CLAIMS UNDER S 90A OF FSMA FOR DISHONEST STATEMENTS MADE TO THE MARKET: AN UNDERUTILISED REMEDY?

Feature KEY POINTS

––Although s 90A is potentially a valuable remedy for investors who have suffered loss
as a result of false statements to the market, for example, in the context of high-profile
scandals such as Tesco, BT, Carillion and Patisserie Valerie, there have been no reported
or unreported decisions under s 90A since it was first enacted more than twelve years ago.
––There are a number of potential reasons for this underutilisation of s 90A, including the
challenges for prospective claimants in assessing the merits of a claim (given that much of
the relevant evidence will be in the hands of the prospective defendant), the availability of
other remedies, and concerns about the solvency of the prospective defendant.
––The lack of judicial decisions on s 90A mean that there remains considerable uncertainty
about the meaning and operation of certain aspects of that provision. This uncertainty
may be a further reason why s 90A remains such a little used remedy.

Authors Peter de Verneuil Smith QC, Philip Hinks and Dominic Kennelly

Claims under s 90A of FSMA for

dishonest statements made to the
market: an underutilised remedy?
This article explores a number of the key concepts that underpin s 90A of the Initially introduced on 8 November
Financial Services and Markets Act 2000 (FSMA) and will consider why it remains 2006 by s 1270 of the Companies Act 2006,
such a little used remedy. s 90A was substantially revised following
the Davies Review of Issuer Liability (March
2007) by Professor Paul Davies QC.

■ All companies with securities traded

on a UK securities market are required
to make a number of disclosures to the
and the Patisserie Valerie £40m accounting
error in 2018.
Investors claiming to have suffered loss
The current iteration of the provision
was introduced on 1 October 2010 by the
Financial Services and Markets Act 2000
market each year. The Companies Act 2006 as a result of such false reporting may seek (Liability of Issuers) Regulations 2010
(ss 395-396) requires the production of annual to take advantage of s 90A of FSMA, a deceit- (2010/1192), the Explanatory Memorandum
accounts; the obligation to produce interim based statutory cause of action which offers to which records the following statement
accounts is derived from the Transparency the fraud measure of damages, and thereby of principle:
Directive (EC Directive 2004/109, Arts 5-6); allows a successful claimant to seek damages
and the obligation to report to the market for losses arising from market movements “Timely, comprehensive and complete
on a continuing basis, eg in relation to inside which are unrelated to the false reporting. reporting by companies is a crucial
information, is derived from the Market However, there have been no reported or element in promoting the allocative
Abuse Directive (EC Directive 2003/6, Art 6). unreported decisions in England and Wales efficiency of capital markets. Lack of
The prompt and fair disclosure of information under s 90A since it was first enacted in 2006. certainty as to the existing common law
to the public enhances consumer protection This article will explore a number of the key position with regard to issuer liability in
and market efficiency which are core objectives concepts that underpin s 90A and will consider damages for inaccurate statements made
of these Directives (implemented in the UK why it remains such a little used remedy. to the market was partially resolved by
via the introduction of the ‘Disclosure and the introduction of a statutory liability
Transparency Rules’ (DTR) chapter to the SECTION 90A FSMA regime. These proposals aim to extend
FCA Handbook); whereas selective and Section 90A provides as follows: the existing statutory regime to ensure
inaccurate disclosures by securities issuers lead complete clarity.”
to a loss of investor confidence in the integrity “Schedule 10A makes provision about
of the financial markets and inefficient the liability of issuers of securities to Section 90A catches all securities
decisions by those active in the market. pay compensation to persons who have (UK and overseas) traded in the UK
A number of scandals in recent times suffered loss as a result of – markets, including the AIM and PLUS
have been centred on allegations of false markets, as well as UK securities traded
reporting to the market: the Tesco £250m –– A misleading statement or on an overseas exchange. It applies to
accounting error in 2014, the BT £225m dishonest omission in certain information published by the issuer on
accounting error in 2017, the Petrofac bribery published information relating to “a recognised information service”, which
controversy in 2017, allegations of misleading the securities; or includes any service “used by issuers
financial reporting by Carillion in the years –– A dishonest delay in publishing such of securities for the dissemination of
and months leading to its collapse in 2017, information.” information required to be disclosed

