Recent decisions in the UK and Australia have significant implications for those involved in (or considering) securities litigation outside of the US. Head of Securities Litigation Keith Thomas considers the decisions and their practical implications for public attorneys and institutional investors below.
SL Claimants v Tesco plc  EWHC 2858 (Ch)
This judgment makes it clear that plaintiffs who are holders of intermediated securities have standing to sue despite not being legal owners, provided that they can prove the chain of title. Many institutional investors allege that they suffered considerable loss as a result of Tesco overstating profits (to the tune of £250 million) for the half-year of 2014/2015. This resulted in stock losses of billions of pounds. While proceedings commenced in 2016, Tesco only applied to have the claim struck out towards the end of last year, on the basis that the investors did not hold legal title to the shares. The application for strike-out was made in relation to investors who (i) held shares in a dematerialised form via the UK Certificateless Registry for Electronic Share Transfer (“CREST”) and (ii) had a custody chain involving more than one intermediary. Typically most institutional investors/public funds hold their securities via a custody chain involving more than one intermediary and ending with the CREST participant.
The argument for strike-out was described as having “two limbs.” (SL Claimants v Tesco plc  EWHC 2858 (Ch), paragraph 36). First, Tesco alleged that the ultimate investor at the end of the chain had only an economic interest (as opposed to a proprietary interest) in the shares themselves. Given that the existence of a proprietary interest is a prerequisite for a claim under The Financial Services and Marketing Act 2000 (“FSMA”), a finding to this effect would have been fatal to any claim being brought by the investors. Second, Tesco argued that even if the ultimate investors were to be regarded as having a proprietary interest in the shares themselves, there had not been an “acquisition” or “disposal” (Ibid, paragraph 36) of the shares (as required by FSMA).
The court categorically rejected both limbs of Tesco’s argument, allowing the investors to continue with their claim. In relation to the first limb, the court held that the ultimate investor in a custody chain had a “right to a right.”(Ibid, paragraph 19). This “right to a right” could be equated to an equitable proprietary right in respect of the securities, i.e., it was not correct to categorise the rights of the investors as economic interests only. In relation to the second limb, the court adopted a wide interpretation of “acquisition” and “disposal”. In reaching this view, the court placed significant weight on the purpose of the relevant legislation, noting that unless the wording in FSMA was “without any semantic doubt entirely deficient to apply in such circumstances, ordinary principles of statutory construction require the court to ensure that the statutory purpose is not thwarted.” (Ibid, paragraph 117). Given that the “whole purpose of the relevant provisions of FSMA” (Ibid, paragraph 117) was to confer a statutory cause of action in situations like the one before the court, the court declined to adopt Tesco’s narrow interpretation.
This case raises issues of “great importance.”(Ibid, paragraph 9) The use of custodians is ubiquitous in the dematerialised securities market. Had the judge agreed with Tesco that the ultimate investors had only an economic interest in the shares as a result of the chain of custody, this would have resulted in the vast majority of institutions who hold shares in this way (and who suffer loss as a result of financial misstatements) being deprived of any effective remedy. This is because parties are only regarded as having standing (i.e., the ability to bring a claim in the first place) if they can establish that they have an equitable proprietary right in relation to the securities (and meet the criteria set out in FSMA).
This case also shows the lengths that the English courts will go to give effect to the purpose behind FSMA. For the likes of public funds and other institutional investors considering bringing securities litigation in England, this is undoubtedly welcome news. It does, however, have some practical implications that are important for practitioners to bear in mind. The court is likely to want to see detailed evidence regarding the chain of custody at a relatively early stage in proceedings, so that it can satisfy itself that the plaintiff does in fact have an equitable proprietary interest in the securities. By way of example, this could include documents such as:
- agreements between the investors and the custodians/trustees responsible for holding their assets;
- agreements between any (sub)custodians in the chain; and
- Important Decisions in Foreign Securities Litigation documents evidencing the ultimate legal owner of the securities (and confirmation that the securities were held and/or settled via CREST).
Government attorneys and those representing them should bear this in mind and seek to collate these (and any other relevant) documents sooner rather than later when foreign securities litigation is contemplated.
TPT Patrol Pty Ltd as Trustee for Amies Superannuation Fund v Myer Holdings Limited  FCA 1747
This judgment could potentially lead to a different approach being taken in the UK (and elsewhere) to causation in the context of securities litigation. Ultimately, it could make it easier to claim under FSMA.
On September 11, 2014, the then CEO of Myer Holdings Limited (“Myer”) made a statement (the “September Statement”) to the effect that in his opinion, Net Profit after Tax (“NPAT”) for the coming financial year (FY15) would likely exceed that reached in the preceding year (FY14). Given that NPAT for FY14 was AUD 98.5 million, the implication was that NPAT for FY15 would be in excess of that figure.
On March 19, 2015, (i.e., less than six months after the September Statement had been made), Myer announced that its NPAT results would most likely be in the region of AUD 75-80 million (i.e., significantly below the figure for FY14).
