This article was originally featured in The Liaison Mid-Year Report 2022 which is published by US-based plaintiff’s law firm Labaton Sucharow.
The number of UK-based investor group actions continues to rise. It is now the most active jurisdiction in Europe for these lawsuits. As of yet, however, there remains limited case law from English courts as to how investor group actions will operate on key issues. Important developments in the ongoing RSA Insurance Group plc (“RSA”) action may provide meaningful guidance and insight as to how securities litigation will proceed in this jurisdiction in the future.
RSA involves over 70 institutional investor claimants, is financed by a single funder, and is being litigated by a single law firm with no competing actions. It was launched in three separate tranches – the first issued in 2019, and the other two in May and June 2021, respectively. The claims are brought under Section 90A of the UK’s Financial Services and Markets Act 2000 (the “FSMA”) under which investors can hold companies accountable for false and misleading statements and omissions, or for dishonest delays in publishing truthful information. The trial on RSA’s liability is scheduled for October 2022, with a second trial covering, among other things, each claimant’s reliance to be held thereafter.
Partner Andrew Hill and Senior Associate Anisha Patel from London-based Fox Williams LLP, who are not litigating this case, share their opinion as to the potential impact of the case on investor actions in the UK and what lies ahead for shareholders pursuing recoveries there.
A statute of limitations victory with reliance implications
In a significant victory for the claimant group, the court rejected an application by RSA to strike out or summarily dismiss certain claims on the basis that they were time-barred. Specifically, RSA applied to strike out/summarily dismiss new claims added in 2021 despite the original claim being initiated in 2019. The court held that the limitations issues in the case were not suitable for summary judgment (therefore, the claims could be maintained). RSA sought to strike out the claims filed in 2021 on the basis that claimants could not take advantage of the statutory provision, which delays the commencement of the six-year limitation period “… until the plaintiff has discovered the fraud [or] concealment … or could with reasonable diligence have discovered it.” By way of background, the first claims had been issued on November 5, 2019, within six years of the first drop in RSA’s stock price, which occurred when the relevant scandal came to light in 2013. The second claims were issued on May 11, 2021, within six years of the publication of findings in June 2015 of an employment tribunal with respect to certain aspects of the scandal.
RSA argued that the “new claimants” could not establish that they would not with reasonable diligence have “discovered” sufficient facts to enable them to plead the claim before May 11, 2015. It pointed to press coverage regarding proceedings before the Employment Appeals Tribunal in 2013 and its own media announcements in January 2014 to argue that this information would have provided the claimants with “the missing pieces of the forensic jigsaw,” which would have put them on notice to investigate their claim by mid-January 2014 (i.e., before May 11, 2015). In other words, RSA argued that there was already sufficient information in the public domain by mid-January 2014 to trigger the commencement of the six-year limitation period. Had this argument been accepted by the court, the new claims (filed in 2021) would be time-barred (on the basis of a limitation deadline of mid-January 2020).
Justice Miles helpfully set out his two-stage analysis in RSA. The first question he asked is whether there was anything to put the investor claimants on notice of a need to investigate the claims against RSA.
He concluded that the “new claimants” had a realistic prospect of arguing that before May 11, 2015, they would not have been in a position to plead a case under Section 90A. The judge referred to the delay between RSA’s announcements regarding its wrongdoing and the press reports, which were published over a year afterwards. A reasonable investor would not have necessarily been monitoring the press for coverage on the issue a year after RSA’s initial announcements. Furthermore, the press coverage did not name any senior members of RSA who would have been aware of the misconduct. On this basis, the “new claimants” would have been unable to fulfil the requirement to demonstrate knowledge of the wrongdoing among “persons discharging managerial responsibility” at RSA (also known as the “PDMR” requirement under Section 90A), which is one of the elements of the cause of action. In other words, Justice Miles agreed that the claimants did not have sufficient information to plead their claims until the tribunal’s findings were published.
We believe that the court ultimately reached a commercially sensible conclusion. It pointed to the lack of evidence regarding the way in which institutional investors monitor their investments and that even reasonably attentive investors cannot be assumed to review official market announcements. The judgment also referred to the possibility that the level of “reasonable diligence” expected from the investor claimants (regarding their discovery of the fraud or concealment) may differ (e.g., between actively managed funds on one hand and tracker funds on the other). It recognized that this may result in different limitations periods for certain investors within the claimant group, and it was therefore not appropriate to consider them all together on a summary basis.
