All questions

Private enforcement

i Forms of actionLiability for statements in prospectuses or listing particulars (Section 90 FSMA)

Section 90 FSMA provides a cause of action to an investor where a prospectus or listing particulars4 relating to securities contains any untrue or misleading statement or fails to include information that is required by statute. Section 87A FSMA sets out the principal requirement that the prospectus or listing particulars include the information necessary to enable investors to make an informed assessment of the issuer5 and the rights attaching to the securities. The applicable fault standard is essentially negligence (albeit with the burden of proof reversed so that it is for the defendants to show that they were not negligent) by virtue of a defence of 'reasonable belief' that the contents of the document were complete and accurate.

The cause of action allows any person who has acquired the securities in question, and suffered a loss as a result of the defect in question, to claim for compensation from any person responsible for the defective document.

The list of persons responsible for a prospectus or listing particulars naturally encompasses the issuer and its directors taking responsibility for the contents,6 as well as those who accept responsibility7 in the offering document or who authorise its contents. The breadth of this latter category means that, while it is clear that issuers and the directors of issuers are the most likely defendants to a Section 90 claim, it is, in theory, possible for a claim also to be brought against a third-party adviser to the issuer (if it can be established that the adviser has accepted responsibility for the contents of the document).

There is considerable debate as to whether the wording of Section 90 is restricted only to the original purchasers of a security, or whether an investor who acquires securities on the secondary market might also have a claim.8 However, the better view is that, as long as the misstatement or omission remains current (i.e., the passage of time, subsequent events or any updated announcements made by the issuer have not rendered the defect in the document stale), the cause of action will extend to a purchaser of securities in the secondary market,9 although as a matter of logic one would expect losses suffered by a secondary market purchaser to diminish the losses suffered by the respective primary market purchaser.

Although market practitioners might think it obvious, there is no express requirement in the statute that limits claims only to where there are material defects in the prospectus or listing particulars; it merely requires that the document includes 'necessary' information. However, the better view is that there must be some ability for the issuer to select the information that is considered to be material to investors for inclusion in the document, not least to avoid deluging investors with immaterial information. Accordingly, the Prospectus Directive can be said to build in a materiality component to what is 'necessary' information. In an interlocutory hearing in the RBS Rights Issue Litigation, Hildyard J took the view that the 'necessary information' test was a limiting concept that was intended to further the investor protection objective by confining the content of the prospectus only to that which was necessary (i.e., indispensable).10 In any event, a Section 90 cause of action is incomplete without the investor establishing causation and loss, which ought to prevent a successful claim for immaterial information defects. Going forward, the provisions of the Prospectus Regulation (which have applied since 21 July 2019) ought to have put the matter beyond doubt by expressly defining the disclosure requirement by reference to 'necessary information which is material to an investor'.

Although the issue has not been tested, on the face of Section 90 it is not necessary for the claimant to show that he or she relied on the defective prospectus or listing particulars when purchasing the securities. It is, on the drafting of the legislation, the loss suffered by the claimant that must have resulted from the defect, rather than the acquisition of the securities in question. This potentially removes one of the significant hurdles that investors face in bringing a claim on behalf of large numbers of investors, given the obvious practical difficulties for claimants in having to show that they each placed reliance on the defect in question when purchasing securities.

A defendant11 to a Section 90 claim can rely on any of the defences set out in Schedule 10 FSMA, which, broadly speaking, provide that the defendant will not be liable where it reasonably believed the contents of the document to be complete and accurate, reasonably relied upon an expert or official source to verify the accuracy of the content in question or took reasonable steps to (or did in fact) cause a correction to be made before the investor acquired the securities. The investor will also fail in its claim if it can be shown that it knew (not merely suspected) that the statement complained of was inaccurate or incomplete. Interesting questions arise as to the steps that will need to be taken to satisfy the 'reasonable-belief' test, the most important of the defences. For example, is it sufficient to ensure that reasonable processes have been followed (including by the issuer's financial and legal advisers and its auditor) in the conduct of due diligence and verification of the contents of the document, or must the judgements reached about materiality also be objectively reasonable? How far down the chain of command within the issuer does attribution of knowledge reach?12 How easy will it be, often many years after the drafting of the document in question, to explain the key judgments on materiality to the court (particularly in relation to the omission of information) unless the rationale for those decisions was well documented at the time? In relation to omissions, must the defendant establish that he or she was aware of the specific matter in question and reasonably determined that it could be omitted or is it sufficient that he or she reasonably considered the prospectus to be complete (such that there was a reasonable belief that no material omissions existed)? These, and other issues, are likely to be fertile ground to be explored in the first cases brought to trial under Section 90 in which the reasonable belief defence is deployed. The knowledge and personal executive (or non-executive) responsibilities of individual directors will also be key, potentially raising the prospect of diverging interests between different directors in defending claims.

