The legal standing of claimants (ie their right to bring a claim and their respective shareholding) has become an unnecessarily heavily contested battleground in securities actions brought in England under sections 90 and 90A/Schedule 10A Financial Services and Markets Act 2000 (“FSMA”).

The push by defendants to make standing as complicated an issue as possible has meant, in some cases, losing sight of the overriding objective to deal with cases justly and cost-efficiently. This results in all parties, especially claimants, bearing significant costs in proving a point beyond what should be necessary. In this article, Tom Otter explains legal standing in securities actions.

How is legal standing established in an FSMA claim?

Legal standing looks straightforward. And it is. To bring a claim, a claimant needs to establish (i) it has legal personality and (ii) it has the requisite interest in the securities.

With some fairly basic confirmations from its custodian and the provision of corporate documents, these questions should be straightforward for most claimants to answer to the reasonable satisfaction of the court. The equities market functions (as it has for many years) on the basis of regulated institutions having an ownership interest in the shares they say they do based on intermediated securities held by their (regulated) custodians on CREST.

Many claimants in securities actions are pension funds, global asset managers or other significant financial institutions. (Why there are not more retail claimants in securities actions is a reflection of several factors and warrants an article in itself.)

Large institutional shareholders have global custody agreements with institutions that offer global custody services. Such global custodians will settle share transactions made by their client institutions across different stock exchanges worldwide. Institutions offering such services are regulated and are principally operations of large regulated global banks such as Citibank, JP Morgan, HSBC, Bank of New York Mellon, as well as State Street and Northern Trust. These institutions have established regulated entities around the world and use their network of such local entities to settle share transactions on the relevant stock exchange.

You may think this means there would be little debate about whether or not some of the world’s largest and most sophisticated institutions have standing, given the systems and controls in place in those organisations. At any given time, their custodians hold records of their shareholdings and their internal legal function maintains the corporate structure. There is no debate, for example, at shareholder meetings or investor calls as to whether or not the institution has the shareholdings it claims to have.

Standing demands made by defendants

In the courtroom, however, defendants have asserted (in some cases successfully) that the position is different. They have sought to make these institutions jump through several hoops, in contrast with the more straightforward approach adopted in relation to retail claimants. These demands often appear more strategic than reasonable and have resulted in large costs being incurred.

For example, defendants have demanded responses to numerous questions to prove standing, including seemingly unrelated, random and unnecessary ones such as:

• whether a claimant is entitled to dividends (a right attaching to shares already acquired and nothing to do with their acquisition)
• whether shares are held in certificated or dematerialised form (when all institutional shares will be held in the latter) and

• the identities of intermediate third-party custodians in a chain of custody.

Standing issues in Allianz Global Investors GmbH & Others v Serco Group Plc (FL-2019-000006, FL-2021-000023) became so complicated that they have been dropped from Trial 1.

This contrasts with the basic steps required for evidencing holdings of other assets, for example:

• if a claimant has to show they had cash in a bank at any point in time in the past, proper evidence would be bank statements duly certified by the bank as to their truthfulness or a letter from the bank confirming the amounts the claimants held in their bank at the relevant point in the past.

• while a bank holds cash, the equivalent for shares for a retail/consumer shareholder would be a stockbroker such as Hargreaves Lansdown, AJ Bell or another savings institution. It would be assumed the court would be amenable to accepting a duly certified statement from their brokerage account as proof of the consumer’s holding. For example, brokerage statements were accepted by the Financial Conduct Authority (FCA) in its recent Link/Woodford compensation scheme.

Courts should be sceptical

It follows that the courts should approach defendants’ efforts to complicate matters of standing with a certain degree of scepticism. There may be cases where a manifest error on the part of the institution or their lawyers (ie misidentifying the legal claimant) will justifiably mean that standing is contested. But otherwise, it is hard to see why basic evidence supplied by the relevant custodian cannot suffice. This would be, for example, a signed letter from their regulated custodian certifying that the custodian held the relevant shares for the claimant in CREST (whether directly or via one or more sub-custodians/nominees) plus the requisite corporate documents detailing legal personality.

In other jurisdictions with well-developed case law in this area, such as the US, standing is generally approached in a sensible, practical manner without being over-complicated and costly, as it is unfortunately becoming in England.

There is no good reason why the evidence required of an institutional shareholder should be conceptually different to what is required of a retail shareholder. It is inconceivable that a retail shareholder would be asked by a court to evidence a chain of custody from their regulated stockbroker. Further, FSMA claims may involve thousands of retail shareholders (as in the 35,000 consumers who brought claims in the RBS Rights Issue Litigation), and careful thought should be given to how complex the process should be for each claimant in a mass claim. It is important that a simple question is not over-complicated such that the cost involved in satisfying standing becomes a significant barrier to redress.

Changes to UK listing rules

This is particularly important given the proposed changes to the UK listing rules, which are generally accepted as likely to result in more corporate failures and loosen investor protections. So, it is more important than ever that there is an efficient mechanism to bring private claims protecting investors to ensure the proper functioning of the market. Without a more pragmatic approach focused on the purpose of the rights of action provided by FSMA (ie to protect investors), it seems inevitable that investor capital (and, therefore, listings) will continue to flow across the pond to the US.

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