In a recent decision in the G4S Limited shareholder litigation, the court clarified that the term “persons discharging managerial responsibilities” (PDMRs) as defined in Schedule 10A Financial Services and Markets Act 2000 (“FSMA”), does not extend to senior executives where the company has directors.
Elisa Wahnon reviews the decision in Allianz Global Investors GmbH and ors v G4S Limited [2022] EWHC 1081 (Ch) here.
Statutory background
The G4S litigation is a claim brought under s90A FSMA in relation to statements made in G4S’s published information.
Section 90A, in conjunction with Schedule 10A FSMA, provides a mechanism for shareholders to sue UK-listed companies where they suffer loss as a result of the company:
- publishing untrue or misleading statements (eg in annual reports),
- omitting information from published information that should have been included, or
- delaying the publication of certain information.
However, the issuer’s liability only arises if a PDMR:
- knew or was reckless as to whether the statement was untrue or misleading, or
- knew the omission was a dishonest concealment of a material fact, or
- dishonestly delayed the publication of the information.
Schedule 10A FSMA contains an interpretation section in paragraph 8. Paragraph 8(5) specifies that for the purposes of Schedule 10A PDMRs are:
- any director of the issuer or person occupying the position of a director, or
- if the issuer is run by its members, any member of the issuer, or
- if there are no persons coming within (a) or (b), any senior executive of the issuer having responsibilities in relation to the information in question or its publication.
The application
G4S applied to strike out the claimants’ allegations in three related actions that certain individuals were PDMRs of G4S. (Last year, in the first of these actions, G4S successfully struck out 90% of the claimants’ claims in that action on procedural grounds.)
G4S’s main argument was that per the definition in paragraph 8(5)(a) of Schedule 10, only directors of the issuer can be PDMRs (including de facto directors and, arguably, shadow directors). G4S argued that the claimants had not pleaded that any of the contested PDMRs were de facto directors.
The claimants’ position was that:
- the term PDMR should be construed within the context of European legislation from where the term originated. Within that context, the claimants argued that the term PDMR includes senior executives responsible for managerial decisions affecting the future developments and business prospects of the issuer and/or business units,
- the issue of construction of the term PDMR was not suited to summary determination as it is novel, complex and of wide significance,
- even if they lost on the construction point, they had pleaded a factually realistic case that the contested PDMRs were de facto directors, and
- there were compelling reasons to hold a trial of the issues the defendant had applied to remove from the case, as there would, in any event, need to be a factual investigation of the involvement and knowledge of G4S’s senior management.
Decision
The application raised two main issues:
- Issue of statutory construction: is the term PDMR within section 90A restricted to G4S’s directors (de jure (ie validly appointed), de facto and arguable shadow directors), or does it also include senior executives?
- On the narrower construction, did the claimants have a real prospect of establishing at trial that the four contested PDMRs were de facto directors of the defendant?
As to the issue of statutory construction, Mr Justice Miles disagreed with the claimants’ submission that the expression PDMR is an autonomous concept of European financial regulation law and should be given the same meaning under s90A FSMA.
The expression PDMR was defined in the 2004 Commission Directive (2004/72/EC), which implemented the 2003 Directive of the European Parliament (2003/6/EC) on insider dealing and market manipulation. The 2004 Directive was implemented in the UK by amendments to FSMA, and the expression PDMR was defined in a manner consistent with the 2004 Directive. Namely, that PDMRs included senior executives with the power to make managerial decisions affecting the issuer’s future development and business prospects.
However, s90A FSMA was enacted in response to the Transparency Obligations Directive (Directive 2004/109/EC) (“TOD”), the purpose of which was to promote investor protection/confidence and market efficiency by requiring issuers of securities to publish information. The TOD set out that member states were free to determine the extent of the civil liability regime. The explanatory notes in relation to s90A FSMA state: “The government was anxious not to extend unnecessarily the scope of any duties that might be owed to investors or wider classes of third parties, in order to protect the interests of company members, employees and creditors.”
Ultimately, since the term PDMR was not even used in the TOD, Mr Justice Miles saw no reason to adopt a definition of the expression used in other European legislation (which had a different purpose and target) when reading s90A FSMA.
Mr Justice Miles also took into account that there was already an existing definition of PDMR in the FSMA (relating to the market abuse legislation), which the drafter deliberately chose not to use and instead adopted the narrower definition. Further, the definition in paragraph 8(5)(a) of Schedule 10A is clear and unambiguous and leaves no scope to go beyond it to include senior executives.
Mr Justice Miles also rejected the claimants’ claim that this is a novel or developing area of law that would be better determined against the facts as found at trial and instead decided this was simply an exercise of statutory construction.
Despite criticism levied at the claimants for not properly pleading this point, Mr Justice Miles concluded that on balance the claimants had said enough in their responses to a Request for Further Information to plead a case that the contested PDMRs were de facto directors. So, the claims against those contested PDMRs were not struck out.
On that basis, the claimants were the overall winners of the application. However, in his costs judgment from 5 July 2022, Mr Justice Miles departed from the general rule that the unsuccessful party pay the costs of the successful party as G4S succeeded on the statutory construction issue. A significant portion of the application was dedicated to that issue, and the court’s decision on that point will have a significant impact on the future conduct of the case.
Comment
The court’s decision to read the definition of PDMR in Schedule 10A in its natural way is not surprising and reinforces one of the main challenges claimants have if they wish to succeed in a s90A FSMA claim. It is often the case (as it was for G4S Ltd) that the issuer is a holding company with a small board of directors and the decisions that relate to information that the issuer is required to publish are in fact made by senior executives/directors of subsidiary companies.
The upshot is that the scope of the issuer’s liability for s90A FSMA claims will be limited if those with knowledge of misleading information/omissions in the published information are not directors of the issuer or cannot be shown to be de facto or shadow directors.
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