In an important decision for securities litigation in the UK, the High Court has dismissed a strike out application made by Tesco plc in the group litigation brought by its shareholders under section 90A Financial Services and Markets Act 2000 (“FSMA”), relating to the false and misleading statements made by Tesco regarding its commercial income and trading profits in 2014: SL Claimants v Tesco plc [2019] EWHC 2858 (Ch).

In summary, Tesco asserted that it was not liable for any untrue or misleading statement in its published information under section 90A and schedule 10A FSMA to any claimants who held the shares in a custody chain with more than one intermediary. While Tesco accepted that its construction would render the FSMA regime ineffective in relation to claims by holders of intermediated securities, it contended that these consequences flowed from a failure of the law to keep pace with the development of a dematerialised market, where transfers in certified securities are replaced with share dealing in computerised form (i.e. through CREST).

The court considered two technical questions of statutory construction in relation to section 90A and schedule 10A FSMA, namely whether claimants who held their shares through CREST:

  1. Had an “interest in securities” within the meaning of paragraph 8(3) of schedule 10A FSMA.
  2. Acquired, continued to hold or disposed of” any interest in securities (even if, contrary to Tesco’s first submission, they had one).

The court answered both questions in the affirmative, dismissing Tesco’s strike out application.

The decision is significant, because the vast majority of transactions in publicly held shares in companies listed in an exchange in the UK are held in dematerialised form through CREST, and the position of the claimants was entirely typical of the dematerialised securities market. If Tesco had been correct in its submissions, the effect would have been to expose a fundamental hole in the FSMA regime. Indeed, the court recognised that, had Tesco been successful, the likely consequence would have been to undermine the legislative scheme implemented by Parliament to reflect in domestic law the European Transparency Directive with a view to encouraging accurate and timely disclosure by issuers and promoting investor protection. The court held that it:

…must proceed on the basis that the draftsman and legislature did understand the market in intermediated securities, did not intend to strip away the rights of investors who chose that mode of holding their investment, and must have been persuaded that the words they used were appropriate to preserve and enhance those rights.”

Background

The underlying claim arose out of false and misleading statements made by Tesco to the market in the context of reporting its commercial income and trading profits in 2014. Two claimant groups have brought proceedings against Tesco under section 90A FSMA alleging that they suffered loss as a result of those misleading statements.

The instant judgment relates to Tesco’s application to strike out the claims on the basis that the remedies available under section 90A and schedule 10A FSMA for untrue or misleading statements were not available to the claimants because of the nature of how they acquired, held and (in some cases) disposed of their interests in the securities. In particular because:

  • The shares in Tesco were, like most listed companies in the UK, held in dematerialised form (i.e. on a computer-based system with no paper certificates) through CREST.
  • The shares were registered in the name of the financial institution providing custodian services to the claimants, so none of the claimants ever directly acquired, held or disposed of a legal interest in any of the shares.
  • Most of the shares in Tesco were held in a custody chain (with custodians in turn using sub-custodians).

Tesco’s position was that the consequence of this was:

  1. That the interest of the claimants in such a custody chain was not an “interest in securities” within the meaning of paragraph 8(3) of schedule 10A FSMA.
  2. In any event, none of the claimants could properly be said to have “acquired, continued to hold or disposed of” any interest in securities (even if, contrary to Tesco’s first submission, they had one).

Decision

The court held that neither of the two limbs of Tesco’s argument was sustainable, and therefore the strike-out application was dismissed.

1. Did the claimants have an “interest in securities” within the meaning of paragraph 8(3) of schedule 10A FSMA?

The court started its analysis with section 90A FSMA, which sets out the liability of issuers of securities to pay compensation to: “persons who have suffered loss as a result of (a) a misleading statement or dishonest omission in certain published information relating to the securities.”

Paragraph 3(1) of schedule 10A provides for compensation to be paid: “to a person who acquires, continues to hold or disposes of securities in reliance on published information to which this schedule applies” and who has suffered loss as a result of any untrue or misleading statement in it (or omission of any matter required to be included in it).