154 March 2019 Butterworths Journal of International Banking and Financial Law
 CLAIMS UNDER S 90A OF FSMA FOR DISHONEST STATEMENTS MADE TO THE MARKET: AN UNDERUTILISED REMEDY?
Feature

by the rules of the market” (Sch 10A, –– a PDMR dishonestly delayed the [1992] 2 B.C.L.C 492); such claims have
para 2). It comprises three distinct information being published; and no relevance to statements addressed to the
(although potentially overlapping) –– the claimant has suffered loss as a markets as a whole.
causes of action: result of the delayed publication.
–– an untrue or misleading statement; This article will address certain of UNTRUE OR MISLEADING
–– an omission of required information; and the key concepts which underpin s 90A. STATEMENTS
–– a dishonest delay in publishing information. Before doing so, it is worth noting that A statement that is factually incorrect
whilst this provision offers an attractive will prima facie satisfy the requirement
The requirements for a successful claim solution to investors who have suffered losses contained in para 3(1)(b)(i) of Sch 10A
in respect of each of these causes of action are as a result of false reporting to the market, that the published information contained
as follows: it curtails the non-FSMA causes of action an “untrue or misleading statement”.
–– Untrue or misleading statement (Sch available to such investors. Schedule 10A This basic starting point aside, at least
10A, para 3): provides a blanket exclusion for any liability two important issues relating to the
–– a dealing in securities issued in a in respect of loss suffered as a result of reliance requirement of falsity remain to be
securities market in reliance upon by any person on an untrue or misleading determined by the courts.
published information (eg the statement in published information to which First, it is unclear whether the statement
purchase, holding or disposal of such the schedule applies (para 7), subject to certain in question must be untrue or misleading in
securities); specified carve-outs. a material way. No such words appear in the
–– an untrue or misleading statement in Of those carve-outs, the following statute and, as such, materiality is unlikely
the published information; remain actionable: to be regarded as a constitutive element of
–– a person discharging managerial
responsibility (PDMR) knew or
was reckless as to the untrue or
... at least two important issues relating to the
misleading statement; and requirement of falsity remain to be determined by
–– the claimant has suffered loss:
–– as a result of the untrue or
the courts.
misleading statement; and
–– it was reasonable for him to rely claims for civil liability under the
–– the cause of action (not least when the
upon the statement at the time of Misrepresentation Act 1967; and legislature expressly uses the word “material”
suffering the loss. claims for civil liability arising
–– for the cause of action based on omission
–– Omission of required information from a person’s having assumed as explained below).
(Sch 10A, para 3): responsibility to a particular person for However, in certain instances, the
–– a dealing in securities issued in a a particular purpose, for the accuracy statements which are the subject of the claim
securities market in reliance upon or completeness of the information may themselves be imbued with an element
published information; concerned. of materiality such that, properly understood,
–– an omission of information required they are not false unless they are incorrect
to be included in the published Neither of these carve-outs is, by a sufficiently large margin (ie quantitative
information; however, likely to be of any assistance materiality), or are otherwise such that they
–– a PDMR knew the omission was a for most claimants. Damages are only would, if properly disclosed, likely affect
dishonest concealment of a material available under the 1967 Act where it the judgment of users of the published
fact; and is established that the other contracting information (ie qualitative materiality).
–– the claimant has suffered loss: party made or adopted a relevant Moreover, the materiality of the relevant
–– as a result of the omission; and misrepresentation; such claims have no statement may, of course, have a bearing
–– it was reasonable to rely upon the relevance to dealings on the secondary on whether the claimant can satisfy the
omitted information at the time of market. As to the latter, this appears requirements of reliance and causation,
suffering the loss. to be a reflection of the pre-s 90A position which are considered below.
–– Dishonest delay in publishing at common law, where a duty of care was, Second, leaving to one side the
information (Sch 10A, para 5): by and large, only owed where financial specific requirements of the material
–– a dealing in securities issued in a statements were given to specified omissions cause of action discussed below,
securities market; persons for specified purposes of which it is unclear whether a claim may
–– a delay in publishing information of the persons making those statements were successfully be advanced on the basis
which Sch 10A applies; aware (eg Galoo v Bright Grahame Murray that, by reason of certain omissions from

Butterworths Journal of International Banking and Financial Law March 2019 155
CLAIMS UNDER S 90A OF FSMA FOR DISHONEST STATEMENTS MADE TO THE MARKET: AN UNDERUTILISED REMEDY?

