material provided for a different purpose”.

Even if the above requirements were met, the claimants still needed to satisfy the court that it should exercise its discretion in their favour to allow the amendments. Mann J noted that the claim was hastily put together in the knowledge that a limitation period was approaching. Had the litigation been put in train earlier, there would have been fewer mistakes or more time to correct them. The court’s discretion is not intended to encourage or assist “such disorderly litigation”, and Mann J refused to exercise it in the claimants’ favour (save for in respect of one claimant which had been identified by its former name in the original claim form).

Claim for losses prior to 2011

The claim form was limited to claims from 2011 onwards, but the claimants’ Particulars of Claim included claims going back to 2006. It was accepted that an amendment to the claim form was needed and, in circumstances where a limitation defence arguably applies, any amendment application would have to satisfy the requirements of CPR 17.4(2) (which states that the court may allow an amendment whose effect will be to add a new claim, but only if the new claim arises out of the same facts or substantially the same facts as a claim in respect of which the party applying for permission has already claimed a remedy in the proceedings).

Mann J considered it impossible to maintain that claims from 2006 onwards arose out of the same or substantially same facts as the claims limited to 2011 onwards. While the facts giving rise to the original claim may have to be investigated in the earlier period, any claim in relation to that earlier period would require additional investigations into any statements made by G4S in that period, the alleged falsity of those statements, the effect on the market of those statements, and the way in which the claimants reacted to such statements. These may be the same type of facts as the original claim, but were in reality different facts. As such, G4S’s application to strike out claims based on publications prior to 2011 succeeded.

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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Climate-related disclosures for issuers: FCA publishes final rules

The Financial Conduct Authority (FCA) has published a Policy Statement (PS20/17) and final rules and guidance in relation to climate-related financial disclosures for UK premium listed companies.

Companies will be required to include a statement in their annual financial report which sets out whether their disclosures are consistent with the Task Force on Climate-related Financial Disclosures (TCFD) June 2017 recommendations, and to explain if they have not done so. The rule will apply for accounting periods beginning on or after 1 January 2021.

As well as some additional guidance, the FCA has made only one material change to the rules consulted upon in March 2020 (CP20/03) with the final LR 9.8.6(8)(b)(ii)(C) R requiring non-compliant companies to set out details of how and when they plan to be able to make TCFD-aligned disclosures in the future.

With regard to monitoring compliance with the new listing rule, the FCA confirmed in its Policy Statement that it will provide further information on its supervisory approach to the new rule in a Primary Market Bulletin later in 2021.

In light of this latest regulatory development, issuers may also want to consider what, if any, litigation risks may arise in connection with climate-related disclosures (and indeed other sustainability-related disclosures which are made in response to these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) in which we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

For a more detailed analysis of the FCA’s Policy Statement, please see our Corporate Notes blog post.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

High Court strikes out “paradigm” claim for reflective loss in the context of allegedly negligent advice on an IPO

The High Court has struck out the most recent claim to engage the so-called “reflective loss” principle, in proceedings brought by a parent company and its subsidiary against advisers that prepared the parent company for its IPO on the Alternative Investment Market (AIM): Naibu Global International Company plc & Anor v Daniel Stewart & Company plc & Anor [2020] EWHC 2719 (Ch).

To put the decision in context, a significant number of judgments involving consideration of the reflective loss principle were adjourned pending the Supreme Court’s judgment in Sevilleja v Marex Financial Ltd [2020] UKSC 31, with the parties making submissions on the implications of the Marex judgment after it was handed down (in July 2020). This is precisely what happened in the present case, which represents the most recent application by the court of the newly defined rule.

As a reminder, the Supreme Court in Marex confirmed (by a 4-3 majority) that the reflective loss principle is a bright line legal rule, which prevents only shareholders from bringing a claim based on any fall in the value of their shares or distributions, which is the consequence of loss sustained by the company, where the company has a cause of action against the same wrongdoer (see our blog post: Untangling, but not killing off, the Japanese knotweed: Supreme Court confirms existence and scope of “reflective loss” rule).

