In an interesting turn of events, on 28 March 2017 it was announced that not only had the Serious Fraud Office (SFO) agreed a deferred prosecution agreement (DPA) with Tesco, but the Financial Conduct Authority (FCA) would also be requiring Tesco to pay compensation to affected shareholders.
The SFO and Tesco have agreed a DPA in principle relating to false accounting, which would result in Tesco paying a financial penalty of just under £129 million and the SFO's full costs. A hearing will take place on 10 April 2017 for court approval of the DPA and until this time, full details of the DPA will not be released, though the SFO has confirmed that it concerns only the potential criminal liability of Tesco Stores Limited (and not Tesco plc or any employee/agent).
This is, however, separate to the criminal action being brought by the SFO against three former directors for Fraud by Abuse of Position contrary to section 1 and 4 of the Fraud Act 2006 and False Accounting contrary to s17 Theft Act 1968. Their trial is due to begin in September 2017.
In addition, Tesco has agreed with the FCA to a finding of market abuse in relation to its August Statement which gave a false or misleading impression about the value of publicly traded Tesco shares and bonds.
Tesco has therefore agreed to pay compensation to eligible shareholders (being those who acquired Tesco shares and bonds after the 29 August 2014 and who still held some or all of them on the last day of trading before the corrective statement was issued on 22 September 2014).
The FCA's records suggest that there were around 10,000 retail and institutional investors who purchased between them 320 million shares during this period and who may be eligible for compensation. The FCA estimates that the total amount of compensation that may be payable under the scheme will be approximately £85 million, plus interest, based upon each purchaser of shares receiving 24.5p a share plus interest at 1.25% a year for institutional investors and 4% for retail investors. According to Tesco, this is the difference in price of the relevant shares and bonds between market close on 19 September 2014 and market close on 22 September 2014 after Tesco had announced on the morning of 22 September 2014 that it had identified an overstatement of its expected profit, as further adjusted for other industry-wide effects on the market. The scheme will be launched in August 2017, administered by KPMG.
This is the first time the FCA has used its powers under section 384 of the Financial Services and Markets Act (FSMA) to require a listed company to pay compensation for market abuse. Section 384 grants the FCA the power, if satisfied that a person has engaged in market abuse and that one or more persons have suffered loss as a result of the market abuse, to require restitution to be paid to the appropriate persons of such amount as appears to the FCA to be just having regard to the extent of loss. In Tesco's case, the FCA determined that purchasers of relevant securities paid a higher purchase price than they should have done and that they are entitled to restitution (being the overpayment, less any amount by which the loss was mitigated, for example by sales during the relevant period or hedging).
It was also within the FCA's powers to impose a financial penalty or issue a public censure, but they did not consider it appropriate in this case, largely given the redress scheme and also the existence of the DPA (in principle). Credit was also given to Tesco for its "exemplary" cooperative approach with both the FCA and SFO during their investigations.
Perhaps the biggest question that comes out of these developments is what does this mean for the Tesco shareholder collective action? In October 2016, the litigation funder, Bentham Europe, announced that it was funding a legal action on behalf of over 125 institutional funds for the profit overstatement, claiming in excess of £100 million in damages, with Stewarts Law acting for the claimants. The action was being brought under section 90A FSMA, which provides that an issuer of securities is required to pay compensation to a person who acquires, continues to hold or disposes of securities in reliance on published information and suffers loss as a result of any untrue or misleading statement in that published information or omission therefrom, provided the issuer knew it to be, or was reckless as to whether it was, untrue or misleading.
The FCA is therefore requiring Tesco to compensate shareholders who would also likely fall within Bentham's class of claimants (given that both retail and institutional will be part of the redress scheme), though we would note that the relevant period in the collective action is longer than for the redress scheme. However, it remains unclear whether there will be any opt-outs from the redress scheme, particularly as the Annex to the FCA's Final Notice states that a full release will be required from the affected shareholder in exchange for the redress payment. While the redress scheme is, therefore, not necessarily fatal to the collective action, the cost/benefit analysis of pursuing such a claim is perhaps not as attractive as it once was.
It will be interesting to see whether the FCA will look to use its powers under section 384 FSMA more in the future for cases such as these, and what effect that may have on claimants' and litigation funders' appetites to pursue such shareholder collective claims.