On 23 January 2024, the Court of Appeal (“CoA”) handed down its judgment upholding the High Court’s first instance decision to strike out two securities claims by Wirral against Indivior PLC (“Indivior”) and Reckitt Benckiser Group PLC (“Reckitt”) brought by way of representative proceedings pursuant to Civil Procedure Rule (“CPR”) 19.8. Wirral has applied to the Supreme Court for permission to appeal the CoA’s decision.
As discussed in our previous articles in December 2023 and June 2024, Mr Justice Green’s decision at first instance was the first and only judgment on whether the representative action procedure could be used for claims brought pursuant to section 90 and section 90A/schedule 10A of the Financial Services and Markets Act 2000 (“FSMA”).
The CoA hearing took place on 10 and 11 December 2024. Our previous article summarises the key arguments presented to the court.
Appeal dismissed
The CoA unanimously dismissed the claimant’s appeal. It found that Mr Justice Green had correctly exercised his discretion to refuse the representative action procedure being used in these claims, highlighting that there are no fetters or limits on that discretion. Sir Julian Flaux (sitting as Chancellor of the High Court) stated that there is “no hierarchy of different procedures” whereby a representative action is somehow to be preferred to other case management mechanisms and, in this case, the multi-party procedure (the standard way in which securities claims have been case managed to date) was available.
Wirral sought to rely upon the Supreme Court’s decision in Lloyd v Google to support a case for a fully bifurcated approach at the representative stage whereby the claimant seeks (only) declarations as to common issues relating to the defendants (thereby parking individual investor issues such as legal standing, reliance, causation and quantum). But the CoA was not persuaded of the merits of such an approach and viewed it as contrary to the overriding objective on the basis that it could result in wasted costs and could make settlement more difficult.
The CoA was not swayed by the claimant’s “access to justice” argument that retail investors would be unable to participate in the claims if they were not allowed to proceed by way of representative actions. Sir Julian Flaux highlighted the absence of any evidence from the funders on such issue or a cogent or coherent explanation as to why the funders were not prepared to fund the participation of retail investors in the multi-party claim that had been issued in parallel, describing the situation as “engineered”.
The investor protection issue
The decision is disappointing insofar as retail investor protection is concerned, given the obvious advantages of representative actions to retail claimants. Swathes of eligible investors generally miss out on settlements because they have not joined (or been invited to join) the claim (given multi-party actions are “opt-in”). These are usually retail investors whose losses (although significant to them) are too small either to make the claims commercially viable for funders and/or to justify the significant individual legal costs required to fight these cases by bringing a claim in their own capacity (given such costs vastly outweigh the likely loss). For these investors, the representative action procedure offers a route to redress not currently available to them given the high individual costs imposed on claimants by the courts’ approach to legal standing. However, without such evidence before the court, this was not something the CoA could have regard to in this case.
Sir Julian Flaux went on to explain his concern that permitting a representative action may result in further claimants joining the claim, even though those claimants may have claims that ultimately would fail (given the need to show reliance for s90A/Schedule 10A FSMA claims). He referred to the decision in Barclays, which held that passive shareholders could not meet the reliance requirement on the basis that paying the market price of the shares was not sufficient to establish reliance on any misstatements or omissions in an issuer’s published information.
Sir Julian Flaux was worried that adopting a representative action procedure for this case could hinder the court’s ability to strike out such claims by passive investors, which would likely have little chance of succeeding.
It is relevant to note that, since the CoA’s decision, Mr Justice Green has handed down his decision in the Standard Chartered strike-out application, and this judgment casts doubt on the decision of Mr Justice Leech in Barclays. It is therefore up for debate whether the CoA would have reached the same decision had the decision in Standard Chartered been handed down before the CoA hearing took place. Having said that, Sir Julian Flaux’s concerns regarding the reliance “barrier” were only one of a number of points made in support of the decision to uphold the first instance judgment.
Still, the issue may be the subject of further judicial consideration in relatively short order, given Wirral’s application to the Supreme Court for permission to appeal the CoA’s decision. The Supreme Court’s decision on whether to allow the appeal is still pending at the time of writing this article.
Concluding thoughts
The scope of the representative action contemplated (and sought) by Wirral was evidently a step too far for Mr Justice Green and the CoA, and neither could get on board with a set of declaratory proceedings that focused only on defendant issues. Both courts struggled to reconcile such an approach with the overriding objective, particularly where the justification of “access to justice” for retail investors was neither understood nor supported by sufficient evidence.
That is not to say this is the end of the road for representative actions in the securities sphere. As noted above, Wirral has applied for permission to appeal the CoA’s decision to the Supreme Court. If permission is granted, there remains a possibility (particularly post-Standard Chartered) that representative actions in the form contemplated by Wirral could get the green light.
Moreover, even if the English courts are not ready to approve a representative action in the form contemplated by Wirral, the courts may be prepared to approve one with different parameters that strikes a better balance between claimant and defendant issues, and gives the court the power to strike-out unmeritorious claims.
For example, a representative action with different sub-classes in relation to reliance would enable the courts and/or the defendants to understand the claimants’ different reliance positions and/or standing to bring claims and may be considered more in tune with the overriding objective. So, too, would a representative action where there exists cogent evidence that a refusal to allow the claim to proceed in this way would have the practical effect of certain claimants being prevented from bringing their claims.
Additionally, a bifurcated representative action that sets out clearly how the next stage to damages would proceed would give the courts comfort that the first stage of the representative action was not wasted costs and could lead to settlement. It would also be interesting to see whether the court’s approach to striking out a representative action would be any different where parallel proceedings had not already been issued on the usual (multi-party) basis, which was the backdrop to the Wirral claim. Of course, a securities action brought under s90 FSMA may be particularly suitable for a representative action given the lack of reliance requirement which would allow the parties to side-step some of these issues entirely.
Therefore, whether a different case may result in a different approach to representative actions remains to be seen. There are good reasons to believe that the door is not entirely shut to securities claims brought by way of a representative action, albeit on a different basis. Other jurisdictions, notably New Zealand, have allowed and encouraged securities actions to be brought by way of a representative action. There appears to be no reason why the English courts could not adopt a similar approach.
As to whether such a “different basis” would render the benefits of representative actions to claimants and litigation funders as attractive a proposition as the Wirral approach remains to be seen (given that the upfront burden of work on claimants would not be particularly different to a standard, bifurcated multi-party action). However, it remains the case in England that the current multi-party approach with the significant upfront individual costs for each claimant can make it uneconomic to bring s90A/Schedule 10A claims on behalf of retail and smaller institutional investors, regardless of how meritorious these investors’ claims are.
As matters currently stand, access to justice is being denied to these claimants, as is self-evident from the lack of retail claimants in these sorts of actions to date. Without the government introducing a class action system for securities claims, it is doubtful whether law firms and/or litigation funders will be willing to fund retail claimants in future securities actions if the position remains as is currently the case.
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