The long-awaited quantum judgment in the first ever section 90A/schedule 10A Financial Services and Markets Act 2000 (“FSMA”) claim to go to trial has been handed down. Harry McGowan, Lorraine Lanceley, Elisa Wahnon and Beata Brachkov provide an update on the key takeaway points for section 90A/Schedule 10A claims.

The estate of Mike Lynch has been ordered to pay over £700m to Hewlett Packard (“HP”) in the long-running Autonomy dispute (ACL Netherlands B.V. (as Successor to Autonomy Corporation Ltd) v Michael Richard Lynch [2023] EWHC 1847 (Ch)). The High Court has now handed down its quantum judgment, becoming the first judicial decision on quantum in a s.90A/Schedule 10A FSMA claim. Mr Justice Hildyard’s judgment follows his lengthy liability judgment handed down in May 2022 (the “Main Judgment” ([2022] EWHC 1178 (Ch)). The Main Judgment found substantially in favour of HP and determined that Autonomy’s published information did not properly disclose the true financial position of the company. However, the judge concluded that, notwithstanding such disclosure failures, HP would still have proceeded with the acquisition, albeit at a reduced price.

A quantum hearing took place in February 2024, followed by further submissions in March 2024, to enable the judge to determine what Autonomy’s share price would have been and what premium HP would have agreed to pay in the absence of such disclosure failures. As we reported here, the quantum judgment was delayed by nearly a year following the death of Mike Lynch in the Bayesian superyacht tragedy.

Key points on quantum in section 90A/Schedule 10A FSMA claims

The “dog-leg” nature of this claim (ie, HP sued Autonomy as the issuer under s.90A/schedule 10A FSMA, and then Autonomy sued the defendants for any liability incurred as a result of that claim) makes it a somewhat anomalous s.90A/Schedule 10A claim (as most are brought as group actions by minority shareholders).

The valuation techniques analysed in the judgment are, therefore, more specific to valuing a company as a whole, including the “synergy value” to the purchaser (ie, the value that could be expected to arise or be developed from purchasing and combining the businesses). This contrasts with valuing the loss stemming from the purchase or holding of (relatively) smaller portions of shares in companies (with no obvious additional synergy value). In particular, both the claimants and defendants in this case utilised the valuation model used by HP when negotiating the deal (with adjustments) to try to determine what price would have been paid by Autonomy in the counterfactual world. In a more typical s.90A/schedule 10A FSMA claim, no common valuation model would be available.

Notwithstanding the above, there are still a few key points we can draw out from the judgment that are of wider importance and applicability to s.90A/Schedule 10A securities claims.

1. The relevant counterfactual

Mr Justice Hildyard held that in assessing losses flowing from misleading statements in/omissions from published information, it is necessary to ask:

• what would have happened had the false statements not been made? and
• what would have happened if, instead, the published information had contained true statements in respect of matters required to be included?

This was referred to as the “FSMA Counterfactual” and has been referred to in other cases as the Counterfactual of Truth (“CFOT”).

The FSMA Counterfactual/CFOT is different to the case law on fraudulent misrepresentation/ tort of deceit cases, where it has been established that the test is only part (i) above, namely what would have happened had the false statements not been made? As Lord Justice Hobhouse said in Downs v Chappell [1997] 1 WLR 426, at 433: “The judge was wrong to ask how they [the representees] would have acted if they had been told the truth. They were never told the truth. They were told lies in order to induce them to enter into the contract. The lies were material and successful.”

Mr Justice Hildyard at paragraph 529 of the Main Judgment added part (ii) to the counterfactual because listed companies are under a duty to publish true statements (ie under the Companies Act 2006 and the Disclosure and Transparency Rules). Going forward, it will be interesting to see if the courts continue to adopt the CFOT as representing the correct counterfactual for the measurement of loss in FSMA cases where it is found that the relevant transaction would have still proceeded (albeit at a reduced price) notwithstanding the relevant disclosure failures.

2. Transaction cases versus no-transaction cases

Following the liability judgment handed down in May 2022, the claimants substantially succeeded in their s.90A/Schedule 10A claim (as well as in separate claims in deceit and/or misrepresentation and for corporate loss). However, as noted above, the judge found that while HP would not have acquired Autonomy at the agreed bid price had Autonomy’s financial position and performance been properly and accurately disclosed, it would nevertheless have proceeded with its acquisition of Autonomy. Therefore, on the facts of this case, the relevant counterfactual is a scenario in which the transaction would still have occurred, albeit at a reduced price (as opposed to a “no transaction” case where the transaction simply would not have occurred).

