Directors found liable for misleading statements and misrepresentations in annual and quarterly reports

Two former directors of Autonomy plc have been found liable for misleading statements and misrepresentations in Autonomy’s annual and quarterly reports. This case (ACL Netherlands BV and others v Michael Richard Lynch and another [2022] EWHC 1178 (Ch)) is the first on the liability of issuers in connection with published information under Schedule 10A of the Financial Services and Markets Act (FSMA) to go to trial.

Hewlett Packard acquired Autonomy, a software company, in 2012 for $11.1 billion. It subsequently claimed that the defendants, Mike Lynch (the former CEO of Autonomy) and Susovan Tareque Hussain (the former chief financial officer of Autonomy), dishonestly and deliberately mispresented Autonomy’s financial performance and that as a result it was deceived into paying more for the company than it was worth. They are claiming US$5 billion in damages.

The claimants alleged that information was published to the market which was known by the defendants to be false, including:

• the description of Autonomy as being a “pure software company” when in fact it undertook and had become accustomed to inflating its apparent revenues by undertaking substantial hardware sales; and
• details of its financial performance, which did not disclose and instead disguised improper practices which Autonomy adopted to boost and accelerate revenue.

The fraud claims in respect of the acquisition were brought (by different entities within the HP group) under the following legal heads:

• FSMA – By far the largest of the claims was a claim under Schedule 10A of FSMA. Schedule 10A imposes liability on an issuer of securities for misleading statements or omissions in published information, but only if a person discharging managerial responsibilities at the issuer (a PDMR) knew that, or was reckless as to whether, the statement was untrue or misleading, or knew the omission to be a dishonest concealment of a material fact.An issuer is liable to pay compensation to anyone who has acquired securities in reliance on the information contained in the publication for any losses suffered as a result of the untrue or misleading statement or omission, but only where the reliance was reasonable.In this case, HP alleged Autonomy was liable in respect of statements or omissions in its published information on which the investor, here the bid vehicle incorporated by HP to acquire Autonomy (Bidco), relied when making an investment decision.
• Deceit / fraudulent misrepresentation – These claims were based on the personal liability of the defendants (rather than of Autonomy). The representations relied upon include confirmations of the accuracy of statements in Autonomy's published information which were made in the course of negotiations of the takeover.

The specific allegations related to six areas within Autonomy’s business and accounting. On all but one of those six areas, the judge concluded that the claimants had made out (to the extent that they were alleged in respect of that area) the FSMA claim and the common law / Misrepresentation Act claims.

Hewlett Packard wanted to claim against the directors rather than Autonomy itself (as Autonomy is now wholly owned by HP). The FSMA claim therefore required HP to satisfy two limbs in respect of each alleged wrongdoing: first, that Autonomy was liable (as issuer) to Bidco, and second, that the defendants were liable to Autonomy as PDMRs. Whilst it was Bidco that acquired the shares, it was HP that had conducted the due diligence, and so it was argued that Bidco could not have relied on the information in question. The judge concluded that HP was the controlling mind of Bidco and therefore its reliance on the information was to be attributed to Bidco.

This judgment is limited to the issue of liability. A separate judgment on the quantum of damages will be delivered at a later date. However, the judge has indicated that he anticipates that, although substantial, it will be considerably less than the $5 billion claimed.

It has been reported that Mr Lynch intends to seek permission to appeal.

For guidance for corporate issuers defending Section 90A/Schedule 10A FSMA shareholder claims, click here to read more on our banking litigation notes blog.