An investor is entitled in a Section 90 claim to recover its full loss on the securities in question, likely to be calculated by reference to the true value of the securities (i.e., their price had the inaccuracy or omission not been made) against the actual price paid. Critical questions arise, not yet determined by the English courts, about the appropriate method of identifying the true value, and at which point in time that value should be assessed. Moreover, in certain circumstances investors may seek to recover the total purchase price for the securities (less the credit for any value it may achieve upon disposal following discovery of the defect) if it can be shown that it would not have purchased the securities at all (a 'no transaction' case). Outside of an IPO context, difficult questions also arise where investors have sold shares prior to the identification of any defect, and whether those sales relate to shares that were purchased following the defective documents or to any pre-existing shareholdings. There is also debate as to whether the right to recover loss extends to consequential losses arising from the purchase of those securities, such as the opportunity cost of what the investor might otherwise have purchased had it not purchased the securities in question. However, the better view is that such compensation would not ordinarily be available under Section 90 and an investor would have to bring a claim in the alternative in fraudulent misrepresentation (deceit) to recover damages on that basis.

Liability for other published information (Section 90A FSMA)

Section 90A FSMA applies to all publications an issuer makes to the market, or whose availability is announced, through a recognised information service (other than prospectuses and listing particulars). It provides a remedy to investors who have suffered loss when buying, selling or holding securities in reliance on such information containing an untrue or misleading statement, or where there is an omission of, or a delay in publishing, information that is required. Crucially, the fault standard is high: the issuer is only liable if a director knew that, or was reckless as to whether, the statement was untrue or misleading, or if they acted dishonestly in omitting or causing a delay to disclosure of a material fact. Unlike a claim under Section 90, the cause of action is only available against the issuer. However, as can be seen from the recently published summary of the conclusions of Hildyard J in ACL Netherlands BV, Hewlett Packard The Hague BV and others v. Lynch and Shushovan,13 a Section 90A claim can be brought in the context of an acquisition of a listed (target) entity by a single acquiring ('bidco') shareholder. The (so-called 'dog-leg') structure of such a claim would involve the acquired target company admitting Section 90A liability to the bidco and then bringing proceedings against the relevant directors who had the requisite knowledge to meet the fault standard of the Section 90A claim.

There is no express requirement for the defect in question to be material. However, the information will need to be material for loss to follow. In addition, the cause of action requires each investor to establish that their reliance on the defect was reasonable, which is unlikely to be satisfied in the case of immaterial defects. The need to show reliance, however, provides a serious hurdle to bringing a claim, and in actions that have been brought to date, interlocutory judgments have proceeded on the basis that claimants will have to show that they each relied on the published information in question.14 However, there remains a live issue as to whether reliance must be shown to have been placed on the defective part of the information published or if it is sufficient to show reliance on the published information as a whole. In the absence of any court guidance or established techniques for claimants to use to show reliance other than on an individual basis, it will be interesting to observe any attempts to import methods that have been adopted in other jurisdictions to overcome this challenge.15

Section 90A creates a safe harbour for issuers of publications to the market (other than for prospectuses and listing particulars), which prevents claims being brought other than under Section 90A (with its high fault standard). However, claims in contract, under the Misrepresentation Act 1967 and common law claims where there has been an assumption of responsibility for the allegedly defective statement, are carved out of that safe harbour.

As with Section 90 claims, there is currently no case law on the appropriate methodology for determining loss under Section 90A, but the difference between the price paid (or received) and the true value of the security in question (or price realised on its sale) is likely to be the appropriate measure, subject to difficult questions of approach to identifying the degree of inflation. While the point has yet to be tested, it is not clear what loss any investor might suffer as a result of merely holding shares (rather than transacting).

Tortious liability

The existence of a duty of care for the content of published documents will depend on all of the circumstances and the proper boundaries of the law of tort in this area are the subject of much debate and a large body of case law. In broad terms, the investor will need to show that the statement was made (or the information omitted) by someone who has 'assumed responsibility' to investors for the content of that statement, and that it is fair, just and reasonable for the court to impose a duty of care in the circumstances. The courts have found that statutory auditors did not assume responsibility to the purchasers of shares in the company they audited,16 and the directors of a company did not assume responsibility to existing shareholders in relation to governance actions (such as voting in an extraordinary general meeting (EGM)) by issuing an announcement or prospectus, or by making certain statements during investor calls relating to the transaction in question.17 However, the High Court has found that an arranging bank assumed responsibility to investors in publicly issued debt securities to ensure that certain transaction documentation had been properly executed.18 Directors also owe duties to existing shareholders to exercise reasonable skill and care when providing recommendations on how to act in relation to corporate actions that they propose.19 The standard to apply in assessing whether reasonable skill and care was exercised was found, in the Lloyds/HBOS Litigation, to be whether no reasonably competent director could have made such recommendation.