In Naibu, the court held that the relevant claim was a “paradigm” example of a claim for reflective loss, where the loss and damage pleaded by the parent turned almost entirely upon the loss suffered by the subsidiary, since the alleged loss consisted of a fall in the value of the shares in the subsidiary (to nil). The most interesting aspect of the judgment, is the court’s rejection of the suggestion that it should look at the losses of the parent and subsidiary as they evolved over time, and that the parent should be entitled to recover any loss suffered at a particular stage if it was different in nature or quantum to the loss to the subsidiary. The court found that it would be wholly artificial to carve up the losses by time in an attempt to circumvent the application of the reflective loss rule.

While Marex emphasised the narrow scope of the reflective loss rule, Naibu demonstrates that the court is prepared to take a robust approach and strike out claims falling within its parameters. This result is likely to be welcomed by financial institutions, as the reflective loss rule is an important defence to shareholder claims, as illustrated by the context of the present case.

Background

Naibu (China) Co Ltd (Naibu China) is a Chinese sportswear company and the wholly owned subsidiary of the second claimant, Naibu (HK) International Investment Limited (Naibu HK), which is in turn the wholly owned subsidiary of the first claimant, Naibu Global International Company plc (Naibu Jersey).

In 2011, Naibu China and Naibu HK instructed the defendants in relation to a proposed floatation on the AIM. The first defendant was instructed to act as their Nominated Adviser (NOMAD) and the second defendant (Pinsent Masons) was retained as their legal adviser. Naibu Jersey was incorporated for the purposes of the AIM floatation, which took place on 30 March 2012 and went on to raise around £6m.

Subsequently, the assets of Naibu China were dissipated (allegedly by its founder) and its factory was closed. The shares in Naibu China held by Naibu HK, and in turn by Naibu Jersey were rendered valueless. Naibu Jersey was de-listed from the AIM on 9 January 2015.

Naibu Jersey and Naibu HK brought proceedings against the defendants alleging breaches of duty and/or negligence in conducting due diligence and preparing Naibu Jersey for its IPO on the AIM.

The present judgment arose in the context of Naibu Jersey’s claim against Pinsent Masons. Amongst other interlocutory activity, Pinsent Masons applied to strike out Naibu Jersey’s claim and sought reverse summary judgment on the following grounds:

  1. No implied retainer or duty of care. There was no contractual retainer between Pinsent Masons and Naibu Jersey, no need to imply any retainer, and no tortious duty of care owed to Naibu Jersey, since Pinsent Masons was engaged to act for Naibu HK and Naibu China only, and the terms and conditions incorporated in the letters of engagement with Pinsent Masons expressly excluded any liability to third parties other than their clients.
  2. Claim barred by the reflective loss rule. The loss claimed by Naibu Jersey was almost entirely reflective of the losses claimed by Naibu HK and therefore irrecoverable under the rule against recovery of reflective losses.
  3. Stay for arbitration. If the strike out / summary judgment applications failed, Pinsent Masons said that Naibu Jersey’s claim should be stayed pursuant to s.9 of the Arbitration Act 1996.

Decision

The court struck out Naibu Jersey’s claim on the basis of the reflective loss principle, save to the extent the claims related to the costs of steps taken by Naibu Jersey to assert control over and investigate the losses suffered by Naibu HK and Naibu China (in relation to which permission was given to amend the particulars of claim). The application for a stay under s.9 of the Arbitration Act was dismissed.

Implied retainer and duty of care

The legal principles governing the implication of a retainer were not disputed. It was common ground that where there is no express retainer, a retainer may nevertheless be implied from the conduct of the parties (as per Dean v Allin & Watts [2001] EWCA Civ 758).

The court was not persuaded that the facts alleged were sufficiently decisive to show that Naibu Jersey had no realistic prospect of establishing an implied retainer. In particular, Pinsent Masons had repeatedly described itself or permitted itself to be described, in formal documents, as being the solicitors for, or instructed by Naibu Jersey.

Given the court’s finding on the implied retainer, Pinsent Masons accepted that it must follow that the case on the duty of care must likewise have a real prospect of success.

Reflective loss

The main issue on the application was therefore the application of the reflective loss principle, i.e. whether Naibu Jersey’s claim against Pinsent Masons was barred because the loss claimed was reflective of the losses claimed by Naibu HK against Pinsent Masons, and therefore irrecoverable under the rule.

The court noted that the starting point in such cases is now the Supreme Court’s decision in Marex, which accepted the rule against reflective loss in Prudential Assurance v Newman Industries (No. 2) [1982] Ch 204, confirming it as a rule of law, but limiting it to claims by shareholders based on the diminution in the value of their shares or distributions that they receive as shareholders.

