On 9 March 2010 HM Treasury published a response to its consultation paper on proposals to extend the statutory regime for issuer liability, which is contained in section 90A Financial Services and Markets Act 2000 (FSMA) (inserted by section 1270 Companies Act 2006), together with the final draft of The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010 (the FSMA Regulations) and accompanying explanatory memorandum. Section 90A FSMA established a statutory civil liability regime for misstatements to the market, supplementing the existing criminal provisions in FSMA. HM Treasury launched this consultation following the Davies Review on Issuer Liability, which sought to examine the consistency of the regime introduced by section 90A FSMA and whether the provision placed the common law rights of shareholders at risk.
HM Treasury has reached the following conclusions in relation to the regime:
- Basis of liability - fraud will remain the basis of the liability as opposed to negligence or gross negligence as per the consultation proposal and Professor Davies’ recommendation.
- Markets to which the regime is applicable - the current regime applies to issuers of securities admitted to trading on UK regulated markets. The regime will be extended to cover all cases where securities are admitted to trading on a securities market where either the market concerned is situated or operating in the UK or the issuer’s home state is the UK. The regime will also be extended such that ‘securities market’ will cover not only UK regulated markets but also UK multilateral trading facilities.
- Securities which should give rise to a right of compensation and who should be considered the issuer of the security - the regime will apply to “transferable securities” as defined in section 102A(3) FSMA. In the case of depositary receipts and other secondary securities giving a right to acquire or sell other transferable securities, the issuer liable to pay compensation shall be the issuer of the underlying securities. For these purposes, “acquisition or disposal of securities” does not include the acquisition or disposal of a “depositary receipt, derivative instrument or other financial instruments representing securities”. Where depositary receipts and other secondary securities are admitted to trading without the consent of the issuer of the underlying securities or derivative instruments are admitted to trading, the issuer will be liable to pay compensation under the regime. For these purposes, the FSMA Regulations will state that “an issuer of securities is not taken to have consented to the securities being admitted to trading on a securities market by reason only of having consented to their admission to trading on another market as a result of which they are admitted to trading on the first mentioned market”.
- Investors to which the regime is applicable - the regime will be extended to include sellers and holders of securities in addition to acquirers. In order to bring an action, there must have been reliance on the information published. HM Treasury distinguishes an active holder from a passive holder and concludes that a passive holder will not be entitled to bring an action as they “would not be able to show reliance upon the statement in making their investment decision”.
- Disclosures subject to the regime - the regime will apply to all information published (or announced) by the issuer by means of a recognised information service. The definition of “recognised information service” will cover information services used to disseminate information required to be published by the rules of a Multilateral Trading Facility. Provided the above is satisfied, the issuer will be liable even if the person claiming damages did not obtain the information from the recognised information service used. In relation to shareholders’ rights, HM Treasury states that the issuer should not be subject to any other liability other than that provided for in paragraph 3 (Liability of issuer for misleading statement or dishonest omission) and paragraph 5 (Liability of issuer for dishonest delay in publishing information) of the FSMA Regulations other than the exceptions set out in paragraph 7.
- Liability for dishonest delay - the regime will be extended to include liability where the issuer acts dishonestly in delaying the publication of the information. The FSMA Regulations define dishonesty using the criminal test so that a person will be ‘dishonest’ in respect of a delay there “that person’s conduct would be regarded as dishonest by those who regularly trade in the markets in question, and, in addition, the person concerned was aware that their conduct would be regarded as dishonest”.
The FSMA Regulations will not come into force until they have been debated by the House of Commons and the House of Lords. They were, however, laid before Parliament on 8 March 2010 and it is intended that the new regime will apply in relation to information first published on or after 1 October 2010.