The Securities Litigation Review: United Kingdom - England & Wales
i Sources of law
England and Wales follow and, indeed, developed the modern common law system, in which the law is derived from a combination of legislation passed by, or under, government statutes and a system of precedent, whereby decisions of the courts are binding in future cases.
The most relevant statute in the context of securities litigation is the Financial Services and Markets Act 2000 (FSMA), which governs many aspects of the provision of financial services and the operation of securities markets in the UK and provides the main causes of action for investors seeking recovery of losses suffered as a result of investments in applicable securities.
In addition to creating civil and criminal obligations, FSMA provides the legal basis for the powers and existence of the Financial Conduct Authority (FCA), which, under those powers, develops and maintains a detailed Handbook containing both binding rules and official guidance on the interpretation of those rules.
Prior to the UK's withdrawal from the membership of the European Union (EU), the Market Abuse Regulation2 (EU MAR), contained the principal legal requirements governing the United Kingdom's (UK) civil market abuse regime. With effect from 1 January 2021, EU MAR has been 'onshored' into UK law through the European Union (Withdrawal) Act 2018 (as amended), as supplemented by The Market Abuse (Amendment) (EU Exit) Regulations (SI 2019/310) (UK MAR) following the expiry of the Brexit transition period on 31 December 2020.
ii Regulatory authorities
The FCA regulates the conduct of the UK's financial services industry and markets. The FCA can bring disciplinary, civil and, in some cases, criminal enforcement action against those whose conduct has breached its rules or statutory requirements, as well as apply to court for specific remedies, such as injunctions.3 There are other prosecution authorities with the power to investigate and prosecute criminal offences of market misconduct.
iii Common securities claims
Typical public securities actions include insider dealing and market abuse cases (under both the criminal and civil regimes), usually brought by the FCA, and administrative action by the FCA for breaches of the applicable regulatory regime regarding the content of publications made by listed issuers, and for breach of the disclosure requirements under UK MAR.
The most common private claims that investors in securities have threatened or brought to date are claims under the statutory liability regimes provided for by FSMA and common law claims in fraud or negligent misstatement. The statutory schemes give causes of action for:
- untrue or misleading statements in prospectuses or listing particulars and the omission of necessary information from such documents (Section 90 claims); and
- recklessly untrue or misleading statements, dishonest omissions of required information, or dishonest delay of such information in relation to an issuer's other publications (Section 90A claims).
i Forms of action
Liability for statements in prospectuses or listing particulars (Section 90 FSMA)
Section 90 FSMA provides a cause of action to an investor where a prospectus or listing particulars4 relating to securities contains any untrue or misleading statement or fails to include information that is required by statute. Section 87A FSMA sets out the principal requirement that the prospectus or listing particulars include the information necessary to enable investors to make an informed assessment of the issuer5 and the rights attaching to the securities. The applicable fault standard is essentially negligence (albeit with the burden of proof reversed so that it is for the defendants to show that they were not negligent) by virtue of a defence of 'reasonable belief' that the contents of the document were complete and accurate.
The cause of action allows any person who has acquired the securities in question, and suffered a loss as a result of the defect in question, to claim for compensation from any person responsible for the defective document.
The list of persons responsible for a prospectus or listing particulars naturally encompasses the issuer and its directors taking responsibility for the contents,6 as well as those who accept responsibility7 in the offering document or who authorise its contents. The breadth of this latter category means that, while it is clear that issuers and the directors of issuers are the most likely defendants to a Section 90 claim, it is, in theory, possible for a claim also to be brought against a third-party adviser to the issuer (if it can be established that the adviser has accepted responsibility for the contents of the document).
There is considerable debate as to whether the wording of Section 90 is restricted only to the original purchasers of a security, or whether an investor who acquires securities on the secondary market might also have a claim.8 However, the better view is that, as long as the misstatement or omission remains current (i.e., the passage of time, subsequent events or any updated announcements made by the issuer have not rendered the defect in the document stale), the cause of action will extend to a purchaser of securities in the secondary market,9 although as a matter of logic one would expect losses suffered by a secondary market purchaser to diminish the losses suffered by the respective primary market purchaser.
Although market practitioners might think it obvious, there is no express requirement in the statute that limits claims only to where there are material defects in the prospectus or listing particulars; it merely requires that the document includes 'necessary' information. However, the better view is that there must be some ability for the issuer to select the information that is considered to be material to investors for inclusion in the document, not least to avoid deluging investors with immaterial information. Accordingly, the Prospectus Directive can be said to build in a materiality component to what is 'necessary' information. In an interlocutory hearing in the RBS Rights Issue Litigation, Hildyard J took the view that the 'necessary information' test was a limiting concept that was intended to further the investor protection objective by confining the content of the prospectus only to that which was necessary (i.e., indispensable).10 In any event, a Section 90 cause of action is incomplete without the investor establishing causation and loss, which ought to prevent a successful claim for immaterial information defects. Going forwards, the provisions of the Prospectus Regulation (which have applied since 21 July 2019) ought to have put the matter beyond doubt by expressly defining the disclosure requirement by reference to 'necessary information which is material to an investor'.
Although the issue has not been tested, on the face of Section 90 it is not necessary for the claimant to show that he or she relied on the defective prospectus or listing particulars when purchasing the securities. It is, on the drafting of the legislation, the loss suffered by the claimant that must have resulted from the defect, rather than the acquisition of the securities in question. This potentially removes one of the significant hurdles that investors face in bringing a claim on behalf of large numbers of investors, given the obvious practical difficulties for claimants in having to show that they each placed reliance on the defect in question when purchasing securities.