The court agreed with Pinsent Masons that the loss and damage pleaded by Naibu Jersey turned almost entirely upon the loss suffered by Naibu HK, since the alleged loss consisted of a fall in the value of the shares in Naibu HK (to nil) and a consequent diminution (to nil) of the value of Naibu Jersey’s investment in Naibu HK.

In the court’s view, the claim was a paradigm claim of reflective loss, which was barred by the principle as confirmed and restated in Marex. In reaching this conclusion, the court rejected Naibu Jersey’s submission that it was necessary to look at the losses of Naibu Jersey and Naibu HK as they evolved over time, making the following findings/observations:

  • The court rejected Naibu Jersey’s arguments that: (a) an investigation (through expert evidence) was required to assess the loss suffered by each of the companies at different stages; and (b) Naibu Jersey should be entitled to recover any loss suffered at a particular stage if it was different in nature or quantum to the loss to Naibu HK (Naibu Jersey suggested the losses of the two companies might diverge at different points in time because the shares were being traded in different markets).
  • Where the reflective loss rule is engaged, the decisive question is the nature of the loss claimed by the shareholder, and there is no further requirement that the amount of the loss to the company should be identical to the loss to the shareholder. In this context, the court referred to Lord Reed’s acknowledgement in Marex that a company’s loss and any fall in its share value may not be closely correlated, particularly in cases where the company’s shares are traded on a stock market. That is one of the reasons why Lord Reed rejected the avoidance of double recovery as a justification, in itself, of the reflective loss principle.
  • Given that the total losses of Naibu Jersey were ultimately the same as those of Naibu HK, it would have entirely undermined the purpose of the rule to allow Naibu Jersey to use the simple device of identifying different losses occurring at different times, with the submission that the losses of the two companies might not have been precisely contiguous.
  • The court considered that it was wholly artificial to carve up the losses by time in an attempt to circumvent the application of the reflective loss rule.

The claim by Naibu Jersey was, therefore, struck out, save in so far as it related to alleged losses relating to steps taken by Naibu Jersey to assert control over and investigate losses suffered by Naibu HK and Naibu China. The application for a stay under s. 9 of the Arbitration Act of those remaining claims was dismissed.

Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Climate-related disclosures for issuers: next steps from UK financial regulators outlined

This month, there have been some significant regulatory announcements in relation to climate-related disclosures. These announcements are a result of the increasing focus on climate change and sustainability risks across governments, regulators and industry and a continued move towards corporate compliance with the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations.

While not launching new developments or heralding the unexpected, these announcements are noteworthy for issuers as they mark a change in tone from the UK regulators regarding climate-related disclosures. Previously, the Financial Conduct Authority (FCA) and Prudential Regulation Authority took a cooperative and directional view, in recognising that issuers’ capabilities were continuingly developing in some areas which might limit their ability to model and report scenarios in the manner recommended by the TCFD. With the latest announcements, it seems increasingly likely that there will now be a shift away from voluntary climate-related disclosures towards mandatory TCFD aligned disclosures across the UK economy.

Key announcements

Recent key announcements include:

  • HM Treasury publishing the Interim Report of the UK’s Joint Government-Regulator TCFD Taskforce (the Taskforce) on the implementation of the TCFD recommendations and a roadmap towards mandatory climate-related disclosures;
  • the Governor of the Bank of England’s (BoE) speech reaffirming what the BoE is doing to ensure that the UK financial system plays its part in tackling climate change;
  • the FCA’s speech on rising to the climate challenge; and
  • the Financial Reporting Council’s (FRC) publication of its Thematic Review on climate-related risk.

Summary of key announcements

These announcements highlight the UK’s financial regulators’ strategy for improving and developing climate-related disclosures. The key points from these announcements include:

Taskforce

  • The Taskforce’s Interim Report highlighted the UK government’s commitment to introduce mandatory climate-related financial reporting, with a “significant portion” in place by 2023, and mandatory requirements across the UK economy by 2025. The Interim Report considered regulatory steps around tackling climate change, and also identified proposed legislative changes from the Department for Business, Energy and Industrial Strategy (which is intending to consult in the first half of 2021 on changes to the Companies Act 2006 to insert requirements around the TCFD recommendations on compliant disclosures in the Strategic Report of companies’ Annual Reports and Accounts, including large private companies registered in the UK).
  • The Taskforce strongly supports the International Financial Reporting Standards Foundation’s proposal to create a new global Sustainability Standards Board on the basis that internationally agreed standards will help to achieve consistent and comparable reporting on environmental and, social and governance (ESG) matters.

