(Anti) Bribery & Corruption:

As both legal and cultural ESG best practice gain prominence, the robustness of companies’ corporate governance procedures faces increased scrutiny. Of course, regulators have for some time investigated and sought to sanction corruption and financial crime, but UK listed companies, and indeed their boards and senior executives, are increasingly being held to account by shareholders, at least as regards the financial impact of misconduct on their investments, by virtue of fast-developing shareholder litigation brought under the Financial Services and Markets Act 2000 (FSMA).

The context of recent FSMA claims

The sectoral context of FSMA claims has varied considerably. However, whether based on allegations of fraudulent overcharging (as in Serco), breaches of sanctions (as in Standard Chartered), or widespread bribery and manipulation of benchmarks (as in Glencore), the common feature is that these claims typically stem from serious and financially significant corporate misconduct. For that reason, observers would be forgiven for thinking that shareholders bringing FSMA claims are seeking to hold companies directly accountable for the underlying misconduct itself. In practice, however, these claims are one-step removed from that analysis, with shareholders instead seeking to recoup investment losses/overpayments caused by companies’ failures to disclose the wrongdoing and its implications to the market.

Types of claim

Excluding parallel common law claims, FSMA includes two causes of action – under sections 90 and 90A – for investors who purchased, held or disposed of interests in listed securities for misleading statements or omissions contained in company prospectuses or other information published via a recognised information service. Investors can also bring claims against companies or directors for dishonest delays in publishing information to the market.

The statute therefore provides for mechanisms by which investors can hold companies to account – not directly for the underlying corruption or bribery, for example, but rather for failures to disclose details of that conduct and its implications to the market, and therefore the financial impact which subsequent public announcements (often resulting from regulatory investigations) reveal as to the true value of their investments. For this reason, claims under sections 90 and 90A FSMA are often referred to as ‘stock drop’ cases – a term derived from the mature shareholder litigation market in the US – as investors seek to recoup investment losses/overpayments.

Standards of proof

While the underlying subject matter of these claims may involve corruption, bribery or some other form of dishonesty, FSMA claimants do not necessarily need to allege and prove fraud by those at the apex of a listed company. Often, these are “follow-on” claims, whereby claimants rely on regulatory findings as to the nature and extent of the underlying wrongdoing. If the listed company in question issued a prospectus that allegedly contains misstatements or omissions, investors will typically focus on section 90 claims (untrue and misleading statements in and/or omissions from prospectuses), for which the negligence standard of liability applies. If claimants can prove that statements were untrue or misleading, or that there were relevant omissions (even where that relates to underlying criminal or quasi-criminal conduct), FSMA shifts the burden of proof so the defendant effectively has to prove that it was not negligent (i.e., that it reasonably believed the prospectuses to be accurate and complete).

That said, dishonesty remains a core plank of causes of action brought under section 90A and schedule 10A FSMA, which relate to published information more generally. For such claims, investors need to prove that a person discharging managerial responsibilities (“PDMR”) on behalf of the listed company: (a) knew or was reckless as to whether a statement was untrue or misleading, or that the omission was a deliberate concealment of a material fact; or (b) acted dishonestly in delaying publication of information related to the underlying wrongdoing or its implications. In practice, therefore, these PDMR dishonesty elements mean that section 90A claimants often need to go further than the scope of any regulatory settlements to prove not only that misstatements or omissions were made, but also that directors or other senior management figures were aware of, or at least turned a blind eye to, what was going on further along the corporate chain.

The future of shareholder litigation

Our team has been closely involved in shareholder litigation in both the UK and in the US, and we have seen these claims being brought in England at a notable rate. The rise of shareholder litigation in the UK has been spurred, in particular, by the availability of third party litigation funding (the size of this market in the UK being estimated in excess of £2 billion in 2023) and the advent of specialist or boutique claimant law firms and claims managers. These firms scan the market for corporate wrongdoing and correspondingly significant share price drops, and then seek to draw in classes of investors on whose behalf these claims can be brought.

On the claimant side, additional considerations for asset managers and pension funds, often some of the largest institutions bringing these claims, are the regulatory and trust-related duties which they owe to the beneficiaries of the funds under their management. This can lead to large claims being pursued by such institutions for the ultimate benefit of their own clients.

Overall, therefore, listed companies and their boards of directors must now increasingly keep a lookout both for regulatory investigations of corruption and bribery-related activities and also for the potential follow-on shareholder litigation, by which shareholders can claim losses that arise from alleged overpayments for their investments and for the alleged lower value of their investments that accounts for the conclusions reached in regulatory infringement decisions. With claims in England in this area still evolving (including, most recently, with the Serco case settling one week into trial), this is certainly an area to watch in the coming years as the scope and reach of these claims continues to be shaped by the courts.