RSS feedsInvestors look set to be given a specific right to damages if companies issue misleading or false market statements as a result of proposals being put forward in a government review.
The Davies review of issuer liability is trying to ascertain whether there should be a new liability regime for damage or loss suffered as a consequence of inaccurate, false or misleading information disclosed by issuers or their management, or if no information is disclosed at all. If the new regime does come into force, finance directors can expect to be on the front line of ensuring companies stay out of trouble.
If it all sounds vaguely familiar, it should do. The Davies review follows a government consultation last year on extending the scope of the statutory damages regime for disclosures required under Financial Services Authority rules implementing the Transparency Directive. Responses to that consultation confirmed how vital it is to get the policy right in such a complex area. But apart from that, no firm conclusion was reached.
Another review
So HM Treasury has hired Paul Davies QC, Cassel Professor of commercial law at
the London School of Economics, to carry out a review of issuer liability and
come up with some firm recommendations.
His first move was to publish a discussion paper setting out his analysis of the problem and inviting comments on the issues. As Davies put it: “It is clear that neither the current state of the law in relation to liability, nor its policy rationale, are easy to state simply.”
Since 1990, issuer liability has been based in common law. The 1990 Caparo case excluded common law negligence liability except where the defendant knows that someone is likely to use the statement for a particular class of transaction.
However, the adoption of the Transparency Directive in 2004 raised fears that the Caparo principle would be undermined. Similar concerns exist in relation to ad hoc disclosures now regulated by the Market Abuse Directive 2003.
In response to these concerns, the government introduced a statutory regime under the Financial Services and Markets Act 2000 for disclosures required by the Transparency Directive. Section 90A confirms the common law stance of no negligence liability to investors and crucially adopts and adapts the common law on deceit, applying it only to issuers and in favour of purchasers of shares. This move is seen as tilting the law in favour of investors.
Davies is looking at two distinct approaches to answering the central questions that the discussion paper raises (see Issuer liability). First, he is considering keeping the existing statutory regime under the Financial Services and Markets Act using a section 90A mechanism to preserve the common law position on liability; and, second, he is exploring the principles of a new regime.
If 90A is extended, questions to be decided include how investors’ claims rank against other unsecured creditors; whether 90A provides a sufficient deterrent for fraudulent misstatement; whether 90A would be a deterrent to other advisers; should liability be extended to advisers; and whether damages should be determined by the courts.
Honest mistake
A new regime would have to decide whether a trigger for liability would be
fraud or negligence and whether there should be liability for statements which
were made honestly, but carelessly, and even whether liability would exist for
statements that were true but late.
Davies also discusses whether development of fraud-based investor action in the UK would encourage a private securities litigation similar to that of the US and whether the arguments for facilitating private litigation outweigh those for excluding it where fraud is involved. He says that fraud-based investor action should be allowed in the UK and argues that the likelihood of a US-style l itigation culture is low.
No doubt Davies will be going through the responses with an open mind, but unless the paper has provoked a strong reaction in favour of amending the 90A approach, the UK is set for a specific regime on issuer liability.
ISSUER LIABILITY
There are many questions that need answering, for example:
• What incentives are appropriate to encourage issuers to disclose meaningful,
accurate and timely statements?
• Should companies, managers or advisers be liable to investors for losses
suffered as a result of investment decisions taken on the basis of inaccurate
information?
• To whom should they be liable?
• If there is to be liability, should the basis of that liability be negligence
(carelessness) or deceit (making a statement without an honest belief in its
truth)?
• Are statutory provisions needed to bring about the appropriate liability
regime, or can that task be left to the common law by way of judicial
development of the relevant rules?
• What is an appropriate balance between public and private enforcement of
companies’ disclosure obligations?
The paper is at www.hm-treasury.gov.uk/davies