BoE

  • The BoE reaffirmed its commitment to driving forward the business world’s response to tackling climate change and reiterated the importance of data and disclosure in firms’ attempts to manage climate risk.
  • The BoE announced that the delayed climate risk stress test (its biennial exploratory scenario dubbed “Climate BES”) for the financial services and insurance sectors would be carried out in June 2021.
  • While the Climate BES will not be used by the BoE to size firms’ capital buffers, the BoE has put down the marker that it expects firms to be assessing the impact of climate change on their capital position over the coming year and will be reviewing firms’ approaches in years to follow.
  • The BoE also directed financial firms and their clients to the TCFD recommendations to encourage focus and drive decision-making, pointing to the benefits that the BoE has itself felt from reporting this year in line with the TCFD recommendations.

FCA

  • The FCA confirmed that from 1 January 2021 new rules will be added to the Listing Rules requiring premium-listed commercial company issuers to report in line with the TCFD recommendations. As anticipated by last year’s Feedback Statement, the new rule will be introduced on a ‘comply or explain’ basis. The general expectation is that companies will comply, with expected allowances for modelling, analytical or data based challenges. It is expected that these allowances would be limited in scope. The Taskforce’s Interim Report notes that the FCA is considering providing guidance on the “limited circumstances” where firms could explain rather than comply. A full policy statement and confirmation of the final rules are expected before the end of 2020.
  • The FCA is also intending to consult on “TCFD-aligned disclosure” by asset managers and life insurers. These disclosures would be aimed at “clients” and “end-investors”, rather than shareholders in the firm itself. The consultation is intended for the first half of 2021 and is stated that “there will be interactions with related international initiatives, including those that derive from the EU’s Sustainable Finance Action Plan” (it should be noted that such standards cover much more than climate disclosures). Current indications are that these disclosure standards would come into force in 2022.
  • The FCA is co-chairing a workstream on disclosures under IOSCO’s Sustainable Finance Task Force, with the aim of developing more detailed climate and sustainability reporting standards and promoting consistency across industry.

FRC

  • The FRC emphasised that all entities (boards, companies, auditors, professional advisers, investors and regulators) needed to “do more” to integrate the impact of climate change into their decision making. One of the FRC’s ongoing workstreams is investigating developing investor expectations and better practice reporting under the TCFD recommendations.

Regulatory reporting requirements and litigation risks for issuers

The recent announcements are a reminder by the UK’s financial regulators that issuers must look beyond the current Covid-19 crisis to the oncoming climate emergency. It is clear that not engaging is not an option, even as the regulatory environment continues to change. Issuers and firms will therefore want to consider the impact of those disclosure requirements/suggestions across the board, from investor interactions to regulatory reporting to meeting supervisory expectations.

As the sands shift, issuers may also want to consider what, if any, litigation risk may arise in connection with climate-related disclosures (and indeed other sustainability related disclosures that are brought out from the shadows with these regulatory developments). There may be an increased risk of litigation under s90 FSMA, s90A FSMA, or in common law or equity. This was considered in greater detail in our recent Journal of International Banking & Financial Law article (published in October 2020) where we also examined the existing climate-related disclosure requirements, the impact of the FCA’s proposals on issuers and how issuers can mitigate against such litigation risks.

Our article can be found here: Climate-related disclosures: the new frontier?

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nish Dissanayake
Nish Dissanayake
Partner
+44 20 7466 2365
Nihar Lovell
Nihar Lovell
Senior Associate
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

Capital Raisings and Opportunistic M&A in a Covid-19 Environment—Lessons Learned from the Global Financial Crisis

The Journal of International Banking Law and Regulation (JIBLR) has published an article written by members of our securities class action practice: Capital Raisings and Opportunistic M&A in a Covid-19 Environment—Lessons Learned from the Global Financial Crisis.

