Investors claiming for losses arising from misleading statements and dishonest omissions in information published by companies in which they invest need to prove that they actually relied upon the relevant statements in making their investment decisions. 

In addition, investors are not able to claim for losses arising from the delayed publication of information where the relevant information has never actually been published. 

The recent High Court judgment in Allianz Funds Multi-Strategy Trust & ors v Barclays Plc [2024] EWHC 2710 (Ch) serves as a useful reminder of the key ingredients of shareholder actions under section 90A of the Financial Services and Markets Act 2000 (FSMA) and is a helpful indicator of the Court’s approach to such claims. 

Section 90A FSMA

s90A FSMA provides a statutory cause of action for investors that suffer losses on investments in public companies as result of (a) a misleading statement or dishonest omission in published information relating to the relevant securities; or (b) a dishonest delay in publishing such information. 

Schedule 10A to FSMA makes further provision for claims of this nature:

1. Paragraph 3: 

• an issuer of securities is liable to pay compensation to an investor who (a) acquires, continues to hold or disposes of the securities in reliance on published information; and (b) suffers loss on those securities as a result of (i) any untrue or misleading statement in that published information, or (ii) the omission from that published information of any matter required to be included in it; and 
• a loss is not regarded as suffered as a result of the statement or omission unless the investor acquired, continued to hold or disposed of those securities (a) in reliance on the information in question; and (b) in circumstances and at a time when it was reasonable to rely on that information.

2. Paragraph 5:

• an issuer of securities is liable to pay compensation to a person who (a) acquires, continues to hold or dispose of the securities; and (b) suffers loss in respect of the securities as a result of delay by the issuer in publishing information.

In both instances, the issuer is only liable if a person discharging managerial responsibilities (PDMR) knew or was reckless as to the statement being untrue or misleading; knew that any omission was a dishonest concealment of a material fact; or acted dishonestly in delaying publication of the information.

Claims of this nature are increasing in frequency. There have been a number of high-profile cases issued in recent years, often following findings of wrongdoing by public companies in the context of regulatory investigations. 

Allianz v Barclays

The brief background to this case is that in 2014, Barclays announced that the Attorney-General of the State of New York (NYAG) had made a complaint against it. The complaint related to Barclays’ alleged operation of a “dark pool” trading system, referred to as “LX” as part of its equities electronic trading division. In January 2016, Barclays entered into a settlement agreement with the NYAG and agreed to pay $35m to the State of New York and $35m to the SEC. 

The claimants in this case allege that they suffered losses on their investments in Barclays, as a result of Barclays making false representations to the market about the extent of high-frequency trading in LX and its safety as a trading environment. The claimants make various allegations that Barclays was under an obligation to disclose the true facts about the LX system, that PDMRs acted dishonestly in causing or permitting Barclays not to disclose those facts in its published information and that this non-disclosure constituted a dishonest concealment of material facts. In addition, the claimants allege that this amounted to a dishonest delay in publication of that information.  

Barclays sought reverse summary judgment on:

• claims made by a category of investors that included passive investors on the basis that those investors did not actually rely on any alleged misstatements; and 
• claims that Barclays delayed the publication of information by not disclosing the true position about LX, in circumstances where Barclays had ultimately not disclosed any information relating to LX. 

Reliance

s90 FSMA sets out the relevant legislative framework for claims relating to statements made in a prospectus, whereas s90A FSMA provides recourse for investors in relation to statements made by a company in its published information other than a prospectus. An important difference between the two causes of action is that for a claim under s90 FSMA a claimant does not need to demonstrate that it relied upon the statement in the prospectus that it alleges to be misleading or containing an omission. However, under s90A FSMA a claimant does need to demonstrate reliance upon the relevant statement in deciding whether to purchase, hold or dispose of shares.

In Allianz v Barclays, the claimants contended that there should be a presumption of reliance. For tracker funds, this would operate on the basis that they take into account the share price movements of the relevant stock, which are influenced by a company’s published information (i.e., price/market reliance). The claimants argued that there should be no requirement to demonstrate that an investor actually applied its mind to the statements that it considers to be misleading. 

Barclays’ position was that the reference to reliance in Paragraph 3 means that the losses that investors can claim must be limited to statements where the investor can demonstrate that it applied its mind to the relevant statement in making its investment decision. Barclays submitted that the Court should apply the same test for reliance under FSMA as it would do in a common law claim for deceit. 

The Court agreed with Barclays that the inclusion of “reliance” in the s90A FSMA cause of action means that an investor must demonstrate that it applied its mind to the relevant statement in making its investment decision. The Court also agreed that the test for reliance is akin to that under the common law in a claim for deceit, so that a claimant must prove both reliance and causation as separate ingredients. A claimant therefore needs to demonstrate that: 

1. it read or heard the representation; 
2. it understood it in the sense that it alleges was false; and 
3. it caused it to act in a way that caused it loss.

The Court did not consider that there would be any further contemporaneous evidence that the passive investor claimants could produce to demonstrate that they had actually read and understood the alleged misstatements in the sense that those investors considered the statements to be misleading. The Court was therefore satisfied that the claims of those investors had no real prospect of success and granted reverse summary judgment on those claims. 

No omission without publication

Barclays also sought reverse summary judgment of claims based on the allegation that Barclays had dishonestly delayed disclosure of information about the functioning of LX, pursuant to Paragraph 5. 

Barclays contended that a claim for dishonestly delaying the publication of information could only be made where the relevant information had ultimately been disclosed. If that were not required, then it would undermine the purpose of the separate cause of action under Paragraph 3. The claimants’ position was that this interpretation could not be right as it would allow a company to avoid liability simply by not disclosing at all. 

The Court agreed with Barclays. It was satisfied that Paragraph 5 only imposes liability upon an issuer in relation to information which has in fact been published and does not impose liability where no publication has taken place. 

It should therefore not be possible for claimants to claim that a company has dishonestly delayed publishing information where that information has ultimately not been published. The Court also ordered reverse summary judgment on the claims under Paragraph 5.

Comment

The case emphasises the importance of claimants properly making out the necessary ingredients of a s90A FSMA claim, including by identifying the specific statements on which they relied and the impact that those statements had on their investment decisions. In this regard, the judgment endorses the plain reading of section 90A and Schedule 10A on the requirement for reliance. It is nevertheless interesting that the judge was happy to order reverse summary judgment at this stage of proceedings rather than proceeding to trial given the complexity of the factual issues involved. We will watch with interest to see whether this decision is appealed.

The judgment includes interesting commentary comparing the English law position on shareholder actions of this nature with the US law concept of “fraud on the market”. In circumstances where statements can be proven to be misleading, the fraud on the market concept gives rise to a rebuttable presumption that the relevant statement caused loss to investors, even if those investors were not aware of and did not rely on the misstatement. However, the judgment notes that it would be novel for the English Court to adopt this approach in circumstances where the applicable provisions of FSMA include express reference to reliance. The effect of this difference is that class formation of affected shareholders in the US is easier, potentially resulting in greater risk in the US for public companies in relation to published information as compared to the UK. 

There has been an increase in the number of s90A FSMA claims in recent years and we anticipate that this will be an area in which there is continuing growth. s90A FSMA claims often go hand-in-hand with regulatory activity and follow on from penalties and findings of wrongdoing. This judgment is a useful reminder that claimants should not view s90A FSMA as a sure route to compensation for any losses suffered on their investments. Claimants will still need to properly plead a case on reliance by references to the specific statements on which they rely.