Section 10(b) Securities Exchange Act 1934 v Section 90A FSMA 2000 -- Who Dares Wins!
Directors and officers of a company may incur liability under English law, if a person acquires shares in the company on reliance of information contained in publications such as the company's accounts/reports, and suffers a loss because those publications contain untrue or misleading statements or omit material facts.
There was no statutory liability regime for inaccurate statements (other than in relation to information contained in Prospectuses) prior to the introduction of s.90A Financial Services and Markets Act 2000 ("FSMA"). Section 90A was introduced as part of the implementation of the European Union ("EU") Transparency Directive ("DT") - the regime relating to the requirement to produce, periodic disclosures to the market, in accordance with DT4. Section 90A was then inserted by the UK Companies Act 2006 (s.1270) which came into force on 8 November 2006.
We discuss below the similarities and differences between the UK and US legislation, and the implications of s. 90A FSMA on directors and officers.
The framework of section 90A is similar to that of Section 10(b) of the Securities Exchange Act 1934 which has been the subject of much securities litigation in the US. Liability for misstatements could be established through the tort of deceit. However, shareholders encountered difficulties in establishing that the company intended investors to rely on the financial statements.
Section 90A FSMA intends to ensure that investors have a right of action against untrue, fraudulent statements made in periodic financial reports, obligates directors and their companies to provide less cautious and informative announcements. It applies only to issuers with securities traded on a regulated market in and outside of the UK. It applies to those companies that are listed on the London Stock Exchange but not AIM.
Section 90A provides that applicable issuers of securities are liable to pay compensation to persons who have acquired securities issued by that company, and suffered loss as a result of any untrue or misleading statement or omission in a publication. The publications to which s.90A FSMA applies include: annual reports, half yearly reports, interim management statements for a financial year beginning on or after 20 January 2007. The issuer is only liable if the person discharging managerial responsibilities was aware that the statement was untrue or misleading or was reckless as to whether it was an untrue or misleading statement or omission. Other persons e.g. directors may be liable to the issuer in respect of the loss. This will have implications for that company's/individual's Directors & Officers Liability Insurance.
In June 2007 Professor Paul Davies QC prepared a report on whether reform was needed to s.90A FSMA. The report recommended that the UK Treasury use its powers to extend the statutory liability regime in s.90A to include not only those required under the DT, but all other general disclosures made to the markets.
On 17 July 2008 a consultation paper was published by the Treasury setting out the Government's proposals to extend the regime on issuer liability. The proposed changes are summarised as follows:
- Fraud should be maintained as the standard of liability. If the standard of liability was reduced to include instances of negligence then this may result in issuers releasing more conservative and less informative announcements to the market which would work against the aim of the Regime.
- The Regime should apply to regulated and exchange - regulated markets such as AIM and Plus Market and cover all multilateral trading facilities.
- The liability Regime should apply to all adhoc statements.
- The current Regime applies to annual and half yearly reports, interim management statements and preliminary statements in annual reports. The proposals aim to extend the rules to cover all announcements made by an issuer through a regulatory information service ("RIS") therefore ensuring that rights of shareholders are not affected. Liability of directors for contents of circulars (sent to shareholders for corporate governance purposes) are likely to be maintained.
- The Regime will make it an offence to dishonestly delay the publication of RIS announcements; information; publications. To prevent excessive amounts of unmeritorious claims a dishonest delay is where the only purpose of the delay is to enable a gain to be made or inflict a loss on a person who acquires the issuer's securities during the period of delay. The claimant would also need to prove that the directors responsible for the delay have acted dishonestly. At present the FSA can take enforcement action in such circumstances but shareholders do not have a direct right of action.
- The Regime proposes that the liability is confined to issuers. Currently, an issuer which is the subject of a successful claim can bring a claim in negligence against other responsible persons. If the issuer failed to take such action, then shareholders would be able to sue on behalf of the issuer through a shareholder derivative action under Companies Act 2006.
There is already an incentive for issuers to take great care in ensuring the accuracy of the information that is released to the market as a result of the various rules to which they are subject e.g. FSMA, Transparency Directive, AIM rules etc. The proposed changes are likely to result in more care being utilised in the production of any statement to the market. However, directors will need to be careful that they do not create a situation where there may be a possibility to argue that an announcement is being delayed in any way.
No litigation arising from s.90A FSMA has been reported as of yet. However, this section may be material as the financial crisis unravels.
For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.