English law provides a statutory regime for disgruntled investors to seek compensation from an issuer of publicly traded securities in respect of loss suffered as a result of misleading or incomplete information disseminated to the market. This regime is contained within the Financial Services and Markets Act 2000 (“FSMA“).
FSMA provides two such routes to recovery: section 90 and Schedule 10A.
Section 90: a summary
Section 90 provides redress for misleading statements or omissions in listing particulars or prospectuses (albeit it does not apply to an AIM admission document). A claim may be made under section 90 against the issuer of the securities or against any person who took responsibility for the prospectus, e.g. a director of the issuer. An issuer or individual is not liable under section 90 if they reasonably believed (having made such enquiries, if any, as were reasonable) that the statements in the prospectus were true and not misleading, or any matters omitted were properly omitted.
Schedule 10A: a summary
Schedule 10A provides redress for misleading statements or omissions in “published information” such as quarterly or annual reports and trading updates in circumstances where: a “person discharging managerial responsibilities” (“PDMR“) of the issuer (i) knew that, or was reckless as to whether, the statement in question was untrue or misleading, (ii) knew that the relevant omission involved the dishonest concealment of a material fact, or (iii) acted dishonestly in delaying the publication of the information; and the person acquiring the securities relied on that published information in circumstances where such reliance was objectively reasonable. The scope of Schedule 10A is narrower than section 90 in a number of respects. Most notably: (i) a claim under Schedule 10A can only be brought against the issuer of the securities, whilst claims under section 90 can also be brought against any person who took responsibility for the prospectus; and (ii) a Schedule 10A claim requires the threshold of dishonesty or recklessness to be met.
The FSMA regime in action
Although the statutory regime under FSMA operates alongside the usual common law causes of action in negligence and deceit, FSMA provides a framework for claims that might otherwise be difficult to bring at common law. For example, it is not possible to bring a claim in the tort of deceit unless the maker of the statement in question intended the recipient of the statement to rely on that statement. Schedule 10A by contrast does not require the issuer to intend the recipient of the statement in question to rely on it. Such an intention would be very difficult to establish in respect of annual or quarterly reports: unlike prospectuses, such documents are not intended to encourage prospective purchasers of securities to invest; the purpose of those documents is primarily to report to the shareholders on the directors’ stewardship of the company and to enable shareholders to exercise their governance rights.
High-profile examples of claims brought under these provisions are:
- A claim brought by institutional and retail investors against The Royal Bank of Scotland, pursuant to section 90. The claim was brought in respect of allegedly false and misleading information contained in a prospectus published by RBS in 2008 in connection with its £12 billion rights issue, shortly before the bank almost collapsed a few months later. The case settled in 2017 shortly before trial.
- In 2016, a claim was brought by institutional shareholders against Tesco Plc, pursuant to section 90A (the predecessor of Schedule 10A) and Schedule 10A, following a public announcement in 2014 that the company’s profits had been overstated in its accounts to the tune of £250 million. The case was dropped by “mutual agreement” in September 2020, again shortly before the trial was due to begin.
- In 2019, a claim based on section 90A and Schedule 10A was brought by certain institutional investors in Serco Group plc in relation to losses allegedly suffered in respect of shares that they held in the company between 2006 and 2013, amid allegations that Serco overcharged and failed to disclose its profits relating to UK government contracts. The case is proceeding on a split trial basis, with the first trial, on issues common to all of the claimants, listed for June 2024.
- Also in 2019, three claims were brought under section 90A and Schedule 10A by institutional investors in G4S, alleging that a failure to disclose wrongful billing practices and the provision of fraudulent financial models to the government in respect of the electronic tagging of offenders and the management of court facilities in G4S’ published information was a material omission and constituted an actionable dishonest delay. The case settled in December 2023, shortly before the first trial in the case which was scheduled for January 2024.
- More recently, a claim has been brought under section 90A and Schedule 10A for compensation in relation to an alleged accounting fraud and allegedly untrue or misleading statements in BT Group’s published information between 2013 and 2017. The claim was issued in January 2023 by institutional investors in BT and is proceeding in the Commercial Court.
This provides a flavour of the sorts of cases we are currently seeing in this space. It is notable that each of the cases described above relates to alleged misleading statements and /or omissions in respect of financial information. However, the FSMA provisions are not restricted in this way and may be used in respect of misleading statements or omissions relating to any subject. By way of example, we may soon see the FSMA regime utilised in an environmental context, with investors seeking to claim in respect of misleading sustainability representations (i.e., ‘greenwashing’) in prospectuses and financial information. This is all the more likely in circumstances where UK companies are facing increasing pressure from regulators and investors to publish environmental disclosures in their market-facing information.
Only one case under the FSMA provisions has so far made it to full trial in the English courts: Autonomy and others v Lynch and Hussain [2022] EWHC 1178 (Ch). Travers Smith acted, and continues to act, for the Claimants in this case. You can read our detailed briefing on it here. The case relates to the acquisition by Hewlett-Packard (“HP“) of the FTSE 100 software company Autonomy for US$11 billion in 2011, and the subsequent discovery by HP of fraudulent accounting and disclosure practices at Autonomy. Among common law causes of action, claims were brought against the former CEO and CFO of Autonomy pursuant to Schedule 10A. The case has undoubtedly paved the way for future proceedings in this area, with the judgment providing much-needed guidance on some of the complex legal issues that arise in FSMA cases. However, in contrast with other FSMA claims – which are generally brought by groups of investors who have acquired an interest in the defendant company – the claims in the Autonomy case uniquely arose out of the wholesale acquisition by HP of the entire issued share capital of Autonomy. The market is therefore still waiting for a ‘typical’ securities action to go all the way to trial.
Securities litigation is on the rise
It is possible to point to additional factors that have contributed to the rise in FSMA litigation. Important amongst these is the growth of litigation funding, which is now a multi-billion-dollar market. The nature of FSMA claims, which often involve groups of shareholders looking for a way to participate in claims without having to contribute to the costs, and where a single claim might not be financially viable, makes them an obvious area for investment and an attractive proposition for litigation funders, who seek high value claims to back. This has been mirrored by an increase in the availability of “after-the-event” insurance for claimants which allows for the risk of adverse costs orders in the event that claimants are unsuccessful to be passed on to litigation insurers.
The gain in momentum can also be attributed to the wide variety of procedural mechanisms now available for group claims. These include straightforward multi-party proceedings, ‘opt-in’ Group Litigation Orders – successfully used in the RBS rights issue litigation – and ‘opt-out’ representative actions pursuant to CPR 19.8.
Finally, the decision of the US Supreme Court in Morrison v National Australia Bank Ltd 561 U.S. 247 (2010), which significantly restricted the extraterritorial application of US securities legislation – ruling that section 10(b) of the Securities Exchange Act 1934 applied only in connection with the acquisition or sale of a security listed on a US exchange, or any other security in the US – may have played its part. The decision rendered it more difficult for shareholders to bring claims under the well-established US class action regime against issuers not listed in the US, such that investors have been encouraged to pursue such claims elsewhere, including in the English courts.
