Causes of action
Which causes of action can be asserted by claimants in relation to the offer and trade of securities and which are most commonly asserted?
In relation to publicly listed securities, the principal statutory causes of action arise under Sections 90 and 90A of the Financial Services and Markets Act 2000. The Financial Services and Markets Act should be read alongside the Financial Conduct Authority (FCA) Handbook, which sets out additional requirements that must be followed when listing securities on the London Stock Exchange. These requirements include the Prospectus Rules, which establish rules to which prospectuses and listing particulars must adhere.
Section 90 – compensation for statements in listing particulars or prospectus
Section 90 makes "any person responsible for listing particulars" liable to compensate an investor who acquired securities and suffered loss as a result of an untrue or misleading statement in the listing particulars, or an omission of any matter required to be included by either the Financial Services and Markets Act or the Prospectus Rules.
It is a question of fact whether a statement is "untrue" or "misleading" and the time at which the relevant statement will be tested for accuracy and truth will typically be when the prospectus or listing particular was sent to the FCA.
While currently untested, it is likely that a claimant will not need to show that it relied on the defective prospectus or listing particulars when purchasing the securities to which the defective document relates.
The manner in which the courts will calculate damages payable under Section 90 is yet to be tested.
Section 90A – liability of issuers in connection with published information
Section 90A makes issuers of securities liable to pay compensation to investors in respect of misleading statements or dishonest omissions in published information relating to the securities, as well as dishonest delays in publishing such information.
Section 90A does not apply to prospectuses and listing particulars as these are governed by Section 90.
The investor must show that:
- it suffered a loss by relying on the information in question; and
- the defect in the document was the result of recklessness or dishonesty, rather than the lower standard under Section 90, which is akin to negligence.
Misrepresentation Act 1967
Investors may also bring a claim for misrepresentation under the Misrepresentation Act 1967. This would be suitable, for example, where a claimant entered into a contract on the reliance of a misrepresentation provided by the defendant. Remedies available include damages and rescission of the contract in question.
Other causes of action
If a misleading statement is made dishonestly, the common law cause of action of deceit may be available. For this cause of action, the claimant must prove that the misrepresentation was known to be false (or the defendant was reckless as to the statement being false) and it was intended to be acted upon. Once intent is established, reliance will be presumed and the burden will be on the defendant to rebut this.
The claimant has a further cause of action in negligent misstatement if a statement is made negligently, where the defendant owes a duty of care to the claimant.
If the defendant is authorised by the FCA, and has contravened an FCA rule, a private person who suffers a loss as a result of that contravention could also have a claim for damages under Section 138D of the Financial Services and Markets Act.
Directors’ and officers’ liability
In what circumstances and to what extent can directors and officers be held liable for misrepresentations, omissions or other fraudulent conduct in relation to the offer and trade of securities?
A claim under Section 90 of the Financial Services and Markets Act is brought against the person responsible for the defective document (prospectus or listing particulars). This will generally encompass the issuer and its directors, who will typically have assumed responsibility for the contents of the defective document.
Section 90A of the Financial Services and Markets Act is actionable only against an issuer. However, directors may be liable to the issuer in negligence or receive a penalty from the FCA in accordance with the FCA's penalty regime under Section 91(2) of the Financial Services and Markets Act, which allows directors who were knowingly involved in an issuer's contravention to be penalised.
In a claim brought under the Misrepresentation Act 1967, or one of the other available tortious claims, the liability of directors and officers will turn on the individual facts of the case.
Can liability be limited in any way?
It is not possible to limit statutory liability under the Financial Services and Markets Act. It is also not possible to exclude liability for fraud; however, other forms of liability may be limited or excluded through a provision in the relevant contract or prospectus. This will be subject to the Consumer Rights Act 2015 (for retail investors) or the Unfair Contract Terms Act 1977 (for business-to-business contracts).
In what circumstances and to what extent can secondary actors (eg, attorneys, auditors and underwriters) be held liable for misrepresentations, omissions or other fraudulent conduct in relation to the offer and trade of securities?
Only the issuer may be liable under Section 90A of the Financial Services and Markets Act. The extent of secondary liability under Section 90 of the Financial Services and Markets Act in securities claims is currently uncertain. Section 90 refers to those who are responsible for the listing particulars or prospectus, but does not identify who may be liable. However, Section 5.5.3 of the Prospectus Rules defines persons responsible as including, in addition to the issuer and its directors:
- any person who has accepted responsibility and is stated in the prospectus as having done so; and
- any person who has authorised the contents of the prospectus.
