Securities litigation in the UK: liability and remedies

Securities litigation is a term commonly used to describe disputes arising out of the purchase and sale of shares in publicly listed companies. These disputes are a form of shareholder claim which typically seek to recover alleged investment losses arising from some form of corporate misrepresentation, mis-selling, fraud, or other corporate wrongdoing.

Globally, there are a large number of group securities litigation claims in progress at any one time, with this number increasing year-on-year. This type of claim is particularly prevalent in the US. In the UK, securities litigation has traditionally been quite rare and reserved for only the most high-profile corporate scandals, however that position is changing. 

Often these claims are commenced as the UK equivalents of class actions, involving a group of investor claimants. There is also increasing interest in direct actions by investors with significant positions, such as large institutional investors, who might prefer not to join a class of claimants in a group securities litigation claim.

The statutory basis for UK securities litigation is set out in the relevant provisions of the Financial Services and Markets Act 2000 (FSMA) (616 pages / 5.4 MB), which is the primary legislation covering the UK financial services industry. The English courts have determined a number of points relating to these statutory claims, but they have not yet had an opportunity to provide a comprehensive analysis of such claims in a single case.  Therefore, there is some uncertainty created by the patchwork of court judgments that are currently available. 

Although these claims are relatively uncommon, companies should keep their policies and procedures for making market announcements or any other public communications under review to ensure that information published by the company is accurate and the risk of securities litigation claims is minimised. 

Liability for company prospectuses and listing particulars

This liability is founded on section 90 FSMA (“section 90 claims”). A section 90 claim arises when a person responsible for listing particulars and prospectuses is liable to pay compensation to someone who acquires securities to which those documents apply and suffers loss. The loss must be suffered in respect of the securities as a result of an untrue or misleading statement in those particulars or the omission from those particulars of required information. This liability includes where there has been a failure to issue a necessary supplementary prospectus or listing particulars.

Section 90 claims are subject to exemptions found in schedule 10 of FSMA.

A potential claimant must have acquired securities after the untrue or misleading statement or omission.  They must also be able to prove that they suffered loss as a result of the untrue or misleading statement or omission. These claims are particularly appealing to a class of claimants because a potential claimant does not need to establish that a defendant has acted dishonestly. In addition, the language of s90 FSMA does not require a claimant to prove it relied on the untrue or misleading statement or omission to bring a claim, although there remains some debate about whether reliance is required.

The potential defendants to a section 90 claim are “any person responsible” for the prospectus or listing particulars in dispute. This includes the issuer of the securities, the directors of the issuer and each person who has accepted responsibility for the particulars.

A party defending a section 90 claim may rely on a range of defences set out in schedule 10 of FSMA. These include, amongst others, a defence of “reasonable belief” where, as a matter of fact, the defendant reasonably believed the statement was true and not misleading or that the omission was properly made. Proving that the statement was correct before the claimant acquired its securities, or that the claimant knew that the statements in question were untrue or misleading or knew about the relevant omissions, are also potential defences.

Liability for other published information

Section 90A of FSMA explains that schedule 10A contains provisions for the liability of issuers of securities to pay compensation to persons who have suffered loss as a result of a misleading statement or dishonest omission in certain published information relating to the securities or a dishonest delay in publishing such information. Unlike the narrow ambit of section 90, these section 90A claims apply to a wide range of published information, including annual and half-year reports.

Liability depends on whether a ‘person discharging managerial responsibilities’ (PDMR) within the issuer had relevant knowledge or acted dishonestly. This requirement to prove dishonesty is a key difference between section 90A claims and section 90 claims and presents a difficulty for claimants because any evidence of dishonesty by a PDMR will sit with the potential defendant. Identifying the relevant PDMR and linking them to the alleged dishonesty is often a challenge.

A potential claimant will be anyone who has suffered loss as a result of the misleading statement or dishonest omission, or dishonest delay in publishing such information. This may include buyers, sellers or holders of securities.

The potential defendant to a section 90A claim is narrower than a section 90 claim and is limited to the issuer of securities.

By comparison with section 90 claims, a claimant in a section 90A claim must, to advance a successful claim, clearly establish individual reliance on the misleading statement or dishonest omission.

Remedies

FSMA does not set out how to calculate the loss suffered by a claimant for the purposes of its damages claim. This has left much scope for debate about the proper method of calculating losses for these claims, which will only be clarified once an authoritative court judgment on this topic becomes available. In the meantime, it appears most likely that a tortious method of recovery of losses - to put the injured party back in the position they would have been in had the wrong not been done to them - will be favoured.

The limitation period for section 90 and 90A claims is six years from the date on which the cause of action accrued. The limitation period is likely to be judged by reference to the date the relevant securities were acquired for section 90 claims; and the date of the misleading statement or dishonest omission, or when the misleading statement or dishonest omission could have been discovered, for section 90A claims.

Alongside these statutory causes of action, a potential claimant may have other causes of action in misrepresentation, deceit (fraudulent misrepresentation) and negligent misstatement depending on the facts of each individual case.