Covid-19 will make it inevitable that some companies will need to bolster their capital positions, which will lead to rights issues and other forms of capital raising later this year and into 2021. On the other hand, there will be other companies who emerge from the immediate crisis and identify opportunities to gain market share or pursue other strategic goals through mergers and acquisitions. The article considers class action specific issues which companies may face during these types of transaction. There are certain parallels which may be drawn between the current environment and the financial crisis, and the article identifies learning points from the two class actions commenced in the English courts following major transactions in the run-up to and at the height of the financial crisis—the Royal Bank of Scotland rights issue and Lloyds’ acquisition of HBOS.

In particular, the article considers:

  • The legal tests governing what information is required to be disclosed;
  • Relevant considerations when information is excluded from public disclosures;
  • Forward-looking guidance;
  • Specificity of risk factors;
  • The impact of timetable pressure;
  • Working capital statements;
  • Recommendations to shareholders; and
  • Regulator capriciousness.

Please contact Ceri Morgan if you would like to request a copy of the full article.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Harry Edwards
Harry Edwards
Partner
+61 3 9288 1821
Chris Bushell
Chris Bushell
Partner
+44 20 7466 2187
Sarah Penfold
Sarah Penfold
Senior Associate
+44 20 7466 2619

High Court tests newly narrowed scope of the “reflective loss” rule in first decision since the Supreme Court’s judgment in Marex

In the first decision to consider the so-called “reflective loss” principle since the Supreme Court’s judgment in Sevilleja v Marex Financial Ltd [2020] UKSC 31 earlier this year, the High Court has emphasised the newly narrowed scope of the rule: Broadcasting Investment Group Ltd & Ors v Smith & Ors [2020] EWHC 2501 (Ch).

As a reminder, the Supreme Court in Marex confirmed (by a 4-3 majority) that the reflective loss principle is a bright line legal rule, which prevents shareholders from bringing a claim based on any fall in the value of their shares or distributions, which is the consequence of loss sustained by the company, where the company has a cause of action against the same wrongdoer. Marex confirmed the narrow ambit of the rule, which should be applied no wider than to shareholders bringing such claims, and specifically does not extend to prevent claims brought by creditors. For a more detailed analysis of the decision in Marex, see our blog post: Untangling, but not killing off, the Japanese knotweed: Supreme Court confirms existence and scope of “reflective loss” rule.

The issue arose in the present case on an application for strike out / reverse summary judgment by the defendant to a claim for alleged breach of a joint venture agreement. The court found that the claim brought by the first claimant – a direct shareholder in the company that suffered the relevant loss – was a paradigm example of a claim within the scope of the reflective loss principle. The court was prepared to determine this question finally and strike out the claim, on the basis that the reflective loss principle is a rule of law and it was not suggested that further relevant evidence might emerge at trial.

However, the more interesting aspect of the decision considered whether the reflective loss principle should bar the claim of the third claimant, who was a “shareholder in a shareholder” in the first claimant (conveniently described in the judgment as a “third degree” shareholder).

The nub of the argument was that the third claimant should be treated as a “quasi-shareholder” in the relevant company, by reason of the chain of shareholdings connecting him to that company. The defendant argued that the third claimant should not be put in a better position, for the purposes of the rule, than if he had actually been a shareholder in that company (i.e. than the first claimant).

However, the court rejected this argument, and held that the reflective loss rule did not operate to bar the claim of a “quasi-shareholder” in this way. The court was particularly impressed by the emphasis in Marex that the reflective loss rule bars only shareholders in the loss-suffering company and is a “highly specific exception of no wider ambit”. This sentiment was antipathetic to any incremental extensions of the rule beyond that described in Marex. The court therefore refused to strike out the claim of the “third degree shareholder”, which will proceed to trial.

Considering the implications of this decision in a financial services context, the robust confirmation and clarification of the reflective loss principle in Marex has generally been well-received by the market. Although the rule has certainly been pruned, there was a clear risk in Marex that the principle, as a binding rule of law, could be lost altogether. In its surviving form, the reflective loss rule will continue to play an important part in the defence of shareholder claims against banks (aside from claims brought under section 90 and 90A of the Financial Services an Markets Act 2000, which provide a statutory exemption).

The present decision could (at first glance) raise concerns of opening the door to novel claims against the bank. For example, where it is alleged that a corporate customer has suffered loss for which the bank is responsible, a claim could theoretically be brought by both that company and by a “quasi-shareholder”, where there is a chain of shareholder ownership in the relevant company. However, the “quasi-shareholder” must have an independent cause of action against the bank, and in most cases there should be good arguments to say that there is no contractual relationship and no duty of care is owed to a second or third degree shareholder.

