The dismissal of the Tesco litigation

On 07 September 2020, a group of institutional investors represented by Morgan Lewis & Bockius LLP dropped their $215 million claim against Tesco PLC. They had sued under section 90A of the Financial Services and Markets Act 2000 (FSMA) for losses they allegedly suffered following Tesco’s announcement in 2014 that its profits had been overstated.

Section 90A/Schedule 10A of FSMA introduced a cause of action to hold public companies accountable to their shareholders for misleading statements made in their published information. 14 years since the statute’s introduction, there has not been a single reported case under it. The Tesco litigation was set to be the first and was awaited eagerly as an opportunity to clarify the statute’s scope and application. That opportunity is now lost, and eyes will now turn towards the forthcoming HP v Autonomy judgment instead.

According to recent press, a spokeswoman for Tesco PLC said the decision to drop the case was reached by “mutual agreement”, but did not go so far as to say a settlement had been reached.

Tesco had entered into a Deferred Prosecution Agreement with the SFO in April 2017, by which it accepted responsibility for false accounting practices and was fined £129 million (see more here). Tesco was also refused permission to resile from admissions that it had made in the criminal proceedings (see more here). However, in order to make good their section 90A FSMA claims, the claimants would have needed to satisfy a number of evidential hurdles. Foremost among these are the requirements to show that:

• One or more directors behaved dishonestly – inference based on a director’s assumed powers and responsibilities is insufficient; and
• each claimant relied on specific inaccuracies in the company’s published information – reliance in some generalised sense on the company’s share price or an annual report as a whole is insufficient.

The first of these hurdles is particularly challenging for claimants, who generally will not gain access to documents evidencing what directors said and did at the time until the disclosure stage. The latter poses a particular burden on large claimant shareholder groups, who might (for example) include tracker funds, who were required to buy the shares to balance their portfolios.

Although the claims did not get to trial, the Tesco litigation demonstrates the financial threat of section 90A FSMA claims to public companies. The claims are also sensitive because they involve questioning the honesty of a company’s directors. Whilst the number of reported cases involving section 90A FSMA allegations remains low, it is clear that such claims are increasingly a feature of the UK litigation market and that companies need to be taking steps to prepare for them, and to handle them as and when claimant groups threaten to bring them.

In order to raise awareness about the threat of section 90A FSMA claims, we shall be publishing a short series of articles on the constituent elements of a claim, the main obstacles to claimants in trying to pursue such a claim and the steps that companies should take when threatened with a claim.

The first of these, to follow in two weeks, will address the main elements of a section 90A FSMA claim.

This article is part of a series exploring practical issues arising out of the components of a Section 90A of FSMA claim. Find the other articles in the series under ‘Related links’ on the right-hand side.