A defendant11 to a Section 90 claim can rely on any of the defences set out in Schedule 10 FSMA, which, broadly speaking, provide that the defendant will not be liable where it reasonably believed the contents of the document to be complete and accurate, reasonably relied upon an expert or official source to verify the accuracy of the content in question or took reasonable steps to (or did in fact) cause a correction to be made before the investor acquired the securities. The investor will also fail in its claim if it can be shown that it knew (not merely suspected) that the statement complained of was inaccurate or incomplete. Interesting questions arise as to the steps that will need to be taken to satisfy the 'reasonable-belief' test, the most important of the defences. For example, is it sufficient to ensure that reasonable processes have been followed (including by the issuer's financial and legal advisers and its auditor) in the conduct of due diligence and verification of the contents of the document? How far down the chain of command within the issuer does attribution of knowledge reach?12 How easy will it be, often many years after the drafting of the document in question, to explain the key judgments on materiality to the court (particularly in relation to the omission of information) unless the rationale for those decisions was well documented at the time? In relation to omissions, must the defendant establish that he or she was aware of the specific matter in question and reasonably determined that it could be omitted or is it sufficient that he or she reasonably considered the prospectus to be complete (such that there was a reasonable belief that no material omissions existed)? These, and other issues, are likely to be fertile ground to be explored in the first cases brought to trial under Section 90 in which the reasonable belief defence is deployed. The knowledge and personal executive (or non-executive) responsibilities of individual directors will also be key, potentially raising the prospect of diverging interests between different directors in defending claims.
An investor is entitled in a Section 90 claim to recover its full loss on the securities in question, likely to be calculated by reference to the true value of the securities (i.e., their price had the inaccuracy or omission not been made) against the actual price paid. Critical questions arise, not yet determined by the English courts, about the appropriate method of identifying the true value, and at which point in time that value should be assessed. Moreover, in certain circumstances investors may seek to recover the total purchase price for the securities (less the credit for any value it may achieve upon disposal following discovery of the defect) if it can be shown that it would not have purchased the securities at all (a 'no transaction' case). Outside of an IPO context, difficult questions also arise where investors have sold shares prior to the identification of any defect, and whether those sales relate to shares that were purchased following the defective documents or to any pre-existing shareholdings. There is also debate as to whether the right to recover loss extends to consequential losses arising from the purchase of those securities, such as the opportunity cost of what the investor might otherwise have purchased had it not purchased the securities in question. However, the better view is that such compensation would not ordinarily be available under Section 90 and an investor would have to bring a claim in the alternative in fraudulent misrepresentation (deceit) to recover damages on that basis.
Liability for other published information (Section 90A FSMA)
Section 90A FSMA applies to all publications an issuer makes to the market, or whose availability is announced, through a recognised information service (other than prospectuses and listing particulars). It provides a remedy to investors who have suffered loss when buying, selling or holding securities in reliance on such information containing an untrue or misleading statement, or where there is an omission of, or a delay in publishing, information that is required. Crucially, the fault standard is high: the issuer is only liable if a director knew that, or was reckless as to whether, the statement was untrue or misleading, or if they acted dishonestly in omitting or causing a delay to disclosure of a material fact.
There is no express requirement for the defect in question to be material. However, the information will need to be material for loss to follow. In addition, the cause of action requires each investor to establish that their reliance on the defect was reasonable, which is unlikely to be satisfied in the case of immaterial defects. The need to show reliance, however, provides a serious hurdle to bringing a claim, and in actions that have been brought to date, interlocutory judgments have proceeded on the basis that claimants will have to show that they each relied on the published information in question.13 However, there remains a live issue as to whether reliance must be shown to have been placed on the defective part of the information published or if it is sufficient to show reliance on the published information as a whole. In the absence of any court guidance or established techniques for claimants to use to show reliance other than on an individual basis, it will be interesting to observe any attempts to import methods that have been adopted in other jurisdictions to overcome this challenge.14
Section 90A creates a safe harbour for issuers, which prevents claims being brought other than under Section 90A (with its high fault standard). However, claims in contract, under the Misrepresentation Act 1967 and common law claims where there has been an assumption of responsibility for the allegedly defective statement, are carved out of that safe harbour.
As with Section 90 claims, there is currently no case law on the appropriate methodology for determining loss under Section 90A, but the difference between the price paid (or received) and the true value of the security in question (or price realised on its sale) is likely to be the appropriate measure, subject to difficult questions of approach to identifying the degree of inflation. While the point has yet to be tested, it is not clear what loss any investor might suffer as a result of merely holding shares (rather than transacting).
The existence of a duty of care for the content of published documents will depend on all of the circumstances and the proper boundaries of the law of tort in this area are the subject of much debate and a large body of case law. In broad terms, the investor will need to show that the statement was made (or the information omitted) by someone who has 'assumed responsibility' to investors for the content of that statement, and that it is fair, just and reasonable for the court to impose a duty of care in the circumstances. The courts have found that statutory auditors did not assume responsibility to the purchasers of shares in the company they audited,15 and the directors of a company did not assume responsibility to existing shareholders in relation to governance actions (such as voting in an extraordinary general meeting (EGM)) by issuing an announcement or prospectus, or by making certain statements during investor calls relating to the transaction in question.16 However, the High Court has recently found that an arranging bank assumed responsibility to investors in publicly issued debt securities to ensure that certain transaction documentation had been properly executed.17 Directors also owe duties to existing shareholders to exercise reasonable skill and care when providing recommendations on how to act in relation to corporate actions that they propose.18 The standard that was found to apply in assessing whether reasonable skill and care was exercised was found, in the Lloyds/HBOS Litigation, to be whether no reasonably competent director could have made such recommendation.
