It is evident that there has been a marked rise in group securities litigation globally in recent years.
This can be traced back to the 2010 US Supreme Court’s decision in Morrison v National Australia Bank 561 US 247 (2010), which restricted the extra-territorial effect of US securities legislation and in turn encouraged shareholders to bring claims against non-US issuers in domestic courts.
The English statutory framework – GLO and FSMA (sections 90 and 90A)
In England and Wales, the primary mechanism for collective securities actions is the Group Litigation Order (GLO) procedure in Part 19 of the Civil Procedure Rules. This allows claimants having common or related issues of fact or law to join a group litigation on an “opt-in” basis.
Where a GLO is made, and relevant claims have been entered on the group register, any judgment on the GLO issue(s) will, unless otherwise ordered by the Court, be binding with regards to the parties to all other claims on the group register.
In terms of causes of action, securities litigation claims are commonly brought under section 90 or 90A of the Financial Services and Markets Act 2000 (FSMA):
• Section 90 (as supplemented by Schedule 10) imposes a non-fraud-based liability for any persons responsible for listing particulars or prospectus (typically directors) to pay compensation to investors who have acquired the issuer’s shares to which the particulars or prospectus applies, and have suffered loss as a result of any untrue or misleading statements or omissions therein
• Section 90A (as supplemented by Schedule 10A), on the other hand, requires an issuer to compensate investors who have suffered a loss as a result of any untrue or misleading statements made knowingly or recklessly, or any dishonest omissions or delay, in any information published through a recognised information service (aside from listing particulars and prospectuses, which are subject to section 90). Notably, section 90A is subject to an element of reliance, meaning that the person alleging loss must have acquired, continued to hold, or disposed of the relevant securities in reliance on the information in question; such reliance must also have been reasonable.
The watershed – The Royal Bank of Scotland
The group action brought against the Royal Bank of Scotland (RBS) and its former directors by tens of thousands of investors who purchased shares in their 2008 rights issue is widely seen as a watershed event in the development of the English collective securities actions.
Claims amounting to £4billion were commenced under section 90 of FSMA on the grounds that RBS had omitted essential financial information from the prospectus accompanying the rights issue, from which the bank had raised £12 billion but ended up collapsing several months later, resulting in a £45 billion government bailout and a steep decline in the bank’s share price.
Notwithstanding the ultimate £800million settlement reached between RBS and the claimants, the case importantly demonstrated the possibility of pursuing high-value securities group actions under the English legal framework.
The reliance test under section 90A of FSMA – Tesco
On the other hand, the Tesco litigation illustrates how securities group litigation can be brought under section 90A of FSMA.
In late 2014, Tesco announced that it had overstated its profits guidance statements by £263 million, following which its share price declined significantly.
In October 2016, two groups of institutional shareholders – Omers Administration Corporation and Manning & Napier Fund, Inc. – commenced class action proceedings in England against Tesco under section 90A, claiming the difference in value between the purchase price of the shares and their market value immediately after the announcement, as well as the loss of profits they would have made had they invested elsewhere.
A successful claim under section 90A, as opposed to section 90, requires claimants to establish that they acted on the reliance of the issuer’s published information when dealing in their securities.
In Tesco, the High Court in the context of disclosure applications ([2019] EWHC 3315 (Ch)) pointed out that reliance will ultimately have to be proved in the case of each investor; even where sample investors are chosen to establish parameters, it is still important for them to be tested by reference to every claimant’s individual circumstances, risk appetite, and investment objectives etc.
This approach adopted by the Court appears to spin in a direction opposite to the “fraud on the market” theory in the US, which lifts the onerous evidential burden off the claimants by creating a presumption that investors have relied on the issuer’s misstatements or omissions in making their investment decisions.
Arguments based on this theory had initially been pleaded in Tesco but were subsequently abandoned at the first Case Management Conference.
As Tesco was eventually settled in September 2020, a month before the commencement of the scheduled trial, the application of section 90A in the context of collective securities actions, including the scope of documentary or witness evidence required for a claimant to pass the reliance test, remains unsettled.
First securities class action judgment in the English Courts – Lloyds/HBOS
Lloyds/HBOS (also known as Sharp & Ors v Blank & Ors [2019] EWHC 3078 (Ch)) was the first, and so far the only, securities class action to proceed to the end of the trial in the English Courts.
The case concerned the acquisition of HBOS by Lloyds during the 2008 financial crisis, which was approved by shareholders at an extraordinary general meeting on the recommendation from the directors as contained in a shareholder circular.
Allegations of the claimants
Of note is that the case did not go down the route of the FSMA statutory regime.
The claims, instead, were centred on the company and its directors’:
i) duty in tort to use reasonable care and skill to ensure that a shareholder’s communication was not misleading and did not contain any material omissions
ii) equitable duty to provide adequate information that gave a fair, candid, and reasonable account of the circumstances, which would enable the shareholders to make an informed decision.
Specifically, the claimants’ allegations in Lloyds/HBOS were twofold:
• The directors’ recommendation to proceed with the acquisition was negligent given that it was based on insufficient due diligence
• The shareholder circular did not contain sufficient information on the risks of the proposed HBOS acquisition (in particular, the fact that HBOS was in receipt of emergency liquidity assistance from the Bank of England and a £10 billion loan facility from Lloyds).
