Statutory issuer liability regime prior to October 2010
Under the previous regime, prior to 1 October 2010, only issuers of securities admitted to trading on a regulated market, such as the London Stock Exchange’s Main Market, were liable for fraudulent misstatements in or omissions from certain publications under the Financial Services and Markets Act 2000 (“FSMA 2000”; see section 90A). Compensation under this liability could only be claimed by investors who acquired such securities and suffered a loss as a result of the misstatement or omission.
New extended issuer liability regime as of October 2010
Under the new regime, the statutory civil liability of issuers under FSMA 2000 has been extended in the following key respects:-
Which markets are covered by the new regime?
In addition to regulated markets, the new statutory liability regime applies to securities that are listed or traded on multilateral trading facilities such as AIM and the PLUS-quoted market.
Who may be liable under the new regime?
Under the new liability regime, the following may be liable in relation to misstatements in or omissions from certain publications:-
- issuers of transferable securities (other than moneymarket instruments with a maturity of less than 12 months)
- in relation to depositary receipts, derivative instruments and other secondary securities, the issuer of the underlying securities where it consented to the admission to trading of the relevant secondary securities; and
- in relation to depositary receipts, derivative instruments and other secondary securities, the issuer of the secondary securities (only, however, for information containing fraudulent misstatements or omissions published by themselves) where the issuer of the underlying securities did not consent to the admission to trading of the secondary securities.
Who may bring a claim?
- continues to hold, or
- disposes of
the securities in reliance on published information containing a misstatement or omission. The shareholder must further have suffered a loss as a result of the untrue or misleading statement or omission.
In HM Treasury’s response to its 2008 consultation on the extension of the statutory regime for issuer liability13, the Government emphasises that with regard to the investor’s decision to continue holding securities there must be reliance on the information published by the issuer, stating that “[T]here is a clear difference between an active holder and a passive holder – the latter 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”. An investor who, for instance, instructed his broker to cancel a sell order in reliance on a fraudulent misstatement and instead retained the holding of securities would, on the other hand, be considered an active holder who may have a claim under the new liability regime.
Which information is subject to the new liability regime?
Any information (not just financial reports as was the case under the pre-October statutory liability regime) published by the issuer by:-
- means of a recognised information service such as a Regulated Information Service
- other means required or authorised to be used to communicate information to the relevant market or to the public when a recognised information service is unavailable (this is taking into account “out of hours disclosures”); or
- other means provided the availability of the information was announced by the issuer by either of the aforementioned means.
The applicable liability standard continues to be fraud (rather than negligence or gross negligence) as was the case under the pre-October 2010 liability regime. Accordingly, the issuer is liable for untrue or misleading statements in or omissions from such publications only provided a person discharging managerial responsibilities (a “PDMR”) within the issuer:-
- knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading; or
- knew the omission to be a dishonest concealment of a material fact.
A PDMR is:-
- a director or
- a senior executive who has regular access to inside information relating, to the issuer and who has power to make managerial decisions affecting the future development and business prospects of the issuer.
The new liability for dishonest delay
The Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010 (the “Regulations”)14 introduce a new statutory liability where investors suffer a loss as a result of a delay by the issuer in publishing information. The same liability standard applies as in relation to misstatements and omissions (see above), i.e. the issuer will only be liable provided a PDMR within the issuer acted dishonestly in delaying the publication of the information.
Are issuers subject to any other statutory liability?
The Regulations exclude other issuer liability (with some exceptions; see below) for loss suffered as a result of misstatements in or omissions from published information or a dishonest delay in publishing information. The exceptions are in particular:-
- civil liability for inaccurate statements in or omissions from listing particulars or prospectuses (section 90 FSMA 2000)
- civil liability for breach of contract or under the Misrepresentation Act 1967; and
- criminal liability.
Will directors be personally liable under the new regime?
The Regulations only impose liability on the issuer. They do not provide investors with a direct right of action against the individual directors of the issuer. Directors may, however, be personally liable to the issuer for negligence or breach of duty and may be sued by the issuer or by a shareholder on behalf of the issuer through the derivative claim procedure under the Companies Act 2006.
What does this mean for issuers in practice?
The new statutory liability regime clarifies the scope of issuer liability in damages for inaccurate statements made to the market and thereby provides greater certainty. Issuers and directors are already subject to considerable financial and reputational penalties for misstatements in information they publish and therefore take great care to verify the accuracy of any public statement. Issuers must continue to carry out a thorough checking and verification process when making any kind of statement to the public and make sure that relevant information is published without undue delay.
There is a risk that litigation in relation to misstatements in information published by an issuer increases although given that potential claimants must show that the misstatement or omission was fraudulent, we expect that increase to be small.