Civil liability in the tort of deceit (or fraudulent misrepresentation) can arise if the investor can establish that the false information was intended to be acted on and that, when stating it, the defendant knew it was false, or was reckless (i.e., he or she did not care) as to whether or not it was false.19 However, a false statement will not be fraudulent if the provider of the statement had an honest belief in its truth at the time it was made.20 The burden is therefore great but, if that intention is established, a presumption is raised that the investor relied upon it and the burden will shift to the defendant to show that the investor did not, as well as potentially extending limitation periods. This cause of action also gives the investor the advantage that it will be able to recover all of its consequential losses, rather than merely those that were reasonably foreseeable. However, it is likely to be a matter of evidence whether the investor can establish on the facts what its counterfactual investments would have been.
If a defendant is able to show that he or she reasonably believed an actionable misrepresentation to be true at the time the contract was made, the investor's claim will be for innocent misrepresentation. However, in most circumstances the applicable remedy for innocent misrepresentation will be rescission, not a claim in damages.
Liability under the Misrepresentation Act 1967
Negligent misrepresentation is a statutory claim under Section 2(1) of the Misrepresentation Act 1967 that is established when an investor can show that he or she entered into a contract in reliance upon a misleading statement of fact made by or attributable to the defendant. The defendant will be liable if he or she cannot show that he or she reasonably believed the statement to be true at the time the contract was made.21 Accordingly, once the statement is shown to have been false, the burden of proving that the statement was made with reasonable belief in its accuracy shifts to the defendant.
The remedies available are favourable to claimants and include both damages, assessed on the measure usually reserved for actions in deceit, and rescission of the relevant contract. However, Section 2(1) only allows for that remedy to be claimed from the contracting counterparty. In a surprising first instance decision in Taberna Europe CDO II Plc v. Selskabet AF1,22 the court found that Section 2(1) of the Misrepresentation Act could be relied upon by a secondary market purchaser for a misstatement made by the issuer to the primary purchaser on the basis that the secondary market purchase brought the issuer and purchaser into some kind of contractual relationship, notwithstanding that the misstatement was made in respect of a different contract. However, the Court of Appeal23 overturned this decision confirming that, in the event of a misrepresentation made by the issuer, the remedy under the Misrepresentation Act is only likely to be available for subscribing shareholders, rather than those who purchase on the secondary market.
Company law duties
Claims might also be brought under company law duties owed to shareholders, such as the duty to provide existing shareholders with sufficient information for them to make a reasonably informed decision about any proposals put to them at EGMs.24 The Lloyds/HBOS Litigation has clarified the scope of this duty, emphasising that the duty requires the company and its directors to provide a fair, candid and reasonable description of the transaction that is being proposed based on the knowledge that the directors in fact had at the time of publication of the document.25 It is necessary for the claimants to prove both reliance and causation. For example, the claim failed in the Lloyds/HBOS Litigation because shareholders could not establish that they relied on the shareholder circular issued by Lloyds (indeed most of the claimants accepted that they had not even read it) and, in any event, it would have made no difference if the information that it was determined should have been disclosed in fact had been. The acquisition of HBOS would still have completed, so the claimants could not establish causation.
Significantly, in the Lloyds/HBOS Litigation, Norris J made obiter comments that suggest that losses suffered by shareholders as a result of breaches of these company law duties may fall foul of the rules preventing claims for losses that are merely reflective of losses suffered by the company26. It remains to be seen if this issue prevents future claims from being successful.
Breach of regulatory obligations
An investor will have a claim where the investment agreement was made with or through a person who was not authorised by the FCA, but should have been, or where the investment was a result of an unlawful financial promotion.27
Under Section 138D FSMA, a private person28 will have additional claims available where an authorised person has breached eligible29 provisions of FSMA or the FCA rules and that breach has caused the claimant loss. These claims are most commonly used by a private person where there has been a failure on the part of an authorised adviser to ensure its advice is suitable or where he or she was misled in some way as to the nature or description of the investment.
In the context of securities litigation, the English courts had previously confirmed that a claim under Section 138D FSMA was not available in respect of an alleged breach of the civil market abuse provisions in FSMA or of listing rules made pursuant to Part 6 FSMA.30 However, with the advent of EU MAR (now UK MAR), which replaced the civil market abuse provisions in FSMA, the position is less clear.
Where loss is suffered by a private person as a result of insider dealing or market manipulation, the FCA (or other prosecutors) may also obtain an order for restitution or compensation for their benefit.31 It is not inconceivable that buy-side parties in receipt of inside information from an issuer or its financial advisers as part of a market sounding, in respect of a transaction for which no cleansing announcement is made, may consider exploring injunctive relief as an option; the FCA also has power to compel issuers to make an announcement.