Allegedly the acquisition would not have been approved but for the negligent recommendation by the directors and the inadequate disclosure in the shareholder circular.
Dismissal of the claims
The claims were dismissed by the High Court.
Firstly, the Court held that the claimants had failed to adduce evidence to demonstrate that the recommendation was so far outside the parameters of competent investment banking advice that no reasonably competent director would have maintained the same view.
Secondly, although it was accepted that the emergency liquidity assistance and the £10 billion loan facility should have been disclosed to the shareholders, there was insufficient evidence to suggest that the shareholders would have voted differently if such disclosures had been made.
In other words, the Court was unconvinced that the breaches were causative of the losses claimed.
Additionally, Lloyds/HBOS highlighted a further hurdle for non-statutory claims in the context of securities litigation. The Court commented that even if the claimants had been able to demonstrate causation, no award of damages would have been available to them under reflective loss principles. Any remedy in respect of the wrongs committed by the directors would rest with Lloyds instead of the shareholders.
In July 2020, the claimants’ application for permission to appeal was rejected by the High Court, which affirmed that the claimants had no real prospect of overturning its previous findings on both causation and loss ([2020] EWHC 1870 (Ch)).
Unanswered questions – causation of loss and measure of damages
While Lloyds/HBOS appears to have demonstrated how future securities group litigation may be impaired by the various hurdles that need to be overcome by prospective shareholder claimants, particularly in respect of causation and loss, it is noteworthy that these legal issues, in the context of the FSMA regime, remain untested waters.
Causation of loss
The language of ‘as a result of’ in both sections 90 and 90A suggests that it is necessary for claimants to establish a causal link between the untrue or misleading statement or omission and their loss suffered.
Similar wording – ‘resulted from’ – is used in the equivalent Australian statute (sections 674 and 1317HA of the Corporations Act 2001). In the recent case of TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer Holdings Limited [2019] FCA 1747, the Federal Court of Australia approved the market-based causation theory, i.e., it was not necessary for the shareholder claimants to establish that they had been induced by the company’s untrue or misleading statement or omission to purchase securities at an inflated price.
Instead, they were only required to demonstrate that such statement or omission had resulted in the market trading the securities at an inflated price and that they would not have purchased the securities at such price but for the market’s reaction to that statement or omission.
As for England and Wales, in the absence of any direct case law on this issue, it remains unclear whether market-based causation would also be endorsed by the English Courts in the context of FSMA claims.
Measure of damages
Both sections 90 and 90A use the wording of “compensation”, which could either be based on the common law measure of damages in deceit and fraudulent misrepresentation or negligent misstatement.
The more generous deceit measure is more likely to be applicable in a section 90A claim, which is analogous to deceit and fraudulent misrepresentation claims in the sense that it is necessary to prove knowledge, recklessness, or dishonesty on the part of a person discharging managerial responsibilities within the company.
Indeed, in Tesco, the measure of loss proposed by the claimants in their quantum particulars is effectively the deceit measure.
This measure of damages seeks to put claimants in the position that they would have been in had they not purchased the securities as all losses flowing from the acquisition of shares would be recovered.
Essentially, a shareholder could claim the difference in value between the purchase price of the shares and the price which is “left in their hands”, i.e., either the current market price or the selling price of the shares (depending on whether the shares have already been disposed of).
By contrast, without the need of establishing any form of dishonesty on the part of the issuer, the negligent misstatement measure, which would confine damages to the consequences of the statement being untrue or misleading or the relevant omission, appears more likely to apply in the context of a section 90 claim.
This measure of damages seeks to put claimants in the position that they would have been in if they had still acquired the issuer’s shares, but without the untrue or misleading statement or omission having been made.
The deceit measure of damages is generally more favourable to claimants in that they will be able to recover the full drop in the issuer’s stock price, even if it was in practice partly contributed by factors unconnected to the untrue or misleading statement or omission that they allegedly had relied on.
The two different measures could potentially result in a huge difference in the damages that a claimant is able to recover. Nevertheless, given that FSMA does not specify the measure of damages, nor is it the subject of any direct case law, the appropriate quantification of damages for these statutory provisions remains to be tested.
Future development of securities group actions in the UK
Lloyds/HBOS has undoubtedly set a high hurdle for shareholders seeking to pursue claims on the grounds of a company and its directors’ tortious duty to act with reasonable care and skill and equitable duty to provide sufficient information.
Nevertheless, a body of precedent for securities group actions, particularly in the context of FSMA, is yet to be established.
With the continued growth in third-party litigation funding and the after-the-event (ATE) insurance sectors that have effectively lifted the adverse costs risks off the shoulders of shareholder claimants, despite still not being comparable to the US-style “opt-out” class action system, the landscape of collective securities litigation in the UK is expected to continue to evolve rapidly.
The Covid-19 pandemic, during which the financial markets have seen both drastic drops and rises in share prices of listed companies, is also anticipated to trigger a wave of securities actions around the globe.
Looking forward, the development of the securities group litigation market in the UK will ultimately depend on the English Courts’ statutory interpretation of FSMA and approach to fundamental legal issues, including reliance, causation, and measure of damages as detailed above.