Background

The underlying facts of the dispute are complex, but relate to the development of a start-up company in the technology sector. In broad summary, in October 2012 an alleged oral joint venture agreement (JV Agreement) was entered into by the claimants, the first defendant (Mr Smith), the second defendant (Mr Finch) and certain other parties. Under the terms of the JV Agreement, it was intended (among other things) that a joint venture vehicle would be set up, called Simplestream Group plc (SS plc), and that Mr Smith’s shares in two existing software companies would be transferred to SS plc.

SS plc was subsequently formed and its shareholders were Mr Smith, Mr Finch and the first claimant, Broadcasting Investment Group Limited (BIG). In alleged breach of the JV Agreement, the relevant shares were not transferred to SS plc, and SS plc subsequently entered creditors’ voluntary liquidation.

BIG brought a claim against Mr Smith and Mr Finch (and others) for breach of the JV Agreement, claiming specific performance as regards the transfer of shares to SS plc, or damages in lieu of specific performance. Alternatively, BIG claimed that it suffered loss by reason of the consequent diminution in the value of its shareholding in SS plc and loss of dividend income from SS plc.

The second claimant (VIIL) was the majority shareholder of BIG and the third claimant (Mr Burgess) was, in turn, the majority shareholder of VIIL. Mr Burgess brought parallel claims to those brought by BIG, on the basis that both BIG and Mr Burgess personally were alleged to be parties to, and therefore prima facie entitled to enforce, the JV Agreement.

Mr Smith applied for strike out / reverse summary judgment on the basis that the claims of BIG and Mr Burgess were barred by the rule against reflective loss, as recently affirmed by the Supreme Court in Marex.

At the date of the hearing to which the present judgment relates, the liquidator of SS plc had not indicated any intention to pursue any claims which SS plc might have in relation to the JV Agreement.

Decision

The court held that, while BIG’s claim to enforce the JV Agreement was barred by the rule against reflective loss first established in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, and should be struck out, Mr Burgess’ claim was not barred by the same principle and could proceed to trial.

The court considered a number of other issues, but this blog post focuses on the court’s analysis of the reflective loss principle, being the first case to consider and apply the Supreme Court’s decision in Marex earlier this year.

Application of the Supreme Court’s decision in Marex

The application for strike out / summary judgment had been adjourned pending the determination of the appeal to the Supreme Court in Marex, which the court noted had clarified the law governing the reflective loss principle and made the task of considering the application at hand considerably more straightforward.

The court acknowledged that – strictly speaking – the application of the reflective loss principle to claims by shareholders was not a matter for decision in Marex, because the question before the Supreme Court considered the specific position of a creditor who was not a shareholder. Nevertheless, all members of the Supreme Court in Marex made it clear that it was necessary for them to review the scope of the principle in its entirety in order to decide whether it should be extended to creditors. It followed that the reasoning of the majority in Marex represents the law which must now be applied to all attempts to rely on the principle of reflective loss, whether the claims are by shareholders or others.

A detailed analysis of the Supreme Court’s decision in Marex can be found on our banking litigation blog. In summary, the Supreme Court (by a majority of 4-3) confirmed that the “reflective loss” rule in Prudential is a bright line legal rule of company law, which applies to companies and their shareholders. The rule prevents shareholders from bringing a claim based on any fall in the value of their shares or distributions, which is the consequence of loss sustained by the company, where the company has a cause of action against the same wrongdoer. However, the Supreme Court unanimously held that the principle should be applied no wider than to shareholders bringing such claims, and specifically does not extend to prevent claims brought by creditors. The majority of the Supreme Court (led by Lord Reed) emphasised that the rule is underpinned by the principle of company law in Foss v Harbottle (1843) 2 Hare 461: a rule which (put shortly) states that the only person who can seek relief for an injury done to a company, where the company has a cause of action, is the company itself. On this basis, a shareholder does not suffer a loss that is recognised in law as having an existence distinct from the company’s loss, and is accordingly barred.

Requirement for concurrent claim

The court’s starting position was to determine whether SS plc (theoretically) had a cause of action arising out of the JV Agreement. It said this was the logical first question, since the rule in Prudential is concerned only with concurrent claims, one of which must be vested in the company which has suffered the relevant loss. The court stated that, if SS plc did not have such a claim, then the application should fail.

