UK shareholder claims: no market reliance as English High Court strikes out passive investors’ claims

On 25 October 2024, the High Court handed down its judgment in Allianz Funds Multi-Strategy Trust & Ors v Barclays Plc, finding in favour of the defendant issuer following its application to strike-out the claims of ‘passive’ investors brought under the UK’s statutory shareholder litigation regime. 

Overview and Key Takeaways

Section 90A and Schedule 10A of the Financial Services and Markets Act 2000 (section 90A) give shareholders or other holders of securities a possible cause of action against issuers in respect of statements or omissions in published information (annual reports, trading updates and other ad hoc announcements) on which they relied and where they suffered loss as a result. The legislation also allows an investor to bring a claim where there has been a dishonest delay in publishing information, with no need to show reliance.

This decision represents a blow to ‘passive’ investors (often ‘tracker’ or ‘index-linked’ funds) seeking damages under section 90A since the Court found that passive investors are unable to meet the ‘reliance’ part of the legislative requirements. The Court therefore found for the defendant issuer and granted reverse summary judgment on 241 claims brought by passive investors which represented approximately 60% of the total value of the claim. The decision also clarifies the narrow circumstances in which a dishonest delay claim may be brought – with these claims remaining open to passive investors. 

The decision provides some welcome clarity on this key ‘reliance’ evidential hurdle for claimants – in particular, it gives meaning to the ‘reliance’ requirement and it is now clear that claimants will have to show that they in fact relied on alleged misleading statements or omissions in published information in order to bring a claim. It also makes clear that a claim in dishonest delay cannot be used to bypass the reliance requirement. The decision will no doubt be welcomed by UK listed companies, albeit it is likely to be appealed. 

Background

Section 90A/Schedule 10A allows an investor in UK-listed securities to bring a claim against an issuer where (broadly) four limbs are satisfied:

• that issuer either made an untrue or misleading statement in its published information or omitted a material fact;
• a “person discharging managerial responsibilities” (a PDMR) knew as much (or, in the case of untrue/misleading statements, was reckless);
• the investor relied upon the statement or omission; and
• that caused the investor to suffer a loss. 

Section 90A/Schedule 10A also provides for a remedy where an issuer delays publishing information, a PDMR acted dishonestly in delaying publication and the investor suffered a loss as a result. There is no reliance requirement.

In this case, claims had been brought by passive institutional investors (described as the ‘Category C’ Claimants) which allegedly suffered losses as a consequence of movements in the defendant issuer’s share price. Relevant to their reliance case, these claimants did not review the defendant issuer’s published information either directly (Category A Claimants) or indirectly through other sources (Category B Claimants). Instead, they relied on a concept of “Price/Market Reliance” which the claimants articulated as an investment process which proceeded on the basis that: 

• the defendant issuer is a FTSE listed entity required to produce published information that reflected negative information and was correct, complete, timely, true and fair;
• the London Stock Exchange is an efficient market and the defendant issuer’s share price itself took account of all published information, including any negative information; and 
• the Category C Claimants took into account – and relied on – the defendant issuer’s share price in making investment decisions.

This was essentially an articulation of the US-style ‘fraud on the market’ theory which is available as an argument for claimants to run in US securities litigation. It has previously been untested whether such market reliance arguments are compatible with the UK shareholder litigation regime but this decision is a decisive move away from US-style securities litigation – on the matter of reliance at least.

The defendant issuer applied to strike out the claims of the Category C Claimants and the dishonest delay claims (and all of the Category C Claimants had also brought dishonest delay claims).

The Decision

Individual reliance

The Court found that the inclusion of the term “reliance” in the legislation must be given some “content” and its inclusion “requires investors to prove a separate ingredient of liability” beyond causation of loss:

“Parliament must have intended to give the term “reliance” some content and to limit the recovery of compensation to those investors who are able to prove something more than that they suffered loss as a consequence of a misleading statement or omission being made to the market” 

The Court also found that the test for reliance under section 90A was not a new and separate test but that Parliament intended for the settled test for reliance in the tort of deceit to apply. In common law deceit, proof of liability requires a claimant to prove both reliance and causation as separate ingredients of the tort. The same is now confirmed to be true of shareholder litigation claims.

Following from this decision, the Court found that “the test for reliance as it applies to express representations (whether made orally or in writing) requires the claimant to prove that they read or heard the representation, that they understood it in the sense which they allege was false and that it caused them to act in a way which caused them loss.”

The judge drew parallels to the principles established in Autonomy, the first section 90A case to go to trial (see our blog posts here and here), where Hildyard J held “the requirement for reliance in Paragraph 3 [of Schedule 10A on misstatements and omissions] cannot be satisfied in respect of published information which the Claimants did not read or consider at all”. In light of the decision, passive investors that do not read the published information will have no cause of action for misstatements or omissions under section 90A. 

Individual reliance on what?

In omissions cases, the Court held that investors are not required to prove that they applied their mind to the absence of a particular statement, but rather that they relied on the published information and that their reliance in doing so was reasonable. What had been omitted from the published information, and the materiality of that, would be relevant in assessing what an investor would have done differently absent the omission(s) and therefore determining the questions of causation and quantum. 

Presumption of inducement

The Court found that there is a presumption of inducement under section 90A which is “an inference of fact which the Court may properly make if the claimant has established that the defendant made the representation with the intention to mislead the claimant, who understood it in the sense which it was intended to have.” However, given its findings on reliance, the Category C Claimants could not rely on the presumption and the Court was prevented from drawing the inference that they were induced or influenced in their investment decisions by the misstatements and omissions. Indeed, the judge considered it “inconceivable” that the Category C Claimants would be able to him at trial that “they were induced to act by the statements… when they accept that nobody who had any responsibility for their investment decisions read the Bank’s Prospectus or its annual reports”. 

Dishonest delay

Schedule 10A provides investors with a claim against an issuer where that issuer has deliberately and dishonestly delayed the publication of information to the market. A claim for ‘dishonest delay’ does not require the claimant to show any form of reliance.

The defendant issuer argued that dishonest delay only applied where the issuer had actually published information. The claimants argued that a claim for dishonest delay should be available where the issuer has published no information at all. They considered that an issuer should not be able to avoid liability for claims in dishonest delay by failing to publish information that it was required to. In practice, this argument would mean that any claim in respect of misleading published information could equally be framed as a dishonest delay claim. The Court rejected this argument, finding it would create a nonsensical overlap between dishonest delay claims and misstatement claims. To accept the claimants' interpretation would have allowed them to bypass the reliance requirement for misstatement claims.

The Court considered that a dishonest delay claim was only available where an issuer had published information but the publication of that information had been dishonestly delayed, and the dishonest delay provisions did not impose liability where no publication had taken place. Schedule 10A was designed to prevent an issuer deliberately and dishonestly delaying publishing information, ie in order to take advantage of the information before the market becomes aware of it and then publishing it accurately at a later point in time – of which the “paradigm example […] is insider trading” followed by dishonest delay.

The Court found that there was no reasonably arguable claim for dishonest delay on the particular facts of the case. However, more broadly, claimants do not have to prove reliance for dishonest delay claims and therefore, this cause of action remains open to passive investors.

Comment

This decision provides important and much-needed clarification on the test for reliance under section 90A and the scope of dishonest delay claims. While the decision is likely to be appealed, it is the second decision (after Autonomy) to give real meaning to the reliance requirement in section 90A, and the claimants are therefore likely to face an uphill battle convincing the Court of Appeal to overturn this decision.