In England and Wales, the procedural features of a private securities claim are largely governed by the Civil Procedure Rules, which form a procedural code governing all aspects of the conduct of civil court claims, with the overriding objective of dealing with cases justly and at proportionate cost.32
Claims will be commenced by the claimant filing and serving a claim form, which will be accompanied or followed by detailed particulars of the legal and factual basis for the claim. Assuming the defendant intends to defend the claim and does not dispute the English courts' jurisdiction, it will file and serve a defence, setting out in detail which parts of the claim it admits, those it denies and those it requires the claimant to prove.33 While the court has wide discretion to determine the subsequent conduct of the claim, the parties are then typically required to give extensive disclosure of documents, including, in particular, those documents that undermine their case or support another party's case, and to exchange witness statements of those individuals each party intends to call to give evidence at trial. Factual witness evidence will often be supplemented by expert evidence on issues that the court permits to assist it in the assessment of the issues in dispute. The court has substantial discretion to order the trial to be on all of the issues at once, or to order a trial of certain preliminary issues or a split trial (which may involve, for example, liability and quantum issues being determined at separate trials), giving rise to significant strategic questions at an early stage of the process.34
There is no true concept of a securities class action in England and Wales in the sense of a representative, opt-out action that is familiar in other jurisdictions. Where multiple claims against the same defendants raise common legal or factual issues, there are, however, three broad mechanisms by which those claims might be joined together. The first and most common is where the claimants themselves successfully apply for a group litigation order, with the effect that the court will manage their claims substantially as one. However, the critical point is that it is an opt-in regime, and a sufficient number of claimants will need to be persuaded to bring claims and join the group to make a claim financially viable (or to attract third-party funding). The consequent need for a 'book-build' at the commencement of proceedings tends to lead to a front-loading of costs for claimants and their funders. Second, the court could exercise its case-management powers to order that the claims are consolidated, or third, it could order that a number of claims that it considers raise common issues are suspended and an individual case, or a small number of cases, be decided as test cases. Whichever of these processes is followed, given the subject matter and likely scale of a piece of securities litigation, the case will usually be eligible for inclusion in the Financial List, which involves the assignment of a docketed judge from a list of judges who specialise in financial litigation.
A key feature of litigating in England and Wales is that, where a party is unsuccessful in bringing a claim, it will generally be required to pay the defendants' reasonable legal costs35. This may extend to any third-party funders who assist in financing an unsuccessful claim.36 While in practice the costs awarded will not represent the full costs a party has incurred in the litigation, these sums are still usually significant and may act as a deterrent to bringing weak or speculative claims.
Given the opt-in nature of securities litigation in England and Wales, there is no general requirement for judicial oversight of an agreement to settle securities litigation. A settlement agreement will simply be a contract between the claimant and the defendant agreeing the terms upon which the litigation will be discontinued, or indefinitely suspended, usually with provision for the apportionment of legal costs. However, there are obvious practical difficulties in settling a claim brought by those investors who have joined the group litigation, at least until the court orders that new claimants cannot join the group (or limitation periods have expired). There are also practical difficulties in coordinating settlement discussions with such a large and potentially diverse set of claimants, potentially with different interests and levels of motivation for the pursuit of their claims. In the event that settlements are achieved with certain parts of the class, practical issues of case management may arise from the fact that different groups of claimants may have taken primary responsibility for certain aspects of the claim, leaving any residual claimants needing to elect to narrow the claim or take on the responsibility for those additional aspects, possibly at short notice prior to trial.
One unusual feature of the jurisdiction, however, is that there is a formal regime in place37 whereby either party to the litigation can make an offer to settle, which, if the other side refuses to accept but then fails to beat at trial, can reverse the usual rule as to liability for costs.
i Forms of action
The FCA has a range of powers to investigate and sanction authorised firms, individuals or listed issuers who it suspects have breached FSMA or the FCA's rules. It also has the power to impose administrative sanctions on any person in respect of a breach of requirements under UK MAR.38 For the most part, the regulator will have the power to impose sanctions directly where it concludes that a breach has occurred. In those cases, it will issue a decision notice, notifying the firm or individual of its findings and imposing what it considers to be the appropriate penalty. That decision notice will usually be published. It will then be for the recipient of the decision notice to decide whether it wishes to refer the FCA's decision to a specialist court known as the Upper Tribunal, which will hear the matter afresh, and determine the appropriate action to be taken by the decision maker (this could include an increase in penalty). The matter is then remitted back to the FCA.
In the context of securities, the key areas that the FCA tends to focus on in its civil enforcement actions include failures in a firm's governance, systems or controls, breaches of UK MAR requirements ensuring disclosure and transparency in relation to price-sensitive information, civil market abuse offences, failures to properly advise on investments (where there is a duty to do so) or to comply with conduct of business or financial promotion rules, and individual failings of a firm's senior managers.
The FCA also has the power to investigate and prosecute certain criminal market misconduct offences, including insider dealing,39 making a false or misleading statement intended to induce someone to invest in securities,40 creating a false or misleading impression in relation to relevant markets or securities41 or in respect of benchmarks.42 The power to prosecute is shared with other prosecutors including the Secretary of State for Business, Energy and Industrial Strategy, the Director of the SFO and the Crown Prosecution Service.43
Those agencies have agreed on broad principles that guide the decision as to which agency should investigate a suspected offence and, where more than one agency is investigating, how they should cooperate to avoid unnecessary duplication and ensure procedural fairness.
Where the FCA decides to commence an enforcement investigation, its first step will be to appoint investigators, who will usually be FCA staff.44 A notice of that appointment and the reasons for it will usually be given to the individual or firm that is the subject of that investigation. There will then follow scoping discussions to determine the likely structure and timescale of the investigation.