Feature

the published information (including wide-ranging (or at least potentially so) who regularly trades on the securities
the omission of information not required provision, given the volume of matters market in question, and
to be included in it), express statements required to be included in any item of –– The person was aware (or must be
contained within it were themselves untrue published information. Were it not for taken to have been aware) that it was so
or misleading. Claims of this nature are this requirement, an omission claim would regarded.”
actionable at common law (eg R v Klysant potentially lie in all circumstances where
[1932] 1 K.B. 442), with the consequence a matter, whether important or Modelled on the old R v Ghosh [1982]
that if such claims were not available insignificant, required to be included by Q.B. 1053 test for dishonesty, the subjective
under s 90A, relief under the statute would a regulation or accounting standard was aspect of the second limb of this test now
be more narrowly drawn than that which omitted. To require an issuer to check stands at odds with the common law,
would otherwise (ie were it not for the for immaterial non-disclosures would following the Supreme Court’s restatement of
abrogating effect of para 7 of Sch 10A) potentially impose a very high regulatory the position in Ivey v Genting Casinos UK Ltd
be available at common law. In this burden and lead to a mass of unhelpful (for [2018] A.C. 391. However, until the statute
regard, there appears to be no principled market users) information being included is amended there is scope for defendants to
rationale why an issuer should be held in every market disclosure. That is in run and potentially succeed upon subjective
liable for a complete omission of a matter contrast to a positive statement, when an perceptions as to what traders would consider
required to be included in a piece of issuer can be expected to choose carefully to be honest.
published information; but should escape and correctly the statements it decides to
PERSONS DISCHARGING
MANAGERIAL RESPONSIBILITIES
... it is not clear whether persons who would be (PDMRs)
considered de facto or shadow directors of the issuer A partial explanation of the novel
expression “persons discharging managerial
may also be PDMRs. responsibility” is given in para 8(5) of
Sch 10A:
liability where it has omitted to include release to the market. It may therefore be
in that information a matter which the case that an omitted material fact is one “For the purposes of this Schedule the
renders misleading express statements which, had it been disclosed, could have had following are persons “discharging
contained in it. a material effect on an investor’s decision to managerial responsibilities” within an
buy, sell or hold the securities in question. issuer –
MATERIAL OMISSIONS The most common example of this is
To satisfy the requirement contained likely to be the omission of a matter that –– any director of the issuer (or person
in para 3(1)(b)(ii) in respect of material affects the price of the securities in question occupying the position of director, by
omissions, there must be an omission by more than a de minimis amount. In whatever name called);
of a matter “required to be included in principle, however, other types of omissions –– in the case of an issuer whose affairs
published information”, and a PDMR are potentially capable of being material are managed by its members, any
must have known that the omission was a in this sense. For example, the omission member of the issuer;
dishonest concealment “of a material fact” of information about breaches of ethical/ –– in the case of an issuer that has no
(para 3(3)). environmental/regulatory standards may persons within paragraph (a) or (b),
No guidance is given by the statute as be important to the investment decisions of any senior executive of the issuer
to the meaning of these two aspects of the certain classes of investors, including so-called having responsibilities in relation
cause of action. The first is likely a reference “ethical investors”. to the information in question or its
to the matrix of legislative provisions Guidance as to what constitutes a publication.”
which prescribes the required content of an dishonest concealment for the purposes of an
issuer’s financial reporting. On this footing, omissions claim may be found in para 6 of This aside, at least two significant points
the omission of any matter required by a Sch 10A: concerning the identification of PDMRs and
legislative provision to be included in a piece their knowledge/mental state requirement
of published information would engage the “For the purposes of paras 3(3) and 5(2) a remain to be addressed by the courts.
court’s jurisdiction under para 3(1)(b)(ii). person’s conduct is regarded as dishonest if First, it is not clear whether persons
As to the second (ie a material fact), (and only if) – who would be considered de facto or
the legislature’s intention appears to have shadow directors of the issuer may also be
been to rein in the scope of an otherwise –– It is regarded as dishonest by a person PDMRs. Although those expressions are

156 March 2019 Butterworths Journal of International Banking and Financial Law
 CLAIMS UNDER S 90A OF FSMA FOR DISHONEST STATEMENTS MADE TO THE MARKET: AN UNDERUTILISED REMEDY?
Feature