This judgment appears to provide a practical, “real-world” view on how information regarding public companies’ wrongdoing is “absorbed” by the market and reflected in their share prices. Although this represents a decision regarding an interlocutory strike-out/summary judgment application (and the court’s interpretation of Section 90A will only ultimately be clarified at trial), the court has nonetheless acknowledged that investors base their investment decisions on a wide range of information sources. This suggests that issuer defendants may find it more challenging to argue that the only way investors can demonstrate their reliance is by pointing to a particular piece of published information within an annual report or financial statement. It suggests that English courts may be prepared to accept the practical reality of investor decision-making, which typically involves a wide range of sources, including annual reports, financial statements, and interpretive analyses of these publications, as well as their further assimilation into investor reports. This, in turn, may lend support to the application by the English courts of the “market-based causation” theory that, for instance, has been accepted by Australian courts in recent years in the context of Australian securities litigations. At the same time, we note that in the very recent Autonomy decision, which arose from Hewlett Packard’s acquisition of 100% of the issued share capital (i.e., privatization) of Autonomy, Justice Hildyard seems to have taken an orthodox view of reliance. Autonomy was not an investor group action litigation, and thus can be distinguished, but for now, it remains the only decision on reliance under Section 90A and, therefore, must be mentioned.
Permission to adduce expert evidence on the investment market
In a further judgment published by Justice Miles in the RSA case, the claimant group was successful in obtaining permission to adduce expert evidence from an equity analyst and a tracker fund expert, with a view to assisting the court to understand the operation of the investment market, the construction and operation of tracker funds and passive management strategies, and the role and size of the passive/tracker segment of the investment market. We consider this to be a step in the right direction in educating the court on the scope of investors who are eligible to participate in Section 90 and Section 90A claims that, in our view, should include “active” investors as well as so-called “passive” or tracker funds, particularly given their significant share of the current investment market. Given that both Sections 90 and 90A are designed to encourage issuer transparency to the market (by establishing their liability for misleading the market) there is, in our view, no reasoned basis for the assertion that compensation should only be available to certain types of investors.
In a subsequent case management judgment issued by Justice Miles in February 2022, the court agreed to “split” the trial in two, with issues regarding (i) the defendant’s wrongdoing; (ii) whether the defendant’s published information was untrue, misleading, or incomplete; (iii) the knowledge of the “persons discharging managerial responsibility;” (iv) claimants’ standing; and (v) the issue of dishonest delay being allocated to the first hearing; and remaining issues relating to reliance, causation, and quantum (i.e., damages) being allocated to the second hearing. In our view, this represents a positive case management intervention from the court, which increases the efficiency of the proceedings from the claimant group’s perspective by streamlining costs associated with the first trial and potentially increasing the chances of a settlement prior to the second trial (if matters for the first trial are decided in the claimant group’s favour). It is also notable that, in reaching his decision, Justice Miles was prepared to change his previous case management decision of March 2021, which had concluded, among other things, that the issue of “reliance” should be dealt with at the first of the two trials.
In summary, we welcome the recent interim decisions in the securities claim against RSA, which, we believe demonstrate the English courts’ willingness to intervene to manage such cases efficiently. In the split trial context, this should avoid claimants being disproportionately and unnecessarily burdened with the provision of evidence (e.g., relating to the “reliance” requirement) at the first trial. The court’s decision to permit the claimants to adduce expert evidence on “active” and “passive” investment approaches also displays a willingness to ensure that its interpretation of the relevant statutory provisions underpinning English securities claims serve their intended purpose in the context of the current stock market. Finally, the court’s rejection of RSA’s attempt to strike out claims (on the basis that the limitations period had expired) demonstrates the court’s willingness to adopt a fair expectation of a reasonable investor’s awareness of a defendant issuer’s wrongdoing and the factors which may trigger such awareness in the real world. We consider that all such interim decisions will contribute to greater efficiencies in English securities litigation and enable such proceedings to progress to trial (and potentially to settlement) more promptly.