The Government has carried out an independent review of liability in respect of damage suffered by investors as a result of false or misleading information disclosed by an issuer in reports and statements.
S1270 Companies Act 2006 introduces a new s90A and 90B into the Financial Services and Markets Act 2000 (FSMA). The catalyst for s90AFSMAis the implementation of the requirements of the EU Transparency Directive.
S90AFSMAprovides a right for those who acquire securities on the basis of untrue or misleading statements published in documents produced pursuant to the periodic disclosure requirements, eg annual reports and suffer loss as a result to seek compensation. In contrast with the US position, the right of action applies only against the issuer (ie the company), not any individual.
Following concerns raised last year in relation to the limited scope of the new statutory liability regime introduced by s90A FSMA, the Government appointed Professor Paul Davies QC to carry out a review of liability for corporate misstatements to the market and consider whether changes should be made to the existing statutory scheme using the provisions of s90B FSMA. The review does not consider changes to the current law relating to liability arising out of Initial Public Offerings. Mr Davies has now published his recommendations. The key changes to the existing statutory liability regime he recommends are that it should be extended to:
- cover all ‘ad hoc disclosure’ requirements, such as those required by the Market Abuse Directive, and all RIS announcements
- confer rights on both buyers and sellers of shares and
- apply to disclosures by issuers with securities traded on nonregulated markets, ie PLUS and AIM. This approach is somewhat inconsistent with the strict liability regime in force relating to misstatements in documentation in connection with IPO’s enshrined in s90 FSMAas this regime does not apply to exchange regulated markets (see below).
Perhaps more significant were the areas in which the review recommends no change, including:
- fraud should be maintained as the standard of liability for misstatements to the market. It appears that the threat of US style investor claims was a significant factor that weighed against adopting a lesser negligence based standard
- statutory liability should continue to be confined to issuers only and not directors of issuers or any other professional advisers.
The review does recommend an extension to the existing statutory liability regime, particularly insofar as companies listed on exchange regulated markets are concerned.
In order for an issuer to be liable under s90AFSMAit is almost inevitable that a director will have knowledge of the misleading statement. Consequently, it is possible that claims may be brought against any director implicated in the misleading statement by either the issuer, its shareholders (via the new statutory derivative claim) or the FSA.
On balance, however, we do not believe s90AFSMAand (if adopted) the extension to the statutory liability regime recommended by the Davies review will materially increase the risk faced by directors. The primary reason is that claims based on statements made in narrative reports or financial statements are difficult to bring because of the requirement to establish fraud. This is reflected by the fact that no issuer has ever been found liable under English law in respect of a statement made in narrative reports or financial statements.