Civil liability in the tort of deceit (or fraudulent misrepresentation) can arise if the investor can establish that the false information was intended to be acted on and that, when stating it, the defendant knew it was false, or was reckless (i.e., he or she did not care) as to whether or not it was false.20 However, a false statement will not be fraudulent if the provider of the statement had an honest belief in its truth at the time it was made.21 The burden is therefore great but, if that intention is established, a presumption is raised that the investor relied upon it and the burden will shift to the defendant to show that the investor did not, as well as potentially extending limitation periods. In the summary of conclusions in the Hewlett Packard case, Hildyard J confirmed that contributory negligence, on the basis that the claimant had the means of discovering the truth, provides no defence to a fraudulent misrepresentation claim. Only if the claimant was in fact aware of the truth would this be relevant since it would negate reliance. This cause of action also gives the investor the advantage that it will be able to recover all of its consequential losses, rather than merely those that were reasonably foreseeable. However, it is likely to be a matter of evidence whether the investor can establish on the facts what its counterfactual investments would have been.

If a defendant is able to show that he or she reasonably believed an actionable misrepresentation to be true at the time the contract was made, the investor's claim will be for innocent misrepresentation. However, in most circumstances the applicable remedy for innocent misrepresentation will be rescission, not a claim in damages.

Liability under the Misrepresentation Act 1967

Negligent misrepresentation is a statutory claim under Section 2(1) of the Misrepresentation Act 1967 that is established when an investor can show that he or she entered into a contract in reliance upon a misleading statement of fact made by or attributable to the defendant. The defendant will be liable if he or she cannot show that he or she reasonably believed the statement to be true at the time the contract was made.22 Accordingly, once the statement is shown to have been false, the burden of proving that the statement was made with reasonable belief in its accuracy shifts to the defendant.

The remedies available are favourable to claimants and include both damages, assessed on the measure usually reserved for actions in deceit, and rescission of the relevant contract. However, Section 2(1) only allows for that remedy to be claimed from the contracting counterparty. In a surprising first instance decision in Taberna Europe CDO II Plc v. Selskabet AF1,23 the court found that Section 2(1) of the Misrepresentation Act could be relied upon by a secondary market purchaser for a misstatement made by the issuer to the primary purchaser on the basis that the secondary market purchase brought the issuer and purchaser into some kind of contractual relationship, notwithstanding that the misstatement was made in respect of a different contract. However, the Court of Appeal24 overturned this decision confirming that, in the event of a misrepresentation made by the issuer, the remedy under the Misrepresentation Act is only likely to be available for subscribing shareholders, rather than those who purchase on the secondary market.

Company law duties

Claims might also be brought under company law duties owed to shareholders, such as the duty to provide existing shareholders with sufficient information for them to make a reasonably informed decision about any proposals put to them at EGMs.25 The Lloyds/HBOS Litigation has clarified the scope of this duty, emphasising that the duty requires the company and its directors to provide a fair, candid and reasonable description of the transaction that is being proposed based on the knowledge that the directors in fact had at the time of publication of the document.26 It is necessary for the claimants to prove both reliance and causation. For example, the claim failed in the Lloyds/HBOS Litigation because shareholders could not establish that they relied on the shareholder circular issued by Lloyds (indeed most of the claimants accepted that they had not even read it) and, in any event, it would have made no difference if the information that it was determined should have been disclosed in fact had been. The acquisition of HBOS would still have completed, so the claimants could not establish causation.

Significantly, in the Lloyds/HBOS Litigation, Norris J made obiter comments that suggest that losses suffered by shareholders as a result of breaches of these company law duties may fall foul of the rules preventing claims for losses that are merely reflective of losses suffered by the company.27 It remains to be seen if this issue prevents future claims from being successful.

Breach of regulatory obligations

An investor will have a claim where the investment agreement was made with or through a person who was not authorised by the FCA, but should have been, or where the investment was a result of an unlawful financial promotion.28

Under Section 138D FSMA, a private person29 will have additional claims available where an authorised person has breached eligible30 provisions of the FSMA or the FCA rules and that breach has caused the claimant loss. These claims are most commonly used by a private person where there has been a failure on the part of an authorised adviser to ensure its advice is suitable or where he or she was misled in some way as to the nature or description of the investment.

