English High Court clarifies scope of FSMA securities litigation

A recent decision of the High Court in a strike out application in securities class action litigation has clarified the scope of  s90A and Schedule 10A of the Financial Services and Markets Act 2000 ("FSMA") regarding reliance and dishonest delay, making it harder for claimants to bring securities claims against UK-listed companies. In the specific case, the decision has led to the claims of 241 of the 465 claimants being struck out, resulting in a £330 million reduction from the £560 million overall claim value.

Background

S90A and Schedule 10A FSMA allow shareholders of UK-listed companies to bring a claim against the company if:

• the company either (a) made an untrue or misleading statement in published information or (b) omitted a material fact in the same;
• a "person discharging managerial responsibilities" ("PDMR") knew that this was the case (or in the case of untrue/misleading statements, was reckless);
• the shareholder relied upon the statement or omission; and
• the shareholder suffered a loss as a result.

S90A and Schedule 10A FSMA also provide for a remedy without the requirement for reliance when:

• a listed company delays publishing information;
• a PDMR acted dishonestly in delaying publication; and
• the shareholder suffered a loss as a result.

The claimants sought to argue that the market price of the defendant's listed shares incorporated consideration of all public information, such that investors who relied on that market price should be considered to have "read" the misleading documents which lead to that incorrect market price. The claimants also asserted that "delay" in this context meant not only the act of deferring or postponing a publication but also not publishing it at all – i.e., delay by "procrastination" or "waiting".

Comment

In striking out certain of the claims, this judgment clarified that:

1. Reliance: to satisfy the reliance requirement of s90A and Schedule 10A FSMA claims, claimants must prove that a person had read the publication containing the untrue/misleading statements or material omission in question (or the gist of it was communicated to them by others). The court's application of this test, arising from the common law tort of deceit, means that claimants are not permitted to establish reliance based on their reliance on market price.
2. Dishonest delay: a claimant cannot bring a claim for dishonest delay of a publication in respect of a publication that the defendant never actually published – that "ongoing delay" will not suffice to establish a dishonest delay claim.

This decision is clearly beneficial to UK-listed companies, as the requirement to prove both inducement and causation in this way prevents passive investors (e.g., tracker or index-linked funds) from bringing claims against them under s90A and Schedule 10A of FSMA.

It also provides welcome guidance on the scope of dishonest delay claims. Nevertheless, listed companies should be aware that unlike misleading/omissions claims, these types of claim remain available to passive investors, as there is no reliance requirement.