Section 90A FSMA claims: who can bring them?

Section 90A claimants

Section 90A/Schedule 10A of FSMA holds issuers liable to a person who "acquires, continues to hold or disposes of the securities in reliance on" the issuer's misleading published information (paragraph 3(1)(a) of Schedule 10A).  In this article, we consider who those persons comprise, particularly as explored in the Tesco litigation.

The Tesco litigation: dematerialised shares and custody chains

Although the Tesco litigation has now come to an end, it has provided us with one of the few reported judgments on Section 90A.  This arose because, in 2019, Tesco applied for a strike-out on the basis that none of the claimants held the requisite interest in Tesco's shares to be able to bring the claim.  It was Tesco's case that only shareholders holding shares in certificated form or in a custody chain with only one intermediary could rely on the Section 90A regime.

The point may sound arcane but it is fundamental to the scope of Section 90A/Schedule 10A.  That is because the majority of investors in UK securities hold dematerialised shares through custodians under the CREST system and would therefore have been shut out of the regime if Tesco's application had succeeded.  As Hildyard J put it when considering the application, Tesco's success would have resulted in "a fundamental hole in FSMA".

The application turned on the interpretation of paragraph 8(3) of Schedule 10A, which states that the acquisition or disposal of securities includes: "acquisition or disposal of any interest in securities" or "contracting to acquire or dispose of securities or of any interest in securities".  Tesco argued that investors holding shares through CREST and along a custody chain do not have any interest in the underlying securities as:

• legal title to the shares is held by the CREST member - generally financial institutions - not the investor; and

• as each custodian holds only their interest in the securities on trust for the next party in the chain, the ultimate investor is a beneficiary of a sub-trust only and not a beneficiary of the securities themselves.

It was therefore argued that the ultimate investor at the end of the chain had no direct proprietary interest in the shares and couldn't bypass the chain of sub-trusts to enforce directly against the issuer.

Hildyard J accepted the logic of those submissions but held that ultimate investors nonetheless have a "right to a right" to the exclusion of others.  Regardless of the intermediation, it is the ultimate investor who instigates the acquisition, holding or disposal of the securities; no custodian along the chain may make or interfere with that decision.  He therefore held that the Tesco claimants were fully entitled to sue Tesco as their rights comprise "any interest in securities" under Schedule 10A.

For similar reasons, the judge rejected Tesco's argument that "acquisition" and "disposal" in paragraph 8(3) of Schedule 10A should be interpreted narrowly to apply to transactions where the investor deals in the securities directly.  In dismissing Tesco's arguments, Hildyard J commented that Section 90A must have intended to bring ultimate investors within its scope as it is they who rely on the issuers' misleading information in deciding to trade.  The regime's market transparency objective also justified his decision on that point.   

Other investors

Hildyard J's decision leaves no room for doubt that investors holding through CREST can bring claims.

It may also have opened the door for a widening of the regime for the benefit of other indirect investors.  Tesco referred to this when making its application, asking whether an investor who held shares in an investment fund, which in turn held securities in the issuer, could sue the issuer under Section 90A if the fund's value fell as a result of the issuer's share price declining.  That sounds as though it may be stretching the meaning of "any interest in securities" too far, but one can foresee a case being made that an investor acquired the fund's shares because the portfolio included the issuer's securities.  Hildyard J declined to comment on this example, but in theory Section 90A could cover these types of claims subject to the investor being able to prove reliance on the issuer's published information (explored later in the series) and perhaps principles of reflective loss.

The other side of the coin is that the judgment's focus on who instigated the trade in reliance on the issuer's published information is going to make it difficult for passive/tracker funds to argue that they should have Section 90A protection.  Likewise, arguably, funds mandated to hold a specific percentage of listed shares.

The next article in this series will look at the key question of what is meant by "persons discharging managerial responsibility" for the purposes of Section 90A, and what claimants need to show that anyone who does come within that definition knew.

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.