Following the announcement in March 2015, there was a considerable decline in Myer’s share price. Shareholders who purchased fully paid shares on or after September 11, 2014, and who still held those shares by March 19, 2015, alleged that by:
- making the September Statement; and
- failing to correct it, Myer had engaged in misleading/deceptive conduct and breached its continuous disclosure obligations under the relevant Australian legislation (the Corporations Act 2001).
The Federal Court of Australia held that:
- the September Statement amounted to earnings guidance (notwithstanding the fact that
- it was made orally during a Q&A session involving equity analysts and financial journalists, as opposed to in writing, and
- the Board had resolved not to give earnings guidance);
- although there were reasonable grounds for making the September Statement, it should have been monitored to ensure that disclosure obligations were not breached;
- by the time of the Annual General Meeting on November 21, 2014, Myer knew (or ought to have known) that its NPAT for FY15 would not exceed the NPAT for FY14;
- it should have disclosed that fact;
- however, on the facts of the case, the court was “not convinced” (TPT Patrol Pty Ltd as trustee for Amies Superannuation Fund v Myer
Holdings Limited  FCA 1747, paragraph 19) that the applicant and group members had “suffered any loss flowing from such contraventions.”(Ibid, paragraph 19). This was because the market had already priced in the fact that NPAT could well be below the “rosy picture” (Ibid, paragraph 20) painted in the September Statement. It was therefore unlikely that a corrective statement would have had any effect.
The significance of this case lies not so much in the outcome (which was ultimately unfavourable to the investors, given that they could not establish loss) but in the extensive consideration that the court gave to the approach that should be taken to causation in the context of securities claims. The court considered the following alternative approaches:
- fraud on the market; and
- market-based causation.
In rejecting Myer’s contention that plaintiffs should be required to establish reliance in the traditional sense (i.e. to show that the plaintiff had heard and relied upon the statement made by the CEO), the court noted that this would be at odds with the tests set out in the Australian statute, which do not “necessarily require reliance.”(Ibid, paragraph 1535). It also noted that there were “conceptual difficulties”(Ibid, paragraph 1523) with making actual reliance a prerequisite for a cause of action in circumstances involving the non-disclosure of information:“how can a shareholder be said to rely upon unaware undisclosed information?”(Ibid, paragraph 1523).
The court noted that (i) the US fraud on the market doctrine involved a “rebuttable evidentiary presumption that a buyer of shares relied on publicly available information in the market where the market has in fact proven to be efficient.”(Ibid, paragraph 1626). Although it remained an element of the cause of action that each member establish (actual) reliance, the presumption effectively “shortcuts this proof.”(Ibid, paragraph 1626). In refusing to endorse this approach, the court focused gain on the wording of the Australian statute. Given the absence of any requirement of reliance, it concluded that the “US doctrine is irrelevant.” (Ibid, paragraph 1535).
Instead, the court concluded the correct approach was to consider market-based/indirect causation. This was in line with both the wording and purpose of the Australian statutory regime, which was to impose legal responsibility on the non-disclosing company for the consequences of its failure to disclose. (Ibid, paragraph 1651). Further, although this approach raised questions about the circumstances in which the chain of causation could be broken (e.g., how one should regard investors who in fact had actual knowledge of the nondisclosure), these were not reasons to “deny” or “negate generally the availability of market-based causation.”(Ibid, paragraph 1654).
This case is significant for a number of reasons. As the first-ever class action securities case to reach trial in Australia, it offers some much-needed insight to the approach that will be taken to causation in this jurisdiction in the future. For those considering bringing securities claims in Australia, it is now reasonably clear that in order to establish causation, it will not be necessary for each shareholder to prove that they relied upon – or even read – the company’s misinformation to establish their loss. Investors will need to show that:
- there was non-disclosure of material information by the company to the market;
- the listed price for the securities was inflated by such nondisclosure; and
- the investors purchased or continued to hold the securities on the market at an inflated price.
However, the impact of this judgment could potentially be felt outside of Australia as well. This is because although decisions of the Australian court are not binding in commonwealth jurisdictions (such as England), they tend to be given a lot of weight and are treated as having persuasive force.
How exactly this will affect those bringing securities actions in England remains to be seen. However, in light of Myer, it may be easier for investors to bring a claim under s90 of FMSA (liability for statements in prospectuses or listing particulars), where reliance is not an express requirement. If the English courts were to follow the approach taken in Myer, investors could potentially find themselves with an easier evidentiary threshold for s90 claims, as there would be no need to demonstrate a chain of causation between each misstatement or omission in the prospectus and the losses alleged by the plaintiffs. This would result in faster, less expensive litigation in England.
It will be particularly interesting to see the ramifications of this case in the context of s90A FSMA claims (i.e., liability for misleading statements or omissions to the market). Although reliance is an express requirement of s90A, it may be that we see a different approach being taken to reliance itself. Those litigating in the UK may wish to argue that, where there is a market in which algorithmic and index-based trades are driven by share prices in the market that alone is sufficient to satisfy the reliance requirement set out in statute. That is, we may see a move away from the argument that reliance is synonymous with representations being made (and actions being taken as a direct result of those representations), to a more fluid concept of reliance that reflects the realities of the market.
This article first appeared in the April 2020 NAPPA Report
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