Since 2016, Stewarts has been acting on behalf of a group of institutional investors who have asserted claims against Tesco PLC (Tesco). These claims are in connection with the well-documented financial reporting scandal that came to light on 22 September 2014 when Tesco’s senior management announced that it had identified an overstatement of its expected profit for the half-year of 2014/15 to the tune of around £250m.

There has been recent court activity in the Tesco case. One judgment related to an application by Tesco to strike-out the claims made by clients of Stewarts and Morgan Lewis on the basis that they do not have proper title to sue. Mr Justice Hildyard rejected both limbs of Tesco’s case, ruling that neither was sustainable. In this article, Zachary Sananes, a senior associate in our Securities Litigation team, looks at the judgment.

The vast majority of claimants held their shares in “dematerialised form” through the CREST (Certificateless Registry for Electronic Share Transfer) system via a chain of custodians or sub-custodians in whose name the shares were registered. Custodians/sub-custodians are typically banks or financial institutions that are specifically retained to, amongst other things, safeguard assets (including shares) and settle purchase and sale transactions. The use of custodians is ubiquitous, and the judge accepted that the position of the claimants is entirely typical of the dematerialised securities market.

Tesco’s first argument, however, was that the consequence of the claimants’ interest being part of a custody chain arrangement does not qualify them as having an “interest in securities” within the meaning of paragraph 8(3) of Schedule 10A of FSMA. This is a necessary pre-requisite for bringing claims under section 90A of the Financial Services and Markets Act 2000 (FSMA).

Tesco’s second argument was that none of the claimants could properly be said to have “acquired, continued to hold or disposed of” any interest in securities within the meaning of Schedule 10A (even if, contrary to Tesco’s first argument, they had a qualifying interest in the first place).

The judge observed the fundamental importance of this issue given the prevalence of custody chains in the dematerialised securities market and the underlying purpose of section 90A of FSMA. When first introduced, Parliament’s objective was to provide a remedy to underlying investors (such as the claimants), as a result of untrue or misleading statements being made to the market by issuers (such as Tesco), as opposed to the investors’ intermediary custodians (who are not affected by nor rely on such information in that capacity). If Tesco was correct on its construction as to the nature of the claimants’ “interest in securities” under Schedule 10A of FSMA, the statute would be unfit for purpose and require further consideration and amendment.

Concerning Tesco’s first argument, Mr Justice Hildyard concluded that the nature of the claimants’ interest pursuant to the custody chain was “a right to a right”, which was unaffected by the insolvency of any of the intermediaries in the custody chain and hence equated to an equitable proprietary interest in the shares. This, he held, fell within the meaning of “any interest in securities” for the purpose of construing Schedule 10A of FSMA.

As for Tesco’s second argument, regarding whether or not the claimants could be said to have acquired, continued to hold or disposed of an interest in securities, the judge concluded that unless the wording “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”. Consequently, this limb of Tesco’s argument also failed.

Tesco sought and obtained leave to appeal the judgment, but has since abandoned its proposed appeal.

This judgment has been well received by many of our securities clients as it adopts a pragmatic approach to the statutory purpose underpinning Section 90A and Schedule 10A of FSMA. Indeed, if the judgment had gone in Tesco’s favour it would have prevented the vast majority of future securities claims from being brought.




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