The claimants, while accepting that in the s.90A/Schedule 10A FSMA claim the counterfactual was a “transaction case”, pleaded in their misrepresentation/deceit claim against Dr Lynch and Mr Hussain that HP would have discovered the fraud and would have walked away from the transaction. That being so, the correct counterfactual for those claims was, according to the claimant, a “no-transaction” case. The judge rejected that pleading and stated: “It is, to my mind, so unsatisfactory as to be unacceptable as a matter of principle that the Court should be asked to make simultaneous but inconsistent findings of fact that in the context of one claim (the FSMA Claim) the transaction would have proceeded, but in the context of the common law claim it would not have proceeded.”

Mr Justice Hildyard concluded that the only realistic solution was to apply a consistent counterfactual to both claims (namely, the “transaction case” counterfactual).

3. Measure of loss

The judge ruled that the relevant measure of loss for s.90A/Schedule 10A claims in a “transaction case” is the difference between the price paid by the claimant on the basis of the position as it was represented to them and the price the claimant would have been prepared to pay in the counterfactual scenario where the defendant had historically published true and accurate information. The judge emphasised the need to avoid the “inevitable but dangerous” temptation to compare the target company as represented and the target company in the counterfactual, as this can result in an inappropriate discounting of the counterfactual target (for example, due to the disappointment of such adverse comparison).

In both the actual bid made by the claimants and the counterfactual scenario, the “synergy value” to the purchaser should be taken into account, as it is a significant element in determining the price paid and what would have been paid in the counterfactual.

Mr Justice Hildyard commented on the loss methodology for the ”no transaction” case being the acquisition price paid less the value of the asset acquired. A key question in this case, but unlikely to be present in a typical s.90A/Schedule 10A FSMA case, is what value of synergies ought to be taken into account in the assessment of that value?

4. Broad-brush approach

The judge consistently referred to the need to apply a “broad-brush” approach when making various assessments on value based on the expert evidence before him. He noted that “this is one of many examples of cases where it is necessary to forego precision and apply a pragmatic view”. Referring to previous judgments, he noted that “the law does not require proof of quantum to be on balance of probabilities; judges must in the end simply: ‘use their forensic skills to do the best they can with limited material to achieve practical justice’”.

5. Event studies

Mr Justice Hildyard specifically commented that none of the parties had offered an “event study”. He noted that an event study in this context measures the impact of a company-specific event on a company’s share price using historic market data. It is a technique often used in US class actions by reference to the “fraud on the market” theory. This is the theory that the market price of shares traded on well-developed markets reflects all publicly available information, including material misrepresentations, therefore giving rise to a rebuttable presumption of causation and reliance.

The judge noted that although the theory has not been adopted in this jurisdiction for the purposes of FMSA, “it might provide a means of assessing whether a given event has substantial long-term effect on market capitalisation”, which could have been useful in this case.

Notwithstanding the judge’s comments, it is unsurprising that none of the parties used an event study in this claim. Generally, economists analyse the share price drop of the company at the time the market is informed that there were historical misleading statements/omissions by the company. However, in this case, Autonomy had already been delisted and was part of HP by the time HP discovered the historical misleading statements/omissions. Therefore, it would be difficult to calculate with any certainty what impact the truth coming out would have had on an independent listed Autonomy.

Commentary

The bulk of Mr Justice Hildyard’s judgment focuses on quantum methodologies not generally applicable to group actions under FSMA. In particular, the judgment spends considerable time assessing the experts’ discounted cash flow (“DCF”) models, which involved adjustments from the DCF model used by HP when bidding for Autonomy.

It was common ground in the quantum proceedings that DCF models are the most used and respected valuation method for assessing the standalone value of a commercial entity. The judge also took into account fact-specific considerations such as synergies resulting from the combination of businesses, which again are unlikely to be relevant in cases concerning standalone purchases of shares by public investors when trading on the stock market.

The judgment does provide some helpful guidance on the principles to be applied when calculating compensation in FSMA cases. Namely, it essentially confirms that the principles for measuring and assessing loss under FSMA cases are the same as in misrepresentation and tort of deceit cases, even though the counterfactual is likely to be different.

This is important authority given that the Autonomy quantum judgment (despite being an outlier of a FSMA claim) represents the first ever s.90A/Schedule 10A FSMA claim to go to trial and have quantum determined. The extent to which the principles established by Mr Justice Hildyard in this anomalous case will be supported and applied by the courts in future, more “vanilla” FSMA claims, remains to be seen.

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