FSMA grants the FCA a range of powers to compel the production of documents and information relevant to its investigation (including interviews).45 It will typically exercise these powers following scoping discussions with the subject of the investigation to gather the information it considers it will need to progress the investigation. However, the FCA may not compel the production of legally privileged documents.46
In criminal market misconduct investigations, the FCA may, as an alternative to compelling document production, obtain a search warrant from the court to enter and search premises (with a police officer) for the purposes of obtaining relevant documents.47
Typically, the FCA will conduct interviews after gathering relevant documents. It may use powers granted to it under FSMA to compel relevant persons to attend interviews. In the context of criminal market conduct investigations it may, however, choose to conduct voluntary interviews under caution, so that what is said in the interview will be admissible as evidence in a criminal court.48
Once it has concluded that it has sufficient grounds to make a finding against the firm or person being investigated, the FCA will, in administrative cases, issue a warning notice, setting out the contraventions it considers to have occurred and the proposed penalty. It has the power to publish that notice.49 The recipient of the warning notice will have an opportunity to make representations on its contents before the regulator finalises its decision in a decision notice.50 This will be done by the Regulatory Decisions Committee, which is an independent function within the FCA. The findings set out in the decision notice can be challenged by referring the matter to the Upper Tribunal for a fresh hearing of the facts and law,51 or seeking judicial review by the courts of some flawed aspect of the FCA's process on narrow, public law grounds.52
In market conduct proceedings, where the FCA determines that a criminal penalty is warranted, it will prosecute the offence through the criminal courts in the same manner as any other applicable prosecutor.
The overwhelming majority of FCA administrative actions against authorised firms and listed issuers are settled at an early stage. Firms are typically incentivised to do so by factors such as reputational concerns, management time and distraction and the availability of a discount of up to 30 per cent on the financial penalty.53 Individuals being investigated will be facing potential loss of their livelihood by being banned from regulated positions, or a substantial fine, and may well be less incentivised by such factors (and indeed may opt to fast-track referral of the case to the Upper Tribunal).
There is no judicial oversight of the regulator's decision to settle a civil or administrative matter, although the FCA must have regard to its statutory objectives when agreeing a settlement. However, the settlement scheme does not apply to civil or criminal proceedings brought in the courts.
As in private actions, the settlement will essentially take the form of a written agreement. As part of that agreement, the individual or firm under investigation will usually agree the form of wording that will be included in a public notice, along with the details of the fine or other penalty that will be imposed.
In criminal proceedings, a guilty plea will be a mitigating factor in the court's assessment of an appropriate sentence for a criminal conviction (often meriting up to a 30 per cent reduction in sentence) and a prosecutor retains discretion about the selection of charges that may be brought. While a prosecutor can decide which charges to bring, it is ultimately for the court to decide what sentence is appropriate in all the circumstances.
iv Sentencing and liability
The FCA has powers to impose a broad range of disciplinary penalties and sanctions.
The sanctions most commonly used by the FCA are:
- fines (with no upper limit on the amount);
- a public censure;
- imposing suspensions and restrictions on firms from conducting regulated business and on regulated individuals from carrying out regulated functions; and
- a private warning.
The FCA has articulated a five-step penalty setting process.54 The FCA will usually consider disgorgement of any benefit received as a result of the breach and an additional financial penalty reflecting the seriousness of the breach. An adjustment (upwards or downwards) may also be made to reflect any aggravating and mitigating factors as well as to ensure that the penalty has an appropriate deterrent effect.55
The FCA also has the power to prohibit an individual from holding an office or position involving responsibility for taking decisions about the management of an investment firm, and from acquiring or disposing of financial instruments, whether on his or her own account or for a third party.56
In addition to its formal disciplinary powers, the FCA also has the ability to impose other sanctions, including banning an individual, suspending an issuer's securities from trading, varying or withdrawing a firm's permission or an individual's licensed status, and requiring redress or restitution to be paid where consumers have suffered loss as a result of a breach.
The choice of law and jurisdiction issues that can arise in a securities litigation context have been complicated by the UK's exit from the EU. From 1 January 2021, the position can broadly be stated as follows:
Choice of law
Here, the position remains largely as it was prior to Brexit, because the Rome I and II regimes (the relevant legislative provisions that applied to all EU Member States) have essentially been adopted by the UK and apply whether or not the chosen law is another Member State's or a non-EU country's (including, now, the UK); in other words, they have universal effect. The default position in respect of non-contractual obligations is that 'the law of the country in which the damage occurs' will apply. This is subject to two main exceptions, the most relevant of which provides an 'escape clause' where there is a 'manifestly closer connection' with another jurisdiction. Although not free from doubt, therefore, through the operation of these rules, the applicable law in a securities litigation context will most likely be the law of the issuer's domicile or that governs the issuance of the securities (i.e., of the location of the market or the regulator that approved the securities).
The position here is more complicated and uncertain because the EU legislation does not have universal effect. The EU has not yet acceded to the UK joining the Lugano Convention in its own right, which would result in the position being similar to the previous position and the UK being subject to provisions that in many respects would replicate those that apply to EU Member States (the Brussels regime). For now, the UK has acceded to the Hague Convention, but this is less comprehensive and has little effect on non-contractual obligations. This is likely to lead to a greater role for the common law, and the application of forum non conveniens principles in determining whether the English court have jurisdiction to hear claims. While it is likely that claims brought against an issuer who is either domiciled in the UK or has listed its securities on a UK securities market can be heard by the English courts, there is an increased risk of jurisdiction challenges.