In the context of securities litigation, the English courts had previously confirmed that a claim under Section 138D FSMA was not available in respect of an alleged breach of the civil market abuse provisions in the FSMA or of listing rules made pursuant to Part 6 FSMA.31 However, with the advent of EU MAR (now UK MAR), which replaced the civil market abuse provisions in the FSMA, the position is less clear.

Where loss is suffered by a private person as a result of insider dealing or market manipulation, the FCA (or other prosecutors) may also obtain an order for restitution or compensation for their benefit.32 It is not inconceivable that buy-side parties in receipt of inside information from an issuer or its financial advisers as part of a market sounding, in respect of a transaction for which no cleansing announcement is made, may consider exploring injunctive relief as an option; the FCA also has power to compel issuers to make an announcement.

ii Procedure

In England and Wales, the procedural features of a private securities claim are largely governed by the Civil Procedure Rules, which form a procedural code governing all aspects of the conduct of civil court claims, with the overriding objective of dealing with cases justly and at proportionate cost.33

Claims will be commenced by the claimant filing and serving a claim form, which will be accompanied or followed by detailed particulars of the legal and factual basis for the claim. Assuming the defendant intends to defend the claim and does not dispute the English courts' jurisdiction, it will file and serve a defence, setting out in detail which parts of the claim it admits, those it denies and those it requires the claimant to prove.34 While the court has wide discretion to determine the subsequent conduct of the claim, the parties are then typically required to give extensive disclosure of documents, including, in particular, those documents that undermine their case or support another party's case, and to exchange witness statements of those individuals each party intends to call to give evidence at trial. Factual witness evidence will often be supplemented by expert evidence on issues that the court permits to assist it in the assessment of the issues in dispute. The court has substantial discretion to order the trial to be on all of the issues at once, or to order a trial of certain preliminary issues or a split trial (which may involve, for example, liability and quantum issues being determined at separate trials), giving rise to significant strategic questions at an early stage of the process.35

There is no true concept of a securities class action in England and Wales in the sense of a representative, opt-out action that is familiar in other jurisdictions. Where multiple claims against the same defendants raise common legal or factual issues, there are, however, three broad mechanisms by which those claims might be joined together. The first and most common is where the claimants themselves successfully apply for a group litigation order, with the effect that the court will manage their claims substantially as one. However, the critical point is that it is an opt-in regime, and a sufficient number of claimants will need to be persuaded to bring claims and join the group to make a claim financially viable (or to attract third-party funding). The consequent need for a 'book-build' at the commencement of proceedings tends to lead to a front-loading of costs for claimants and their funders. Second, the court could exercise its case-management powers to order that the claims are consolidated, or third, it could order that a number of claims that it considers raise common issues are suspended and an individual case, or a small number of cases, be decided as test cases. Whichever of these processes is followed, given the subject matter and likely scale of a piece of securities litigation, the case will usually be eligible for inclusion in the Financial List, which involves the assignment of a docketed judge from a list of judges who specialise in financial litigation.

A key feature of litigating in England and Wales is that, where a party is unsuccessful in bringing a claim, it will generally be required to pay the defendants' reasonable legal costs.36 This may extend to any third-party funders who assist in financing an unsuccessful claim.37 While in practice the costs awarded will not represent the full costs a party has incurred in the litigation, these sums are still usually significant and may act as a deterrent to bringing weak or speculative claims.

iii Settlements

Given the opt-in nature of securities litigation in England and Wales, there is no general requirement for judicial oversight of an agreement to settle securities litigation. A settlement agreement will simply be a contract between the claimant and the defendant agreeing the terms upon which the litigation will be discontinued, or indefinitely suspended, usually with provision for the apportionment of legal costs. However, there are obvious practical difficulties in settling a claim brought by those investors who have joined the group litigation, at least until the court orders that new claimants cannot join the group (or limitation periods have expired). There are also practical difficulties in coordinating settlement discussions with such a large and potentially diverse set of claimants, potentially with different interests and levels of motivation for the pursuit of their claims. In the event that settlements are achieved with certain parts of the class, practical issues of case management may arise from the fact that different groups of claimants may have taken primary responsibility for certain aspects of the claim, leaving any residual claimants needing to elect to narrow the claim or take on the responsibility for those additional aspects, possibly at short notice prior to trial.

One unusual feature of the jurisdiction, however, is that there is a formal regime in place38 whereby either party to the litigation can make an offer to settle, which, if the other side refuses to accept but then fails to beat at trial, can reverse the usual rule as to liability for costs.