In response to this preliminary question, the court found that SS plc had a contractual claim to enforce the JV Agreement by virtue of the s.1(1)(b) of the Contracts (Rights of Third Parties) Act 1999 (1999 Act), which provides that a person who is not a party to a contract may in his/her own right enforce a term of the contract if “the term purports to confer a benefit” on that person.

One of the terms of the JV Agreement pleaded by the claimants (and therefore of course taken as factually correct for the purpose of the application), provided that the shares to be transferred to SS plc would be held by the company beneficially, which in the court’s view, appeared ostensibly to bestow an advantage on SS plc for the purpose of s1(1)(b). This analysis was unaffected by the fact that the agreement in question was oral rather than written, and the court found on the facts nothing to suggest that the parties did not intend the term in question to be enforceable by SS plc, so as to engage s.1(2) of the 1999 Act and disapply s.1(1)(b).

Scope of the rule in Prudential / the reflective loss principle

Having concluded that SS plc had a concurrent claim to enforce the JV Agreement, the court turned to consider whether the rule in Prudential, as explained by Marex, barred : (1) the claim brought by BIG, a shareholder in SS plc; and/or (2) the claim brought by Mr Burgess, who was not a direct shareholder in SS plc.

(1) BIG’s claim

In the court’s judgment, BIG’s claim was a paradigm example of a claim that was within the scope of, and was therefore barred by, the rule in Prudential.

The court accepted that BIG’s claim was in respect of a loss suffered by SS plc, because:

  • BIG’s claim was to enforce the JV Agreement, and in particular, Mr Smith’s alleged obligation to transfer shares to SS plc.
  • BIG was a shareholder in SS plc and its loss was merely reflective of that suffered by SS plc, as was apparent from the claimants’ pleaded case.
  • Since SS plc and BIG had concurrent claims against Mr Smith, BIG’s claim was barred by the rule in Prudential.

The court confirmed that the rule in Prudential extended to both the claim for damages and to the claims for specific performance of the JV Agreement. In particular, the court noted Lord Reed’s explanation in Marex that one of the consequences of the rule in Prudential is that a shareholder cannot (as a general rule) bring an action against a wrongdoer to recover damages “or secure other relief” for an injury done to the company. There was no suggestion in Marex that any specific remedy, such as specific performance, is exempt from the rule; to allow otherwise would permit the avoidance of the rule in Foss v Harbottle.

(2) Mr Burgess’ claim

The court then turned to consider whether Mr Burgess’ claim was within the scope of the rule in Prudential.

The court said the real question here was whether, following Marex, the rule in Prudential can apply to bar the claim of someone who is not a shareholder in the company which suffers the relevant loss (i.e. SS plc). As explained above, Mr Burgess was not a shareholder in SS plc directly. He was the majority shareholder in VIIL, which was the majority shareholder in BIG, which was a shareholder in SS plc.

The court noted that, given the conclusion reached by Lord Reed, the answer to this question might appear obvious (emphasis added):

“The rule in Prudential is limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way.”

While Lord Reed limited the application of the rule, in terms, to claims by shareholders in the relevant loss-suffering company, it was argued that a number of the justifications underlying the rule applied with equal force to Mr Burgess’ claim. This was because Mr Burgess was in the position of “a shareholder in a shareholder” or of “a shareholder in a shareholder in a shareholder” (conveniently described in the judgment as “second degree” or “third degree” shareholders).

The court commented that the nub of the argument seemed to be that Mr Burgess should be treated as a “quasi-shareholder” in SS plc who, by reason of the chain of shareholdings connecting him to SS plc, could not be in a better position, for the purposes of the rule, than if he had actually been a shareholder in that company.

The court was not persuaded, and held that the rule in Prudential did not operate to bar Mr Burgess’ claim, for the following key reasons:

  1. The judgments of the majority of the Supreme Court in Marex make it clear that the rule only bars claims by shareholders in the loss-suffering company.
  2. The descriptions of the rule in the judgments of Lord Reed and Lord Hodge are antipathetic to any incremental extension of the rule to non-shareholders, whatever policy justifications may be advanced for such an extension.
  3. A “second degree” or “third degree” shareholder is not, in fact or in law, a shareholder in the relevant company. To blur that distinction would be to ignore the separate legal personality of the companies which form the intervening links in the chain between the claimant and the loss-suffering company. In the present case, none of the limited circumstances applied for the court to “pierce the corporate veil”.
  4. The rule in Prudential derives from the legal relationship between a shareholder and his/her company; and the rule is something which the shareholder contracts into when he/she acquires his/her shares. This reasoning cannot apply to a second degree or third degree shareholder who does not acquire shares in the relevant company and therefore never contracts into the rule so far as it affects recovery of losses by that company.

