The HP v Autonomy judgment

The HP v Autonomy judgment was handed down yesterday. It provides some long-awaited clarity on the application of certain aspects of Section 90A FSMA, but it is also notable for what questions remain unanswered.

The outcome

Yesterday’s judgment held that Autonomy is liable under Section 90A for publishing misleading information about its business, which HP relied on in agreeing to buy Autonomy for an inflated price. And, in turn, that Dr Michael Lynch (the former CEO of Autonomy) and Sushovan Hussain, the former CFO (for whom our firm acted), are liable to Autonomy as they knew about that misleading information.

Section 90A clarity provided by the judgment

A key question going into the trial was whether Autonomy (the issuer) can be held liable for losses caused by all alleged misrepresentations, or only those that Dr Lynch and Mr Hussain (the PDMRs) knew to be untrue. The judgment confirmed it is the latter. This is welcome news for defendants, and implies that claims mounted on arguably fringe sections of published information may be more challenging to bring.

Another area that the judgment provided clarity on was reliance. The judge confirmed that, like other deceit-based claims, there will be a factual (though not legal) presumption that an objectively material representation did induce the claimant to transact. While that appears to be a victory for claimants, it may be pyrrhic.

Unlike other deceit claims, the presumption does not obviate the need for s90A claimants to show that they ‘reasonably relied’ on the misrepresentation. Reaffirming his earlier judgment in the Tesco litigation, the judge held this requires claimants to prove that they read the specific representation, and understood it in the sense now alleged – our experience suggests that proving this is, and may now remain, the main practical challenge for claimants bringing s90A claims, particularly in a group action context.

Open issues

The judgment also carries a cautionary tale for directors and companies: where a director’s decision to omit facts in published information was informed by views of reputable professionals (auditors etc), that is unlikely to satisfy the Section 90A test for dishonest concealment of a material fact, subject to a ‘true and fair view’ override.

That override stems from the judge’s view that it is must “be engraved on the heart of every company director” that a company’s accounts must present a ‘true and fair view’ – that question is “ultimately a matter for the judgement of the directors” and cannot be delegated. Therefore, regardless of any professional advice received, if a director knew that omitting certain information would result in the company’s financial statements being false and misleading in the round, that can comprise the PDMR dishonesty necessary to establish the company’s s90A liability. Undoubtedly, there will be many questions about the circumstances in which this ‘override’ will apply to financial statements, and if similar ‘overrides’ can be formulated for other parts of published information.

Equally, market participants looking for more clarity on whose reliance counts under Section 90A, or whether high-level statements (say on ESG credentials) are sufficient to bring a successful claim under the statute may be less satisfied by the judgment. These issues are particularly relevant to the governance-based Section 90A class actions currently working their way through the courts. The relative simplicity of the corporate relationships and misrepresentations in issue meant that the judgment made observations regarding, but did not need to decide, such matters; it will take further judgments to assess their wider application.

Finally, quantum issues have been reserved for a later judgment. While this unusual bifurcation was largely driven by timing pressures from Dr Lynch’s extradition proceedings, the judge has indicated that there are “challenging difficulties both in terms of legal principle and in their effect on the ultimate decision” to transact in securities. It is a stark reminder that, despite s90A’s longevity (first introduced in 2006), there remains many open questions which may cause claimants to think twice about bringing a claim under it.