Jurisdictional reach of the FCA
The FCA's general conduct and supervisory jurisdiction under FSMA extends to all firms undertaking specified regulated activities in the UK.
The FCA's jurisdiction is generally confined to conduct that occurs in the UK, although certain rules have wider territorial scope (most notably the requirement to disclose issues to the regulator). The nature of international securities transactions also means that there may often be a practical difficulty in determining whether it can be said that aspects of the transaction have taken place within the UK. The FCA is also empowered to conduct investigations in support of overseas regulators.57
The FCA's market abuse jurisdiction
By contrast, the FCA must ensure that the provisions of UK MAR are applied in the UK, not only in respect of all actions carried out in the UK, but also in respect of actions carried out abroad relating to financial instruments:
- admitted to a UK-regulated market, Gibraltar-regulated market or an EU-regulated market, or for which a request for admission to trading on such a market has been made;
- traded on a UK or an EU multilateral trading facility (MTF), admitted to trading on a UK or an EU MTF, or for which a request for admission to trading on a UK or an EU MTF has been made;
- traded on a UK- or an EU-organised trading facility (OTF); and
- in respect of financial instruments whose price or value depends on or has an effect on the price or value of a financial instrument referred to in points (a), (b), or (c) including, but not limited to, credit default swaps and contracts for difference.
Jurisdiction of criminal courts
In broad terms, as a matter of common law, the English courts' criminal jurisdiction extends only to conduct that occurs within England and Wales. However, given the increasing tendency for criminal activity to be of a cross-border nature, modern authorities have tended to interpret this doctrine in a broad manner to encompass cases where a substantial proportion of either the prescribed conduct or, where applicable, the prescribed consequences occur within England and Wales.
There are, however, a number of specific statutory exceptions that explicitly extend the territorial scope of certain offences beyond England and Wales. In the context of criminal conduct in relation to securities, the criminal insider dealing and market manipulation offences are the most obvious examples. In an extension of the more recent approach at common law described above, these offences capture both conduct that occurs within or from England and Wales and conduct that occurs abroad where the likely effect is in England and Wales.58
Year in review
A number of new securities litigation claims have been filed during the course of the year, confirming shareholder class actions as an established part of the disputes landscape in England and Wales. In addition, there have been significant developments in existing shareholder class actions as well as other decisions, which will likely have an important impact on how ongoing and future securities litigation claims will play out.
It was reported that the Tesco Litigation (a Section 90A claim) settled shortly before the trial of the claim was due to commence. Accordingly, the court will have to wait for the opportunity to provide clarity on some of the key issues explored in this chapter. However, at a pre-trial review hearing,59 the court took the opportunity to further emphasise the importance of claimants establishing that they relied on the statements that are said to give rise to a claim.
Another of the claims that is working its way through the English courts, a Section 90A claim against G4S plc, was the subject of a successful strike-out application. The court held60 that a large number of the claimants had failed to add themselves to the claim form in a satisfactory way prior to the expiry of the relevant limitation periods and, as a consequence, their claims were time barred. Subject to any appeal, this result disposes of a significant proportion of the Section 90A claims in these proceedings, and emphasises the care that must be taken by claimant firms who explore claims relating to historical conduct. There is clearly a balance to be struck between taking the time to carry out an effective book-building process, often facilitated by the conclusion of criminal or regulatory investigations into the conduct on the one hand, and the expiry of limitation periods on the other.
In a potentially important decision for securities litigation claims, the High Court has considered the concept of awareness on the part of claimants in a misrepresentation case, which has clear implications for those shareholder class actions where reliance is an essential element of the cause of action (including Section 90A). In Leeds City Council and others v. Barclays Bank plc and another,61 the court confirmed that for a claimant to establish that it relied on an alleged misrepresentation, it is a separate, and prerequisite, requirement for that claimant to show that it had some appreciation of the representation having been made. While in some instances such a prerequisite will be straightforward to establish, in a Section 90A context, this decision suggests that it will be necessary for claimants to establish that they were, in some way, aware of the statements that they criticise as untrue or misleading. While the judgment leaves open how a claimant will be able to satisfy this element of the cause of action, and this will tend to be highly fact dependent, a clear battleground will likely develop as to whether this will require, for each claimant, evidence of conscious thought in the sense of being 'actively present' in the claimant's mind. If it does, it will be insufficient for a claimant to establish reliance by simply adducing evidence that it would have acted differently had the statement been correct or not misleading. It will also be necessary to show that it, or its agent, was aware of the statement that was made.
The regulatory agenda was undoubtedly impacted by covid-19. The FCA's Business Plan 2020/2021 noted that the Plan was 'fundamentally reshaped by the impact of coronavirus' and that the immediate priority was the covid-19 response. As a consequence, the FCA delayed certain regulatory activities it had planned and indicated regulatory forbearance in a number of areas. As a consequence, the FCA issued its lowest number of fines since its establishment in 2013, with much of its work focused on support for consumers.
However in the latter part of 2020, the FCA took a number of high-profile enforcement actions against firms. The FCA fined TFS-ICAP Limited for market misconduct after brokers carried out the practice of 'printing' trades, which encouraged clients to trade when they might not have done. The FCA also took its first UK enforcement action under the Short Selling Regulation against Hong Kong asset manager Asia Research and Capital Management Ltd, which failed to make 155 notifications to the FCA and 153 disclosures to the public of its net short position in a UK listed company.