Interestingly, there does not appear to have been any discussion of the lack of connection between the claim brought by Mr Burgess (where the cause of action was a personal claim for breach of the JV Agreement to which he was a party), and the loss alleged to have been suffered, which arose separately through his indirect shareholding in SS plc. As a result of the failed application, Mr Burgess’ claim will proceed to trial, which may offer the opportunity to consider this issue.

Suitability for summary judgment

The court rejected the claimants’ suggestion that the application of the rule in Prudential is inherently unsuitable for summary determination because there is a discretion in the operation of the rule.

The court commented that both the application of the Prudential rule itself and the question of whether SS plc had an independent cause of action under the 1999 Act raised questions of law, which were suitable for determination on a strike-out / reverse summary judgment application (following the court’s observations in Easyair Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch)).

Harry Edwards
Harry Edwards
Partner
+61 3 9288 1821
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

Climate-related disclosures: the new frontier?

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the Financial Conduct Authority (FCA)’s proposals for regulating climate-related disclosures and the litigation risks which may arise for issuers from such proposals.

Climate change has been part of the political and regulatory discourse for years. However, it is an issue which is gaining increasing prominence on the global stage. Over a thousand companies now support the Task Force on Climate-related Financial Disclosures (TCFD)’s recommendations, while shareholder activism in the climate arena is stretching beyond Greenpeace’s proposed resolutions at energy companies’ AGMs. Against this backdrop, both the EU and the UK have advocated for adapting their financial systems to address climate risks. Whilst the European Central Bank and Bank of England are addressing the risks from climate change in their financial systems, attention has also turned to how companies themselves can be affected by climate change, both in terms of risk assessment and management, and in terms of investor and market-facing disclosures. The current legal framework regarding issuer disclosure already provides some requirements for issuers to disclose climate-related risks in certain circumstances. However, the existing disclosure requirements fall short when it comes to consistent and meaningful disclosures. There are therefore systemic and policy drivers to increase transparency, reporting and potential regulation in this space.

The FCA has noted that voluntary adoption of the TCFD’s recommendations has been increasing. However, based on the feedback that the FCA received in response to a 2018 Discussion Paper, the FCA considers that there is evidence to support the case for it to intervene to accelerate such progress.

In our article, we examine the existing disclosure requirements for issuers, the FCA’s new proposals for regulating climate-related disclosures, the FCA’s reasons behind the proposals, how issuers will be impacted by the proposed regulatory change, the litigation risks which may arise for issuers and how issuers can mitigate against such litigation risks.

This article can be found here: Climate-related disclosures: the new frontier? This article first appeared in the October 2020 edition of JIBFL.

Simon Clarke
Simon Clarke
Partner
+44 20 7466 2508
Nihar Lovell
Nihar Lovell
Senior Associate
+44 20 7374 8000
Sousan Gorji
Sousan Gorji
Senior Associate
+44 20 7466 2750

Securities class actions in England and Wales: the challenges for funders and a perspective from Australia

Herbert Smith Freehills LLP have published an article in Butterworths Journal of International Banking and Financial Law on the principal characteristics of third party litigation funding in the securities class action markets in Australia and England and Wales.

In Australia, the rise of securities class actions over the last decade has been driven in part by the presence of an active third party litigation funding market: every shareholder class action to date has been backed by litigation funders. In England and Wales, securities class actions are a more recent trend (but rapidly growing), in which third party litigation funders are increasingly taking an active role.

In our article, we compare and contrast how recent case law developments in Australia and England and Wales may impact the approach adopted by third party litigation funders to securities class actions, and therefore the risks faced by listed companies in each of these jurisdictions.

This article can be found here: Securities class actions in England and Wales: the challenges for funders and a perspective from Australia. This article first appeared in the September 2020 edition of JIBFL.

Harry Edwards
Harry Edwards
Partner
+61 3 9288 1821
Hannah Lau
Hannah Lau
Associate
+44 20 7466 2314