Describe the nature and extent of securities litigation in your jurisdiction.
The amount of securities litigation being pursued through the courts of England and Wales has increased significantly in the past few years. Headline cases, including the RBS Rights Issue Litigation, the Tesco Litigation and the Lloyds/HBOS Litigation, have been closely followed for developments in the law and procedure affecting securities claims. However, significant uncertainties in the law in this area remain.
The combined jurisdiction of England and Wales does not presently have an American-style opt-out class action system within which securities litigation can be easily pursued. However, the procedures and practice for opt-in group actions are becoming more developed.
For simplicity throughout this chapter, where we refer to the law, courts and jurisdiction of England we are referring to the law, courts and jurisdiction of England and Wales.Available claims
What are the types of securities claim available to investors?
In England, the primary causes of action for securities claims are statutory. Those causes of action are derived from the Financial Services and Markets Act 2000 (FSMA), section 90 and section 90A.
Section 90 gives rise to a non-fraud based liability and is designed to compensate investors who bought securities issued pursuant to a misleading prospectus. Section 90A gives rise to an ‘open market’ liability for securities bought, held or sold in reliance on untrue or misleading statements in or omissions from certain publications by listed companies.
Pursuant to Schedule 10A FSMA, a section 90A claim cannot be brought where a section 90 claim is available. Further, if a claim under section 90A is available, save for express exclusions set out in paragraph 7, Schedule 10A (including breach of contract and claims under the Misrepresentation Act 1967), an issuer is not liable for claims made on any other basis. This exclusion of other liability does not apply to claims brought pursuant to section 90.
This chapter will focus on the statutory claims applicable to listed securities.
Notwithstanding the decision in Sharp and others v Blank and others  EWHC 3220 (Ch) (referred to as the Lloyds Litigation) which applied and supported the long-standing position in Caparo v Dickman  2 AC 605 that a duty of care is only owed where advice is given for the particular purpose of the recipient relying on it, there may be instances where common law claims are appropriate.
Unlike the FSMA claims above, these causes of action can be brought by shareholders in both private and public companies. The potential claims include:
- claims in the tort of deceit (known as fraudulent misrepresentation);
- claims for negligent misstatement;
- claims for contractual misrepresentation under the Misrepresentation Act 1967; and
- claims for breach of contract (where a misrepresentation has been incorporated as a contractual term), mistake and various trust or equitable claims against any person who acted as a fiduciary to the investor.
Further, derivative claims pursuant to section 206(3) of the Companies Act 2006 can be brought against a company by a shareholder. A derivative claim permits a shareholder to pursue actions on behalf of the company in relation to wrongs committed by the company’s directors, typically breaches of duty by the director. However, the remedy is the company’s and not the shareholder’s and therefore the benefit to the shareholder is only any increase in value of his or her shareholding in the company resulting from, for example, damages paid by the director (or directors’ and officers’ insurers) to the company as a result of the derivative action.
In addition, minority shareholders can bring unfair prejudice claims pursuant to section 994 Companies Act 2006, if the facts support such a claim. The usual remedy is for the minority shareholder’s shares to be bought out or bought back by the company.Offerings versus secondary-market purchases
How do claims arising out of securities offerings differ from those based on secondary-market purchases of securities?
Section 90, which applies to securities offerings, does not preclude a secondary or aftermarket claim from being brought. There has been no case law directly on this point. However, in Possfund Custodian Trustee Ltd v Diamond; Parr v Diamond  1 WLR 1351 (Possfund), Lightman J (obiter) considered a section that is similarly worded to section 90 (Financial Services Act 1986, section 166) and concluded that: ‘[The] reference to the “person who has acquired the securities to which the prospectus relates”, as it seems to me, naturally refers to the placee in respect of the shares originally allotted to him.’ In Hall v Cable & Wireless plc  EWHC 1793 (Comm), Teare J restated this position but confirmed that [Lightman J’s judgment in Possfund], ‘noted that protection was afforded by [section 150 of the Financial Services Act 1986] to all purchasers of listed securities (whether placees or after-market purchasers) “who had relied on the continuing and updated representations in the listing particulars and the updates”. I assume that the cause of action created by section 90 of the 2000 Act is likewise for the benefit of all purchasers of listed securities.’ Academic opinion is also largely in favour of the application of section 90 to aftermarket purchases in so far as the ‘after-market’ is the after-market in the prospectus shares, as opposed to the issuer’s securities at large.
Section 90A applies to open market claims and is not therefore limited to those securities acquired in a securities offering.Public versus private securities
Are there differences in the claims available for publicly traded securities and for privately issued securities?
The statutory claims under section 90 and section 90A are only available in relation to publicly traded securities. The common law claims, including the derivative claims and unfair prejudice claims identified in response to question 2, may be available against both public and private companies.Primary elements of claim
What are the elements of the main types of securities claim?
Section 90 provides that any person responsible for listing particulars or a prospectus is liable to pay compensation to a person who has:
- acquired securities or any interest in securities offered by the listing particulars or prospectus; and
- suffered loss as a result of any untrue or misleading statement or omission of information from the listing particulars or prospectus where that information was necessary to enable investors to make an informed assessment of the issuer and the rights attaching to the securities.
Persons responsible for a prospectus will always include the issuer of the relevant securities but may also include directors and sponsors.
Claims brought under section 90 do not require a claimant to show that it relied on the alleged misstatements or omissions (or even show that they read the prospectus). This interpretation of the statute was followed in the RBS Rights Issue Litigation.
