SECURITIES CLASS ACTIONS

Authors: Harry Edwards, Simon Clarke and Jonathan Ripley-Evans

Businesses around the globe have long faced the risk of securities class actions - the prospect of facing claims which are brought by large numbers of disgruntled investors alleging 'stock drops' (falls in share prices) as a result of flaws in their public disclosures or documentation. The primary jurisdiction for such claims remains the United States, but in recent years we have seen a greater focus on potential claims against UK-listed financial institutions brought in the English courts.

Statutory liability regimes under FSMA

Private securities litigation is in the relatively early stages of development in England and Wales. The most relevant statute in this context is the Financial Services and Markets Act 2000 (FSMA), which provides the key causes of action for investors seeking recovery of losses suffered as a result of alleged disclosure flaws.

S90 FSMA provides a cause of action to an investor where listing particulars or a prospectus contains any untrue or misleading statement, or if it fails to include information that is required by statute. This cause of action allows any person who has: (1) acquired the securities in question; and (2) suffered loss as a result of the defect in question, to claim for compensation against any person responsible for the defective document. The applicable fault standard is essentially negligence (albeit with the burden of proof reversed so that it is for the defendants to show that they were not negligent) by virtue of a defence of 'reasonable belief' that the contents of the document were complete and accurate. On the face of s90, it is not necessary for the claimant to demonstrate reliance on the defective prospectus or listing particulars when purchasing the securities. The list of persons responsible for a prospectus or listing particulars naturally encompasses the issuer and (in equity capital markets at least) its directors, as well as those who accept responsibility in the offering document or who authorise its contents. The breadth of this means that, while it is clear that issuers and the directors of issuers are the most likely defendants to a s90 claim, it is in theory possible for a claim to be brought against a third-party adviser to the issuer and other parties involved in the publication of the relevant information (if it can be established that they have accepted responsibility for the contents of the document).

S90A FSMA applies to all publications an issuer makes to the market, or whose availability is announced, through a recognised information service (other than prospectuses and listing particulars). It provides a remedy to investors who have, when buying, selling or holding securities, suffered loss as a result of reasonable reliance on published information (other than listing particulars or a prospectus) containing a misleading statement or omission, or where there is a delay in publishing that information. Unlike s90 claims, s90A claims can only be brought against the issuer of the securities. The fault standard is higher than for s90 and is recklessness (rather than negligence or dishonesty): the issuer is only liable if a director knew that, or was reckless as to whether, the statement was untrue or misleading, or if they dishonestly omitted, or caused a delay in disclosing, a material fact.

Applicability of UK securities claims to African issuers and capital market participants

S90 FSMA will apply to African-domiciled issuers who have a primary or dual listing on the Main Market of the London Stock Exchange or who otherwise issue a prospectus or listing particulars. The regime will also be applicable to directors of such companies as well as, theoretically, their third-party advisers (irrespective of where they are based). S90A FSMA applies to securities which are admitted to trading on a securities market in the UK, which includes the Main Market of the London Stock Exchange and AIM. The effect of this is that the s90A regime applies, for example, to securities of any African-domiciled issuer who has either a primary or dual listing on a UK market.

For more information, please contact Harry Edwards, Simon Clarke or Jonathan Ripley-Evans or your usual Herbert Smith Freehills: