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UK court rulings shed light on directors’ liability as securities case law evolves

Financial, Executive and Professional Risks (FINEX)
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By Claire Nightingale | December 3, 2019

A recent UK court case stemming from the 2008 financial crisis sheds light on the extent of directors' and officers' duties and the compensation available to shareholders for allegedly misleading public documents.

The risks to directors

Statutory claims

The precept that directors of listed entities are potentially liable for misstatements in public documents is not new to English law. The liability for misstatements in public documents has been around well over a century since the Directors Liability Act of 1890 and is now to be found in Sections 90 and 90 A of the Financial Services and Markets Act 2000 (FSMA). But there is a dearth of decided cases (or indeed claims) such that the current spate of activity is of great interest.

Just one claim has been brought under Section 90 of the FSMA since it was enacted. That claim surrounded shareholder allegations that a bank and some of its former directors were liable for untrue or misleading statements in a Rights Issue Prospectus. The claim was settled before it reached the courts (although this is not to say that new law was not made along the way).

Section 90 operates to make any person who is responsible for listing particulars and prospectuses liable to compensate anyone who has both:

  • Acquired securities to which those documents relate
  • Suffered a loss as a result of either an untrue or misleading statement or an omission of the matters required to be included

As to who is responsible, that is set out elsewhere in the Financial Services and Markets Act 200 (Official Listing of Securities Regulations) 2001 and includes not only the company but also:

  • Each director at the time the relevant document was submitted to the relevant authority
  • Any person who has authorized him or her self to be named as a director or who has agreed to become a director

Significantly (and in a manner similar to US securities law), Section 90 does not require claimants to show that they relied on any alleged misstatement or omissions for which these individuals are responsible. This contrasts directly with Section 90 A, the regime in relation to the open market, where claims can only be brought against the issuer, not against the directors responsible for the alleged misstatements or omissions.

It is worth noting, though, SL Claimants v. Tesco plc, where the defendant argued that it was not liable to any claimants who held the shares in a custody chain with more than one intermediary for any untrue or misleading statement in its published information under section 90 A. While the defendant's request for summary judgment was dismissed, leave to appeal has been granted. The ultimate decision could have significant implications for redress generally under FSMA.

Common law claims

In the meantime and perhaps most significantly, on November 15, 2019, the court dismissed all common-law claims against a bank and five former directors in Sharp v. Blank. An earlier claim regarding fiduciary duties was previously struck down. We do not yet know if there will be an appeal.

In short, the claimants sought damages or equitable compensation, alleging that:

  • The directors were negligent in recommending a transaction to shareholders at the height of the financial crisis
  • The directors failed to disclose material information or made material misstatements

This is the first civil claim for compensation brought by shareholders or directors in English law in relation to the contents of a circular or announcement. The allegations rested in common law negligence and the equitable duty of directors to provide shareholders with sufficient information.

It will be of some significant comfort that the claims were dismissed and that some clarification has been provided.

Norris J found that the directors owed a common law duty to shareholders to exercise reasonable care in relation to the statements made and an equitable duty to provide sufficient information for shareholders to make an informed decision (which was in part breached). But the claimants failed to establish that they had suffered any loss.

There are some useful points made in the judgment:

Directors' recommendations
  • In order to prevail in a negligence claim, the shareholders needed to show that no reasonably competent director could have shared the view taken – that the view was outside the range of responses reasonably open to competent directors.
  • The directors are not required to redo the work of their advisors and should seriously consider the advice of professionals such as investment bankers.
Sufficient information
  • The duty to provide sufficient information does not correlate with all information.
  • A fair and candid account will include positive and negatives but need not necessarily emphasize weaknesses.

Looking ahead

We suspect that these matters represent the beginning, not the end of the development of UK securities laws. The English plaintiffs' bar is carefully monitoring a number of financial institutions in relation to their financial statements and in relation to disclosures around anti-money laundering investigations, among others.

While the statutory regime has not yet been fully subject to judicial scrutiny, it will likely be in due course. Directors will be well advised to consider the extent of their liability and ensure they understand the extent to which they may be indemnified by the issuer or by insurers.

Author

Claire Nightingale
Global Head of FINEX Financial Institutions Claims Advocacy & TPL

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