Accordingly, there is a risk that claimants may seek to bring claims against third-party advisers who assisted in the preparation of the documents, including underwriters, auditors, lawyers and public relations consultants. Audit firms in particular may find themselves at risk, as prospectuses must include an independent report and audited historical financial statements. However, Section 5.5.9 of the Prospectus Rules makes it clear that a person shall not be deemed responsible for a prospectus solely on the basis of having given advice on its contents in a professional capacity.
With respect to auditors and any tortious liability, an auditor will owe a duty of care to the shareholder only if there is a ‘special relationship’ – that is, if it has provided a specific shareholder with information with respect to a specific transaction for a particular purpose of which the auditor is aware.
Can liability be limited in any way?
Under the Prospectus Rules, persons may state that they accept responsibility for the prospectus only in relation to specified parts. This is commonly used by auditors and accountants to make clear the parts of the prospectus that they have prepared.
Given the broad definition of ‘persons responsible’, it is common for third-party advisers to ensure that they are not named in the prospectus as having accepted responsibility for the contents. Further, specific disclaimers may be included in the prospectus to that effect.
Who may file securities claims? Are there any restrictions on foreign claimants? Who are the most common claimants (eg, pension funds, institutional investors)?
Any individual or entity which has a legal personality may bring a securities claim. The individual or entity must itself have purchased the securities and subsequently suffered a loss; therefore, for example, a claim cannot be brought in the name of a company set up to manage a group litigation order.
There are no additional restrictions on foreign claimants, and it is common for foreign claimants to bring claims (including those relating to securities) in the courts of England and Wales. The types of claimant in securities claims vary and include funds, institutional investors and individuals.
Under Section 90 of the Financial Services and Markets Act, any person who has acquired securities to which the defective document relates and who has suffered a loss may bring a claim. This includes a person who has subsequently sold relevant securities and – while currently untested – should also apply to purchasers who have purchased securities in the secondary market.
Pleading and evidentiary standards
What pleading and evidentiary standards apply to securities claims, including with regard to:
(a) Proof of reliance on the relevant misrepresentation, omission or other fraudulent conduct?
The extent to which reliance is necessary when bringing claims under the Financial Services and Markets Act is currently uncertain as it has not yet been tested. However, the common view is that it is unlikely that claimants will have to show that they relied on the relevant misrepresentation or omission in the defective prospectus or listing particulars in order to succeed under Section 90, but that they will have to show such reliance when bringing a claim under Section 90A.
Reliance on a misrepresentation will also be necessary when bringing a claim under the Misrepresentation Act 1967 or in the tort of deceit.
English law and procedure do not recognise the fraud-on-the-market doctrine in US securities law.
(b) Proof of loss causation?
There are no specific requirements regarding proving loss and causation in securities claims. As a matter of general principle, a claimant in English proceedings will succeed only if it can demonstrate that it has suffered loss and that the loss was caused by the relevant breach.
The loss that can be claimed in claims under Sections 90 and 90A of the Financial Services and Markets Act continues to be a complex and uncertain topic. Both sections provide that a defendant is liable to compensate the claimant for loss suffered in respect of the securities as a result of misstatement or omission. However, the Financial Services and Markets Act does not outline the measure of damages, nor is it the subject of any direct authority. Various bases have been put forward, including:
- the price paid for the shares and the price that would have been paid had the true position been known or the relevant untrue and misleading statements not been made;
- the price paid for the shares and their market price once the true position was known;
- the price paid for the shares and their prevailing market value; and
- where the claimant has sold its shares, the price paid for the shares and the price at which they were later sold.
Each of these approaches will give rise to practical issues in demonstrating causation. Pending clarity from the courts, claimants should consider carefully how best to plead their claims in relation to loss and causation as this is likely to be a particularly contentious issue in the proceedings.
(c) Materiality requirements?
Neither Section 90 nor Section 90A of the Financial Services and Markets Act expressly requires a defect in the document to be material in order to found a claim.
However, the courts may arguably conclude that there is at least an element of a materiality requirement. Particularly in relation to Section 90A, a claimant must establish reasonable reliance on the relevant defect, which would be difficult should that defect not be material.
