How could class action litigation developments under FSMA affect your company?
Claims under section 90 and section 90A Financial Services and Markets Act 2000 (FSMA) are a fast-growing area, providing investors with an avenue of redress should they consider that a public company has misled them in respect of its public disclosures. As class actions gain a foothold in England and Wales, these claims are increasingly being used by investors and shareholders to seek to recoup their losses and hold public companies to account.
In this first edition of our Securities Digest, we look at the legislative provisions and key developments that will have a significant impact on how both claimant investors and defendant companies manage claims under section 90 and section 90A FSMA.
Basis for claims
Section 90, section 90A and Schedule 10A FSMA offer remedies to investors who have suffered loss as a result of misleading statements or omissions made in public disclosures.
Section 90 covers untrue or misleading statements or omissions made in a company’s listing particulars or prospectus. Section 90A and Schedule 10A relate to misleading statements or dishonest omissions in ‘published information’ or dishonest delays in publishing such information. ‘Published information’ covers information published or announced by an issuer on recognised means such as a recognised information service (RIS). For example, an issuer’s annual report.
There are a number of procedural ways in which these claims are being brought. First, some claims are being issued by including a long list of claimant shareholders (often running into the hundreds) on a single claim form. A sample of those claimants may then be identified to try certain issues. Second, representative actions are being issued under CPR 19.8 where a representative party seeks to bring a claim on behalf of other shareholders. Third, different claims issued on behalf of different groups of shareholders against the same defendant are being case managed together by the court, with common pleadings used where appropriate.
Section 90 was enacted almost 25 years ago (in 2000) and section 90A not so long after (in 2006). Schedule 10A came into force nearly 15 years ago (in 2010), albeit the provisions of each of these have been amended since enactment. Despite this, there had been no reported decisions in the English court on these provisions until the decision in ACL Netherlands BV & Ors v Lynch & Ors (Autonomy) in May 2022. The Autonomy decision provides guidance and clarification on the tests that an investor claimant must meet in order successfully to recover compensation under section 90A.
Autonomy was an English company which produced machine-learning software. It was acquired by Hewlett-Packard (HP). Following the acquisition, HP announced a substantial write-down in the value of Autonomy. HP attributed this to alleged disclosure and accounting failures. HP brought proceedings against Autonomy’s former CEO and former CFO, alleging that HP had been induced to purchase Autonomy by dishonest statements and omissions in Autonomy’s published information.
Mr Justice Hildyard described Autonomy as “a 93-day trial which I believe may rank amongst the longest and most complex in English legal history”. The judgment was over 1,200 pages, excluding schedules and appendices, and Hildyard J found HP to have “substantially succeeded” in its claims that it was induced into acquiring Autonomy by dishonest statements and omissions in Autonomy’s published information. The judgment focussed on liability and Hildyard J explained that a subsequent judgment would be required to determine quantum.
In order to succeed in a claim for compensation under section 90A and Schedule 10A, a claimant must prove that there was ‘guilty knowledge’ in the defendant company.
The key point for claimant investors and defendant companies arising from Hildyard J’s judgment is the clarification of the test under section 90A and Schedule 10A. In order to succeed in a claim for compensation under section 90A and Schedule 10A, a claimant must prove that there was ‘guilty knowledge’ in the defendant company. In respect of claims for misleading statements or dishonest omissions under paragraph 3 of Schedule 10A, a claimant must also prove that it relied on the misleading statements published by the defendant company. Reliance is not, however, required for a claim for dishonest delay in publishing information under paragraph 5 of Schedule 10A.
The court found that, under Schedule 10A, a person discharging managerial responsibilities (PDMR) for the issuer must, in the case of a statement, have had actual knowledge of the untruthful nature of the statement at the time the statement was made. In the case of an omission, a 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.
The court clarified that if the PDMR received advice on the statement or omission from an adviser, for example an auditor, it will be relevant whether that advice was in the adviser’s remit and whether the PDMR was in a position to assess that advice. If the PDMR was acting in accordance with the advice of reputable professionals, the PDMR’s knowledge is not likely to be ‘guilty’. However, in the case of ‘front-end’ reports that are intended to reflect the directors’ views of the business, 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. Directors are therefore less likely to be protected from claims about statements made in the directors’ sections of any reports.
Where there has been a public finding of ‘guilty knowledge’, as was the case in Autonomy, by, for example, a regulator or criminal court, or a public admission of ‘guilty knowledge’, the claimant investor’s position is made easier.
The court also commented on the extent to which a claimant must have relied on the false or misleading statement.
In a similar vein to the Leeds City Council and others v Barclays Bank strike out case, the court stipulated that the person acquiring the securities must have applied their mind to the statement in question, and that statement must have induced the acquisition or induced the acquirer to transact on the terms he did. The court suggested that a claimant must have actually reviewed the document in which the statement was published; if the claimant did not review a document, they cannot say they have relied on a statement in it.
The court did go on to clarify that the claimant need not necessarily have to point to a specific statement in isolation. In some cases, statements or omissions may in combination create an overall false impression which no single one imparts, which may be enough if that impression had an impact on the claimant’s mind or an influence on their judgment.
The impact of Autonomy
The Autonomy judgment paves the way for certain investors to pursue claims under section 90A of FSMA, and has helped to clarify the steps that may be required in order for claimants to succeed in a claim under paragraph 3 of section 90A. It is likely to be a key judgment going forwards in this area. However, there remain a number of questions on how the court will interpret section 90 and section 90A that are not answered in Autonomy. In addition, even the areas that were considered by the court remain controversial and are likely to be developed and refined further in subsequent cases.