Section 90A addresses open market claims. An issuer of securities is liable to pay compensation to persons who have suffered loss from buying, selling or holding securities as a result of reliance on an untrue or misleading statement in, or omission from, certain publications made by the issuer or a dishonest delay by the issuer in publishing such information. Relevant publications would include annual reports and accounts and interim results but may also include any information published by means of a recognised information service.Materiality
What is the standard for determining whether the offering documents or other statements by defendants are actionable?
In a section 90 claim it is necessary to establish that the listing particulars or prospectus contained untrue or misleading statements or omitted any matter required to be included by section 80 or 81 FSMA (with regard to listing particulars) or section 87A or 87G FSMA (with regard to a prospectus). For both listing particulars and the prospectus, the required information is, broadly, the information necessary to enable investors to make an informed assessment of (i) the assets and liabilities, financial position, profits and losses, and prospects of the issuer of the securities; and (ii) the rights attaching to the securities. With regard to listing particulars, but not a prospectus, there is a reasonableness requirement and the reasonable requirements of a professional adviser can be relied upon by the defendant issuer in establishing the standard of information required to be included.
In a section 90A claim, the wording of the statute provides only that any untrue or misleading statement can trigger liability or the omission of any matter required to be included in the publication; there is no explicit requirement for such statements or omissions to be material, but they must have been relied upon.Scienter
What is the standard for determining whether a defendant has a culpable state of mind?
There is no requirement in a section 90 claim to prove that the defendant had a culpable state of mind. The statement being made can therefore be innocent, in the sense of it not being intentional, reckless or negligent. However, the defendant to a section 90 action can escape liability if it can make out the defence that it reasonably believed, having made such enquiries, if any, as were reasonable, that the statement made was true or not misleading or the matter omitted was properly omitted.
In a section 90A claim the standard required is more than mere negligence. The claimant must establish that a person discharging managerial responsibility (PDMR) knew or was reckless as to whether the statement was untrue or misleading, or knew the omission to be a dishonest concealment.Reliance
Is proof of reliance required, and are there any presumptions of reliance available to assist plaintiffs?
There is no requirement for a claimant in a section 90 claim to establish that they relied on, or in fact read, the offending listing particulars or prospectus.
Under section 90A there is a higher threshold. The claimant must demonstrate that they relied on the published information in deciding whether to buy, hold or sell the securities. It is currently unclear, as this issue has not been determined by the courts, whether or not a ‘fraud on the market’ theory (ie, that an efficient market prices all available information into a share price, and therefore in acquiring the shares the purchaser is relying on all of that available information in paying the price that they pay for the shares) is available to establish reliance. The Tesco Litigation has reached the stage where reliance evidence is being filed but, to date, there have been no rulings from the court as to what reliance evidence is required or sufficient.Causation
Is proof of causation required? How is causation established?
The use of ‘as a result of’ in the wording of both section 90 and section 90A suggests that it may be necessary to show a causal link between the misleading statement or omission and the loss suffered by the claimant. However, there is no direct case law on this point. It therefore remains unclear whether or not the rules on remoteness, found in tort cases, would apply to these statutory claims.
There is no direct case law on the measure of loss in section 90 claims. Analogous case law suggests that to avoid difficult questions of causation in the loss of value of a security, a date of transaction measure be adopted (ie, price paid less ‘true value’ at the date of transaction). There is no current case law that suggests that loss be calculated by reference to an event study, which would attempt to eliminate losses not related to the issuer and the complained of events. There is also no case law on the measure of loss in section 90A claims, analogous case law suggests that the deceit measure may be appropriate.Other elements of claim
What elements present special issues in the securities litigation context?
With, in particular, the RBS Rights Issue Litigation settling prior to the determination of many of the contested legal issues, the elements of a section 90 claim remain relatively untested. The same can be said for section 90A claims. The concept of what is ‘necessary information’ in the context of section 90 and the relevance of the materiality or otherwise of a misleading statement or omission remain to be determined. So too does the appropriate measure of loss in both section 90 and section 90A claims.
A further and fundamental issue in both section 90 and section 90A claims is the identity of the persons at the issuer who have the requisite knowledge or responsibility for the prospectus, listing particulars or statement. This is fundamental to the ‘reasonable belief’ defence in a section 90 claim (as set out in question 7) and to establishing the identity of the PDMRs in a section 90A claim.
The Lloyds Litigation went to trial in late 2017 to early 2018. At the time of writing, a judgment has not yet been handed down; however, it is anticipated that the decision will provide some further clarity on a number of issues including the role of advisers to issuers, the materiality test and issues relating to the principles of quantum of loss and the methodologies for calculating that loss in a non-statutory securities litigation context. It will also address a number of issues relating to directors’ duties as relevant to non-statutory claims, particularly in relation to the issuing of a shareholders’ circular.Limitation period
What is the relevant limitation period? When does it begin to run? Can it be extended or shortened?
The limitation period for the statutory claims is six years from the date of accrual of the cause of action. For section 90 claims, the cause of action is likely to accrue from the date on which the securities were acquired pursuant to the listing particulars or the prospectus, typically the closing date on a London Stock Exchange issue. However, arguments have been run that the cause of action accrues once the claimants are aware of the misstatements or omissions. For section 90A claims, the cause of action is likely to accrue on the date the misleading, untrue or omissive publication was made or, if the fact that it was untrue, misleading or omissive could not be known, for example, because this had been concealed, on the date this could be known, for example, on corrective disclosure.
It is also possible, with all parties’ agreement, to extend the limitation period by entering into a standstill agreement. This, however, gives rise to the risk of losing a potential claim where the standstill agreement does not identify all possible claims or parties.