not mentioned in Sch 10A, support for claims in deceit, such that the claimant only Co plc v Hayward [2016] UKSC 48. As such,
the proposition that de facto and shadow needs to show that he was influenced by the the courts may be prepared to apply the
directors may be PDMRs may be found in defendant’s fraudulent misrepresentation same approach to s 90A, notwithstanding
the parenthetical words “(or person occupying in some degree, or that he might have acted the absence of any express reference to a
the position of director, by whatever name differently if no misrepresentation had been presumption of inducement in the text of
called)”. Further, it is not obvious why, as a made (see, eg BV Nederlandse Industrie Van the statute.
matter of principle, an issuer should escape Eikprodukten v Rembrandt Enterprises Inc Finally, and importantly for tracker funds
liability under s 90A where its de facto or [2018] EWHC 1857 (Comm)). It may be that and retail investor claims, it remains to be
shadow directors possessed the requisite this jurisprudence cross-fertilises the law seen whether s 90A requires an investor
mental state, but where its registered directors on s 90A. actually to have read and relied upon the
did not. Although para 8(5)(c) has no direct Second, what is the relevant published information. Although reliance is
application outside of a scenario where counterfactual for a claim under s 90A? an express requirement of the statute (para
the issuer lacks any directors or managing In particular, is the appropriate enquiry 3(4) of Sch 10A), a construction requiring
members, nonetheless the formulation what the claimant would have done: investors to have read the financial statements
“any senior executive of the issuer having (i) if no representation had been made to in question would exclude “fraud on the
responsibilities in relation to the information him at all; or market” type claims. Such a construction
in question or its publication” arguably (ii) if the claimant had been given the true would not sit comfortably with the intention
provides further support (by analogy) for the facts. behind the Transparency Director to achieve
view that de facto and shadow directors ought
to be regarded as PDMRs falling within
para 8(5)(a).
... it remains to be seen whether s 90A requires an
Second, it is unclear whether the investor actually to have read and relied upon the
knowledge (or, indeed, recklessness) of
several individuals who are PDMRs may be
published information.
aggregated together to thereby satisfy the
requirements of the statute. The weight of authority (particularly “a high level of investor protection”. Instead,
recent authority) concerning common law a broader interpretation of reliance may
RELIANCE/CAUSATION deceit favours the first of these approaches be appropriate where tracker funds and
Like common law deceit, s 90A contains (eg Rembrandt Enterprises at [104]). retail investors rely upon the market price
requirements of reliance and causation of However, in a common law deceit claim, as factoring in the as-represented financial
loss (save that reliance is not a requirement in the defendant is generally under no obligation position of the issuer, based in part upon
delayed publication cases). In particular, the to speak at all, which makes (i) above the published statements of the issuer. Pursuant
claimant must have acquired, continued to appropriate counterfactual. Accordingly, it to such a construction, reliance on the market
hold or disposed of securities “in reliance on” is uncertain whether that approach would price would itself constitute reliance (albeit
the relevant published information (para 3(1) continue to apply where the untrue or indirectly) upon the published information.
(a)); and must have suffered loss “as a result of ” misleading statement was required (eg by the This remains a highly controversial and
the relevant untrue or misleading statement or Companies Act 2006 or certain statements untested question.
omission (para 3(1)(b)). of accounting principles) to be included in the
Here, again, a number of points remain to published information. CONCLUSION
be worked out by the courts. Third, claimants in common law deceit As noted in the introduction, s 90A is
First, must an investor advancing a claim benefit from a “presumption of inducement”. potentially a valuable remedy for investors
under s 90A establish causation on a “but Once it is shown that the misrepresentation who have suffered loss as a result of false
for” basis (ie but for the untrue statement, was material in the sense that it was likely to statements to the market, for example in
he would not have acquired the securities induce entry into the relevant transaction, the context of the high-profile scandals
in question)? Although it is sometimes said then it will be presumed that the claimant mentioned above. However, that remedy is
that a claimant in common law deceit – upon was so induced unless the defendant is able to rarely used, and there have been no reported
which the statutory cause is modelled – must rebut that presumption. There is a separate or unreported decisions under s 90A since
make out causation on such a basis (see, eg question about whether this presumption it was first enacted more than twelve years
Chitty on Contracts, 32nd ed., at paras 7-038 applies to a claim under s 90A. As to this, the ago, with the result that none of the issues
and 7-054), on the other hand there is case presumption has been characterised as an identified in this article have been tested by
law (including recent case law) which tends inference of fact or evidential tool, rather than the courts to date. While it is difficult to
to suggest that a less stringent test applies to a presumption of law: see Zurich Insurance identify the reasons for this underutilisation

Butterworths Journal of International Banking and Financial Law March 2019 157
CLAIMS UNDER S 90A OF FSMA FOR DISHONEST STATEMENTS MADE TO THE MARKET: AN UNDERUTILISED REMEDY?