“The court’s findings on reliance in Autonomy could be regarded as over-cautious, and may not reflect the future direction of travel, as they set a high bar to bring new claims under paragraph 3 of section 90A” says Ravi Nayer, a specialist in high-value commercial litigation and group claims in BCLP’s Litigation & Investigations group.
This is particularly the case in respect of the reliance element of the judgment. Indeed, Hildyard J recognised in his judgment that he had employed a narrow approach, stating: “the court should not interpret and apply the section in a way which exposes public companies and their shareholders to unreasonably wide liability”.
The impact of the Autonomy judgment is already being seen in other claims under section 90A and Schedule 10A that are proceeding through the courts. Whilst Autonomy suggests that a claimant must have actively turned its mind to statements made by the issuer in order to pursue a claim under paragraph 3 of section 90A, it is unlikely that Autonomy will be the last word on the scope of reliance required to pursue such a claim.
The reasoning in Leeds City Council v Barclays Bank was doubted in the later 2021 case of Crossley & Ors v Volkswagen Aktiengesellschaft & Ors (which was not referenced in the Autonomy judgment), where the court refused to strike out a claim where direct reliance could not be shown. In Various Claimants v Serco Group plc, certain claimants are seeking to rely on two forms of ‘indirect reliance’ known as ‘market reliance’ and ‘price reliance’ in order to pursue section 90A claims for claimants where ‘direct’ reliance on statements by an issuer has not occurred.
It remains to be seen whether the reasoning in Autonomy and Leeds v Barclays will ultimately mean that such ‘indirect reliance’ claims do not succeed or whether the courts will find a way to allow such claims in order to enable a wider group of claimants access to compensation under the FSMA regime. The lack of a reliance requirement to pursue a ‘dishonest delay’ claim under paragraph 5 of Schedule 10A coupled with the narrow interpretation of ‘reliance’ under paragraph 3 of Schedule 10A in Autonomy may well lead to an increase in claimants pursuing ‘dishonest delay’ claims.
Proposed change to liability for forward-looking statements
Following the recommendations made by Lord Hill in his Review of the UK Listing Regime (the Hill Review), the Government undertook a formal consultation in 2021 on the current rules for prospectuses and, in particular, reviewed the liability threshold for forward-looking statements (as under section 90 of FSMA). The Treasury has now published a near-final draft of its proposed regulations (The Public Offers and Admissions to Trading Regulations 2023), and an accompanying Policy Note, in which it explains that it seeks to raise the threshold of liability for certain “protected forward-looking statements” (PFLS) from negligence (as per section 90) to fraud and recklessness (as per section 90A). As such, a person responsible for PFLS contained in a prospectus would attract liability only if they “knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading” or “knew the omission from the [PFLS] to be a dishonest concealment of a material fact”. The threshold for liability would therefore be aligned with that applicable to certain other information required to be disclosed by public companies, for example annual reports and accounts (as under section 463 of the Companies Act 2006).
This change is intended to encourage listed companies to include forward-looking statements in their prospectuses, which the FCA considers would be useful for investors to have when making investment decisions. It is likewise intended to avoid forward-looking statements being communicated to certain classes of investors only, for example financial institutions that are more involved in a company’s proposed capital raise, via third party communications. It may therefore become more difficult for investors to bring claims against listed companies for breach of section 90, based on PFLS.
Although the new liability standard will be outlined in the regulations, the FCA will define the categories of statements that count as PFLS. The FCA published an Engagement Paper in May 2023 to ascertain stakeholders’ views on this. In particular, it is considering how PFLS should be defined, the types of statements that should be protected, whether there should be minimum criteria for how PFLS are produced, whether sustainability-related disclosures should be protected and how PFLS should appear in prospectuses, so as to warn of the reduced liability that will attach to them. The deadline for responses to the Engagement Paper is 29 September 2023. The FCA has said that, following this deadline, it will gather views during focus groups with stakeholders later in 2023, with a view to preparing specific rule proposals and, in 2024, it will undertake a formal consultation on these.
The growing appetite for class action litigation, and the availability of litigation funding, increases the likelihood that we will see a growing trend of claims under section 90, section 90A and Schedule 10A FSMA. The court is, therefore, likely to see a wave of new cases in this area that seek to build on and/or distinguish the reasoning in Autonomy when seeking access to compensation under these provisions. The Autonomy case itself is also likely to result in further useful guidance on how issues of quantum are determined. In his initial judgment, Hildyard J explained that he would need to address quantum in a separate judgment. In a subsequent judgment issued on 19 July 2023, which considered the admissibility of further evidence in respect of quantum, Hildyard J directed that the quantum trial be listed for November or December this year.
By acting prudently and carefully, corporates can limit their risks. Directors and anyone else responsible for prospectuses and listing particulars also need to be careful, or they could be personally liable under section 90.
Care needs to be taken in respect of all published material to ensure that it is clear and to reduce the risk of its meaning being misinterpreted. Where assertions are made publicly, corporates need to ensure that they are clear in their internal documents as to what they rely on when making those assertions.
Statements of future intent are particular areas of potential exposure, and corporates must ensure that they have fully considered, discussed and documented the steps that they will take to achieve their stated future goals, not forgetting to monitor progress against those stated goals.
Directors should also be aware of the requirement to correct promptly any misleading statements that have been made in the past when they become aware of the inaccuracy of past statements.