Outside of FCA enforcement action, ESMA published a review on the functioning of EU MAR since its implementation in 2016. The review was submitted to the European Commission and is expected to feed into their review of EU MAR. ESMA highlighted certain areas where it suggested providing additional guidance. For the purposes of securities actions, the most relevant areas are in relation to the application of the definition of inside information and disclosure and further guidance on pre-hedging, particularly around factors that may be considered when assessing if a specific pre-hedging conduct poses risks of market abuse and of violation of conduct rules.
Although ESMA Guidelines and Recommendations have not been incorporated into UK law, the FCA expects firms and market participants to continue to apply the ESMA Guidelines that existed before the end of the transition period, where relevant, as they did before the end of the transition period.
Outlook and conclusions
Securities litigation continues to be a significant growth area in England and Wales, with new, high-profile cases being commenced at regular intervals, and high levels of activity by class action promoters, such as litigation funders and both existing and new entrants into the claimant firm space.62 Moreover, the impact of macro factors, in particular the economic impacts of the covid-19 pandemic, which has led to many companies seeking access to capital from public markets, and the increased scrutiny on climate change disclosures, may give rise to increased securities litigation activity in the relatively near term. In the longer term, the UK government's reaction to the recommendations of the Lord Hill Review63 (including the proposed changes to the prospectus regime, rules relating to forward-looking statements and reducing barriers to the listing of Special Purpose Acquisition Companies (SPACS)) will be closely watched by the securities litigation market.
The market will continue also to watch the passage of existing cases through the courts as participants await clarity on a number of the issues explored in this chapter.
In the public sphere, we expect to see an increasingly broad focus on types of misconduct, particularly non-financial misconduct and how this is tackled by firms. Increased working from home has posed challenges for firms when monitoring the conduct of staff, but the FCA expects firms to have appropriate systems and controls in place to manage these new risks. The FCA Director of Market Oversight, Julia Hoggett, highlighted the FCA's concerns on how covid-19 has impacted firms' control environments and stressed that the FCA is acutely aware that conduct crises can follow financial crises. Firms can expect increased supervisory attention on wholesale conduct in the months to come. The Bank of England also published findings from a survey exploring the impact of covid-19 on machine learning in December 2020. Around half the respondents expected the importance of machine learning for future operations to increase as a result of covid-19, so this is likely to be a focus area.
We also expect to see a divergence from the EU in certain regulatory matters as the UK begins 2021 outside of the EU's regulatory framework. One expected area of divergence is in relation to amendments to MAR, which only take effect after the end of the transition period and so will not automatically apply to issuers on the UK SME growth markets. If the Financial Services Bill 2019–2021 is adopted in its current form, not all of the MAR amendments will be carried over to the UK market abuse regime. Likely divergences currently include the new market sounding safe harbour and lighter touch insider list requirements amendments for MAR.
1 Harry Edwards is a partner and Jon Ford is a senior associate at Herbert Smith Freehills LLP. The authors would like to acknowledge the assistance of Ceri Morgan in producing this edition of the chapter.
3 The Prudential Regulation Authority also has power to bring administrative enforcement actions, but with the objective of promoting the safety and soundness of the firms it regulates.
4 An admission document for the purposes of listing on the London junior market, AIM, is outside the scope of Section 90 FSMA.
5 In particular, its assets and liabilities, financial position, profits and loss and prospects. See also Section 80(1) FSMA.
6 The European listing requirements and market practice for wholesale debt issuers is that the corporate vehicle, rather than the directors, takes responsibility for the content of the offering document. However, the breadth of the test for responsibility to bite (if they 'authorise the contents') means that even for such deals the directors could potentially also be liable.
7 The Financial Services and Markets Act 2000 (Official Listing of Securities) Regulations 2001/2956 Regulation 6(1) sets out the full list of persons responsible for the contents of listing particulars, and the Prospectus Rules 5.5, contained in the FCA Handbook, set out the full list in respect of a prospectus.
8 It is noteworthy that a predecessor to Section 90 liability (Section 67 of the Companies Act 1985) gave a right of action to 'those who subscribe for any shares or debentures on the faith of the prospectus', in contrast to Section 90 FSMA, which contemplates the action accruing more broadly to those who have 'acquired the securities'.
9 See J Lightman, obiter, in Possfund Custodian Trustee Ltd v. Diamond  1 WLR 1351 at 1360 discussing the equivalent provision in the statute preceding FSMA, Section 166 of the Financial Services Act 1986. He did not expressly determine the issue because the relevant statutory provision had not been brought in effect, but considered that liability owed to 'any person who has acquired the securities to which the prospectus relates' did not extend to the secondary market. See also discussion about liability for aftermarket transactions in Competition Law 1998, 19(10), 311–314 and J Payne, 'Possfund v. Diamond: a reassessment of the common law duty owed to subsequent purchasers who rely on a company prospectus', JFC 1997, 4(3), 253–254. The Possfund decision has not to date been considered or applied in the context of Section 90 FSMA.
10 RBS Rights Issue Litigation  EWHC 3433 (Ch), Paragraph 53.
11 There is a potential question over whether or not the Schedule 10 defences are available to the issuer in addition to natural persons. However, the better view is that they are not restricted to natural persons.
12 See, for example, Meridian Global Funds Management Asia Ltd v. Securities Commission  2 AC 500 PC.
13 Manning and Napier Fund and Omers Administration Corporation v. Tesco  EWHC 3296 (Ch); SL Claimants v. Tesco plc; MLB Claimants v. Tesco plc  EWHC 3315 (Ch).