Feature Biog box

Peter de Verneuil Smith QC, Philip Hinks and Dominic Kennelly are barristers practising
from 3 Verulam Buildings, Gray’s Inn, London. Email: [email protected]

with any certainty, there are at least three reasons. operation of s 90A, it remains likely that
possibilities as follows. The test for “market manipulation” s 90A will continue to be an underutilised
First, as explained above, the claimant is in some respects less stringent than statutory remedy, a least until a great deal
in a s 90A claim must prove that a PDMR the test imposed by s 90A. In particular, of those uncertainties are removed through
of the defendant has acted dishonestly, under Art 12(1)(c) of the Market Abuse a reported decision. The forthcoming
ie that he knew that the relevant statement Regulation, “market manipulation” occurs trial in 2019 of Hewlett Packard’s claim
was untrue or was reckless as to the same when there is dissemination of certain against Mike Lynch in connection with
(or equivalent requirements for delay and types of false or misleading information its acquisition of Autonomy (which is
omission cases). In most cases, however, all by a person who “knew, or ought to have proceeding in the Financial List in the
of the evidence relevant to this question will known, that the information was false High Court) includes a claim under s 90A
be in the hands of the prospective defendant. or misleading”. Accordingly, it is not and may therefore provide an opportunity
This means that prospective claimants are necessary to prove knowledge on the part to resolve some of these uncertainties.
unlikely to be in a position to assess whether of a PDMR, and knowledge on the part of However, as the RBS Rights Issue litigation
there are good grounds for a claim, at least an individual lower down in the hierarchy demonstrated in respect of s 90 of FSMA
absent regulatory or criminal proceedings of the prospective defendant will suffice. (the sister provision of s 90A, which
against the prospective defendant (or its Moreover, the FCA (rather than the relates to statements in listing particulars/
directors/employees) which results in prospective claimant) will shoulder the prospectuses)1 the interests of parties
additional information coming in to the burden of proving that the requirements for achieving a settlement may continue to keep
public domain. an order for compensation under s 384(5) this provision out of the judicial spotlight. n
Second, s 90A is not the only remedy are satisfied, and for that purpose the
available for investors who have suffered FCA will be able to call upon investigatory 1 The RBS Rights issue settled the day before
losses as a result of false statements to the powers and resources that are not available the trial: see Prospectus litigation: lessons
market. In particular, s 384(5) of FSMA to a private litigant. learned from the RBS Rights Issue litigation
empowers the Financial Conduct Authority Third, if the prospective defendant is published in the May 2018 issue of this
(FCA) to, inter alia, order a person who insolvent (or if there are concerns about its journal, ((2018) 5 JIBFL 288).
has engaged in “market manipulation” insolvency), then a claim under s 90A
contrary to the Market Abuse Regulation (which, if proven, would rank alongside all
(EU Regulation No 596/2014) to pay of the other unsecured debts of the company)
Further Reading:
compensation to persons who have suffered is unlikely to provide an effective remedy for
loss as a result. This power was exercised for investors. Carillion and Patisserie Valerie Prospectus litigation: lessons learned
––
the first time in the context of Tesco’s 2014 provide recent examples of cases where from The RBS Rights Issue Litigation
accounting error referred to above, resulting concerns about the issuer’s solvency (2018) 5 JIBFL 288.
in the establishment of a compensation (and therefore its ability to satisfy any Extension of the statutory regime for
––
scheme for investors. Where the FCA judgment against it) may discourage issuer liability (2010) 11 JIBFL 682.
exercises its powers under s 384(5), this will claims under s 90A. LexisPSL: Banking & Finance: Issuer
––
often provide a more straightforward remedy Given the above considerations and the liability for ad hoc disclosures and
for investors than s 90A for the following uncertainties surrounding the meaning and dishonest delay: cause for concern?

Corporate Rescue and Insolvency Subscribe today to

Corporate Rescue and Insolvency (CRI) is an authoritative, well-researched and incisive journal CRI for just £464
which offers commentary and analysis on all areas of insolvency and restructuring law
(domestic and international) for the busy insolvency practitioner and professionals in related industries.
CRI focuses on insolvency and corporate rescue issues in line with market changes and offers an excellent
mix of in-depth features; In Practice articles covering both technical and practical pieces; and International articles. Other
CRI sections include: Cases Alerter; Cases Reporter; Legislative Update; Turnaround; Market Spotlight; and Sector Focus –
prepared and written by top City law firms to keep you up-to-date with the latest developments.
The new cover and internal layout design allows easy navigation and is well-suited to a time pressured day.
CRI is an essential companion in helping the insolvency and restructuring practitioner and other related professionals
meet and maintain the requisite standards of excellence.

Visit www.lexisnexis.co.uk/store/uk/

158 March 2019 Butterworths Journal of International Banking and Financial Law