Section 90A FSMA claims: who at the company needed to know?

Section 90A/Schedule 10A FSMA holds issuers liable to investors who have suffered a loss as a result of relying on published information that the issuer's "persons discharging managerial responsibility" ("PDMR") knew to be misleading.

We have previously published articles exploring "What is misleading published information?" and "Who can bring s.90A claims?".

This article considers which 'persons' discharge managerial responsibility for the purposes of Section 90A, and what investors will need to show that they knew.  These issues go to the heart of why this statutory cause of action exists: to hold a company accountable if those to whom it delegated responsibility for its published information knowingly allowed mistruths to be promulgated in the market.  The cause of action also recognises the flipside: to hold a company liable where those individuals did not possess the relevant knowledge borders on strict liability, and would be unfair.

Who are PDMRs?

Paragraph 8(5) of Schedule 10A FSMA sets out the relevant definition.  The provisions that are most likely to be relevant are sub-paragraphs (a) and (c), which state:

"(a) any director of the issuer (or person occupying the position of director, by whatever name called)"

"(c) in the case of an issuer that has no persons within paragraph (a)..., any senior executive of the issuer having responsibilities in relation to the information in question or its publication."

Sub-paragraph (a) leaves no doubt that de jure directors are PDMRs: the wording on that is unequivocal.  The meaning of the words in parentheses is open to more debate, but the better view seems to be that it will (only) apply to de facto or shadow directors, i.e. those who are in practice carrying out the role of director, whether or not they have the title.  That interpretation is borne out by sub-paragraph (c), which brings other senior executives into the frame, but only in the case of issuers who have no directors.

For most issuers, therefore, the answer to the question "who were the PDMRs?" will be "those who were on the board at the relevant time." That creates a significant challenge for potential claimants who may have a strong belief (or even evidence) that one or more people within the company's executive management had relevant knowledge, but need to be able to bridge the gap from there to knowledge on the part of one or more members of the board in order to bring themselves within Section 90A.  In many large, listed companies, board members are unlikely to have had the sort of day-to-day operational involvement which might have given them that knowledge (or at least, it may be very difficult for claimants to show that they did so).  

PDMR's knowledge: misstatements in published information

In the case of misstatements, Section 90A/Schedule 10A requires claimants to show that the PDMR knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading. Recklessness bears the meaning laid down in Derry v Peek¹, namely not caring about the truth of the statement, such as to lack an honest belief in its truth.

As discussed above, directors may delegate functions to specialised individuals or teams, sometimes with external support. A common example is the delegation of financial reporting to a finance team and external auditors. In the HP/Autonomy litigation (in which judgment is currently awaited), one of the issues in play was the extent to which a director-PDMR may rely on such delegation to argue that they did not, and could not have been expected to, know about the detailed content of the company's financial reporting.

PDMR's knowledge: omissions/dishonest delays from published information

In the case of omissions and dishonest delays, Section 90A claimants must show that the PDMR knew the omission to be a dishonest concealment of a material fact, or acted dishonestly in delaying the information's publication. Unlike its Section 90A predecessor, Schedule 10A introduces a statutory definition for dishonesty, namely that: "a person's conduct is regarded as dishonest if (and only if) -

(a) it is regarded as dishonest by persons who regularly trade on the securities market in question, and

(b) the person was aware (or must be taken to have been aware) that it was so regarded."

The definition raises a number of questions, including what is meant by those that "regularly trade on the securities market". The term encompasses a wide range of market participants who may have different views on disclosure standards, which variance will make the subjective test in (b) difficult to apply. The fact that Schedule 10A includes a subjective element also places it at odds with the common law, where dishonesty is now assessed purely objectively (Ivey v Genting²).

While these distinctions may seem fine, they could be the difference between success or failure in a Section 90A claim, where a great deal will turn on precisely what a PDMR had in mind when making, omitting to make, or deciding to delay the making of, a particular statement.

The next article in this series will look at the key question of reliance, another central plank of Section 90A claims.

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.

¹ (1889) 14 App Cas 337

² [2017] UKSC 67