As a matter of practice, as litigation in England and Wales is a costly exercise, it is unlikely that an action would be pursued in relation to an immaterial defect which is likely to give rise to a very limited damages award (if anything), even if successful.
(d) Scienter requirements?
Only certain securities-related causes of action require the defendant to have intended or had knowledge of the wrongdoing in question.
Under Section 90 of the Financial Services and Markets Act, there is no requirement that the person responsible for the listing particulars intended or had knowledge of an untrue or misleading statement in the particulars, or any omission.
In contrast, under Section 90A it is necessary to demonstrate that the conduct of the directing minds of the issuer was dishonest or reckless. ‘Reckless’ in this context means having inadequate regard for whether a statement is true. The position is broadly the same in a claim in deceit.
(e) Any other requirements, standards or considerations?
In civil law cases, the burden of proof is on the balance of probabilities. In the significant majority of cases it is for the claimant to prove its case; however, the burden of proof is reversed in some cases. For example, once a claim in deceit is established, the defendant must show on a balance of probabilities that the claimant did not rely on the representation.
What pre-trial disclosure/discovery mechanisms are available to support claims, if any?
Parties may voluntarily exchange documents at any point during proceedings. However, a potential claimant may apply for pre-action disclosure before proceedings are formally commenced under Rule 31.16 of the Civil Procedure Rules. The threshold for ordering pre-action disclosure remains relatively high and the court will determine whether granting such disclosure is desirable in order to:
- dispose fairly of the proceedings;
- assist the dispute to be resolved without proceedings; or
- save costs.
Parties are required to provide copies of documents mentioned in their statements of case. Additionally, the courts will generally order disclosure of documents relevant to the case. This is typically through requiring ‘standard disclosure’, the disclosure of documents that a party relies on or which adversely or positively affect a party to the proceeding's case. The breadth of documents covered under standard disclosure has led to huge disclosure exercises in numerous cases; the courts have therefore begun moving towards issuing more focused disclosure orders in order to reduce the number of documents that are disclosed.
What rules and standards govern non-disclosure of documents on the grounds of professional privilege or other confidentiality considerations?
Parties need not provide privileged documents to the other side. The two main heads of legal professional privilege are:
- legal advice privilege – protecting communications between a lawyer and his or her client in which legal advice is sought or received. Not all communications between lawyers and their clients will therefore be privileged; and
- litigation privilege – protecting communications between a lawyer or his or her client and a third party, or other documents created on behalf of the lawyer or client, which were created for the dominant purpose of use in litigation and which came into existence once litigation was in reasonable contemplation.
What interim measures are available to claimants in securities cases?
The Civil Procedure Rules form the procedural code which governs civil procedure in England and Wales. Under these rules, multiple interim measures are available to claimants in civil claims, including securities cases. These include:
- security for costs;
- interim injunctions;
- interim declarations;
- freezing orders;
- search orders;
- disclosure orders;
- interim payment orders; and
- orders for payment of moneys into court.
An application for an interim measure will be made by an application notice, and must state the order that is sought and the reasons why the applicant is seeking the order. The Civil Procedure Rules provide detailed guidance on how such an application is made.
The courts also retain their inherent discretion at common law, which allows them to make interim orders other than those specified in the Civil Procedure Rules.
Statute of limitations
What is the statute of limitations for filing claims?
Limitation in civil actions is governed by the Limitation Act 1980 and the applicable limitation period, and the manner in which it is calculated will depend on the claim being pursued. If the applicable limitation period has expired, the defendant shall have a complete defence to the claim.
For an action founded on tort or for a breach of contract, the starting point is that a claim will be time barred if brought later than six years after the date on which the cause of action accrued (Section 9 of the Limitation Act). In a claim for breach of contract this is the date of the breach of contract; in a claim in tort it is the date on which the damage was suffered.
In cases concerning negligence in respect of latent damage, the limitation period is the later of six years from the date when the damage occurred or three years from the date when the claimant had the requisite knowledge and the right to bring such an action – with a 15-year longstop (Section 14A of the Limitation Act).
For an action brought in deceit, the limitation period is more generous and does not start running until the claimant has discovered the fraud or could have done so with reasonable diligence (Section 32 of the Limitation Act).
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