Investors 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.
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
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.
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.
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
• 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
• 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
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