14 For example, see the discussion of 'fraud-on-the-market' theory in the US chapter of this book and the discussion of indirect, or market-based, causation in the Australian chapter, including the discussion of the judgment in TPT Patrol Pty Ltd v Myer Holdings Limited  FCA 1747.
15 Caparo Industries Plc v. Dickman  2 AC 605.
16 Sharp v. Blank  EWHC 3007 (Ch); Sharp v. Blank  EWHC 3078 (Ch).
17 Golden Belt 1 Sukuk Company v. BNP Paribas  3182 (Comm).
18 Sharp v. Blank  EWHC 3078 (Ch).
19 Derry v. Peek  UKHL 1.
20 Bisset v. Wilkinson  AC 177 PC 183.
21 Misrepresentation Act 1967, Section 2(1).
22  EWHC 871 (Comm).
23 Taberna Europe CDO II Plc v. Selskabet AF1  EWCA Civ 1262.
24 Kaye v. Croydon Tramways  1 Ch. 358 CA (Civ Div); Tiessen v. Henderson  1 Ch. 861 HC (Ch); CAS (Nominees) Ltd v. Nottingham Forest FC Plc  BCC 145 HC (Ch); Re Smith of Smithfields Ltd  EWHC 568 (Ch).
25 Sharp v. Blank  EWHC 3078 (Ch).
26 The reflective loss principle has recently received confirmation from the Supreme Court in Sevilleja v. Marex Financial Ltd  UKSC 31.
27 FSMA, Sections 26, 27 and 30.
28 Defined in the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2000, Regulation 3 and broadly any individual who is not carrying out a regulated activity, and some corporate entities that are not acting in the course of business, when suffering the loss. See Titan Steel Wheels v. RBS  EWHC 211 (Comm) for the courts' restrictive approach to the meaning of 'private persons' for the purposes of standing to bring a claim under what is now Section 138D FSMA. There is ongoing speculation about changes to primary legislation to broaden the categories of claimants who fall within the scope of Section 138D FSMA.
29 Obligations placed on authorised persons by FSMA or the FCA Rules will be eligible provisions for this purpose unless there is a further provision stating that a breach does not give rise to a claim of this type.
30 Hall v. Cable & Wireless Plc  EWHC 1793 (Comm).
31 See, e.g., FCA Final Notice of 28 March 2017 in respect of Tesco Plc and Tesco Stores Limited (Tesco).
32 Civil Procedure Rules, Rule 1.1.
33 If a defendant fails to defend a claim within the applicable time limit following valid service, the claimant will be able to apply to court for a default judgment, allowing it to begin the enforcement process.
34 See for the example the contrasting approaches taken by the courts in the RBS Rights Issue Litigation, the Lloyds/HBOS Litigation and the Tesco Litigation.
35 See for example the court's approach to costs in the Lloyds/HBOS Litigation: Sharp & Ors v Blank & Ors  EWHC 1870 (Ch).
36 Indeed, in the Lloyds/HBOS Litigation, Norris J determined that the third-party funder, Therium, should be jointly and severally liable for the defendants' costs.
37 Civil Procedure Rules, Part 36.
38 The FCA also has power, on an application to the court for an injunction or restitution, to ask the court to impose a penalty in cases of market abuse under Section 129 FSMA – see FCA v. Alexander, FSA/PN/053/2011; FCA v. Da Vinci & Ors  EWHC 2401 (Ch).
39 Criminal Justice Act 1993, Part V.
40 Financial Services Act 2012, Section 89.
41 Financial Services Act 2012, Section 90.
42 Financial Services Act 2012, Section 91.
43 The FCA and the Crown Office have agreed arrangements for the prosecution of offences in Scotland arising out of FCA investigations.
44 In addition, Section 166 FSMA gives the FCA the power to appoint a skilled person to produce a report, on which enforcement action is commonly based.
45 Sections 122A–122F in respect of breaches of UK MAR, and Sections 170–176A FSMA generally.
46 Defined as 'protected items' as described in Section 413 FSMA.
47 Section 122D (for market abuse) and Section 176 FSMA.
48 Section 174 FSMA.
49 Section 67(1)–(3) FSMA.
50 Section 67(4)–(6) FSMA.
51 Section 67(7) FSMA.
52 But see the Court of Appeal decision in R (Wilford) v. Financial Services Authority  EWCA Civ 677.
53 It is now also possible to enter into a focused resolution agreement and in this way partly contest a proposed action (see Decision Procedure and Penalties manual (DEPP) 5.1.8AG to DEPP 5.1.8DG). A discount is also available in respect of partly contested cases – DEPP 6.7.3A.
54 DEPP 5.6, DEPP 5.6A-C. The FCA is planning to consult on revising its penalty process.
55 DEPP 6.5.
56 Section 123A FSMA.
57 Section 169 FSMA.
58 The UK has opted out of the Criminal Sanctions (Market Abuse) Directive 2014/57/EU, Article 10 of which requires Member States to establish jurisdiction (at least) in respect of criminal market abuse offences committed in whole or in part in their territory, or by one of their nationals where the act is an offence where it is committed.
59 Manning & Napier Fund, Inc & Anor v. Tesco plc  EWHC 2106 (Ch).
60 Various Claimants v. G4S plc  EWHC 524 (Ch).
61  EWHC 363 (Comm).
62 See for instance the recent opening of a London office of Phi Finney MacDonald, a claimant class action firm from Australia that specialises in securities litigation.