Paragraph 8 contains rules of interpretation which apply to schedule 10A. The court noted that of central importance to the present application was the definition given in paragraph 8(3) (emphasis added):

References in this schedule to the acquisition or disposal of securities include:

(a) acquisition or disposal of any interest in securities, or

(b) contracting to acquire or dispose of securities or of any interest in securities,

except where what is acquired or disposed of (or contracted to be acquired or disposed of) is a depositary receipt, derivative instrument or other financial instrument representing securities.

The question under the first limb of Tesco’s argument was therefore whether the claimants had an “interest in securities” sufficient to enable them to maintain proceedings for the purposes of section 90A and schedule 10A FSMA. Finding that they did have such an interest, the court made a number of key observations:

  • It readily accepted that where there is a chain of intermediaries, the investor at the end of the chain does not have any direct proprietary interest in the underlying security, nor can it enforce any rights held in the chain of sub-trusts directly against the issuer (referring to the Lehman Rascals case: re Lehman Brothers International (Europe) [2010] EWHC 2914 (Ch)).
  • The court also accepted that the concept of an or “any interest in securities” must denote something more than a contractual right or economic interest in such securities for the ‘custody chains’ to have legal sustainability.
  • The court acknowledged that it would be wrong to treat sub-trusts as if they were a contrivance which could be looked through for the purpose of identifying the true interest held by the ultimate investor.

However, in the court’s judgment, the ‘right to the right’ which the investor had via the custody chain was, or could be equated to, an equitable property right in respect of the securities, and this was sufficient to qualify as “any interest in securities” for the purpose of schedule 10A FSMA. The court noted that this conclusion was supported by the court’s explanation in: In the matter of Lehman Brothers International (Europe) [2012] EWHC 2997 (Ch):

It is an essential part of the English law analysis of the ownership of dematerialised securities that the interests of the ultimate beneficial owner is an equitable interest, held under a series of trusts and sub-trusts between it, any intermediaries and the depository in which the legal title is vested: see paragraph [226] of my judgment in the RASCALS case.”

2. Did the claimants “acquire, continue to hold or dispose of” any interest in securities?

Tesco’s second limb of argument was that – even if the claimants had an “interest in securities” – none of the claimants could sue because none could be said to have “acquired” or “disposed of” their interest in Tesco shares within the meaning of paragraph 8(3) of schedule 10A FSMA.

Tesco’s construction of paragraph 8(3) depended upon the proposition that there could only be an “acquisition” or “disposal” of an interest in securities if there was a transfer of, or dealing in, that particular interest (as distinct from some other interest). On Tesco’s case, at the very most, all the ultimate investors had was a beneficial interest. It said that a purchase or sale by the legal owner of legal title would not constitute a purchase or sale of the beneficial interest, because the beneficial interest could be created or extinguished, but could not be acquired or disposed of.

The court noted that Tesco’s argument depended upon a narrow interpretation of the expressions “acquisition” and “disposal” as used in schedule 10A, and confining them to the very interest in which the claimant has or had.

The court was mindful that ordinary principles of statutory construction required it to ensure that the statutory purpose (here of the relevant provisions of FSMA) were not thwarted, unless the wording was without any semantic doubt entirely deficient to apply.

With this in mind, the court referred to the Supreme Court’s recognition that in other contexts the word “disposition” was capable of encompassing the destruction or termination of an interest (see Akers v Samba Financial Group [2017] AC 424). It seemed to the court plain and obvious that the expressions “holding” and “acquisition” must in logic be given broad corresponding remit. It said there was every reason to give the expressions such meaning here, to ensure the achievement, rather than the negation, of the statutory purpose.

The court concluded:

Accordingly, I consider that any process whereby, in a transaction or transactions on CREST, the ultimate beneficial ownership of securities that are, with the consent of the issuer, admitted to trading on a securities market in accordance with paragraph 1 of schedule 10A, comes to be vested in or ceases to be vested in a person constitutes (respectively) ‘the acquisition or disposal of any interest in securities’.”

The court therefore dismissed the strike-out application.