Together they review;
- Who has the potential to be impacted by securities litigation;
- The impact of sections 90 and 90a of the Financial Services and Markets Act 2000 (FSMA);
- Key case law developments and;
- The future of securities litigation in Scotland.
The information in this podcast was correct at the time of recording. The podcast and its content is for general information purposes only and should not be regarded as legal advice. This episode was recorded on 27/07/2023.
David Lee, Podcast host
David Lee hosts Podcasts by Brodies. David is an experienced journalist, writer and broadcaster and he is also the host of 'The Case Files' and 'What do I do if...' Podcasts by Brodies.
00:00:05 David Lee, Host
Hello and welcome to Podcasts by Brodies. My name is David Lee and in this episode, I'm joined by Brodie's partners, Craig Watt and Jared Oyston to discuss Group securities litigation. What is it? Why is it on the increase? And what could it mean for companies in Scotland?
Welcome to you both and if we can come to you first, Craig, what do we mean in this context by “securities” and therefore, by implication – securities litigation?
00:00:35 Craig Watt, Partner & Solicitor Advocate
Well, "securities" is a little bit of an unfamiliar term in the UK. It's a term that's perhaps more commonly used in the states. In short, a security is a tradable financial asset, which includes shares of corporate stock or funds or bonds and so, it's a little wider than stock or units of stock called shares in a publicly traded company, but that's what we're talking about when we're talking about securities in the context of securities litigation.
It's got a technical meaning in the states, where it's broadly categorized into debt securities, equity securities and derivatives but the more common use of the term in the United States has probably lent itself to adoption in the context of securities litigation. That's where the name is really taking hold, but it's also commonly called, stock drop litigation or shareholder litigation.
So, in short, shares of the units of ownership in a company and companies sell them to shareholders predominantly to provide funding, to grow their businesses. Some companies have millions of shareholders, some have far more limited pool of shareholders, but they all own a piece of that company, and these shares can be bought by individuals or corporate shareholders, and they can buy and sell those shares depending on the nature of the company on stock markets like for example the London Stock Exchange.
Now, securities litigation is a means by which shareholders can bring claims against listed companies to recover losses that they have suffered when buying, selling or trading securities and reliance upon information that I suppose in essence contains an untrue or misleading statement, or where there's an omission or delay in publishing information that should have been published. This is all governed by the Financial Services and Markets Act 2000 in the UK, and sections 90 and 90a of that act are the primary mechanisms by which shareholders have available to them the ability to progress claims against the issuers for untrue or misleading statements or omissions.
00:02:57 David Lee, Host
Jared, who needs to know about this? Who might it affect and how and why might they be affected?
00:03:06 Jared Oyston, Partner
Thanks, David. This topic is really of interest to anyone who may be connected with the issuance of securities in public companies, or more generally, the information that public companies publish about themselves from time to time. That obviously includes the companies themselves - which tend to be the primary targets of securities litigation - but it also includes key officers. Most obviously the directors can also find themselves the target of securities claims but even if they're not the target and the claim is focused just on the company, securities litigation will almost always place the conduct of directors under scrutiny.
Ultimately, the public statements made by a company are - or are taken to have been - approved by its directors. So, in any securities litigation, the conduct of the directors - and in particular any divergence there may be between what they've said and what they knew or should have known - will often be at the core of the case. So, companies and directors are an obvious group who should be focused on this issue, but whilst they tend to be the targets of these claims, disputes of this type can obviously have much wider fallout ramifications.
There will usually be a range of parties who are involved in a company's public disclosures and statements, particularly when preparing to issue securities. For example, the publication of listing particulars or other financial statements will inevitably involve the company's auditors and accountants. They will be subject to input and verification by lawyers as well, so the role of those third parties can come into focus too, not necessarily in the claim itself, but as part of the wider fallout from this kind of dispute. And of course, all of those parties will have various types of insurance cover, insurers will often need to be involved in the process of seeking to resolve securities claims. So, this is an obvious area of concern for insurers as well.
00:05:10 David Lee, Host
We touched on this a little bit in Craig's intro, but what about legislation covering securities litigation, what's there now and what's its purpose?
00:05:20 Jared Oyston, Partner
Yeah. So as Craig said, the key legislation is the Financial Services and Markets Act 2000 known as FSMA, which is the key piece of legislation governing financial markets and the provision of financial services in the UK. As Craig has said, the key provisions of FSMA for this topic, sections 90 and 90a.
In terms of what those do, section 90 concerns what we refer to as "listing particulars."
Listing particulars are essentially a document or suite of documents prepared and published by a company as it prepares to issue securities, and those documents basically contain information about the company and the securities in question. The purpose of listing particulars is really to give potential investors the information they need in order to be able to make an informed decision about whether they want to invest in the company by buying these securities.
So, what section 90 of FSMA does, is it provides that anyone who is responsible for listing particulars (which primarily means the company and its directors) is liable to pay compensation to anyone who suffers a loss in relation to securities as a result of untrue or misleading information statements made in the listing particulars, or the admission of any piece of information which should have been included in the listing particulars, section 90 is really all about ensuring that the information included in listing particulars is complete and accurate, and if it isn't giving a remedy to investors who suffer a loss as a result.
Then you have section 90a, which relates more broadly to public statements. Generally, what section 90a does is make an issuer of securities (the company) liable to pay compensation to investors who have suffered a loss arising out of misleading statements, or dishonest admissions, or delays in publication of relevant information relating to securities. So, whereas section 90 is very much focused on listing particulars, section 90a is broader and covers public statements more generally, and so could include, for example, misleading statements or omissions contained in a company's annual financial statements.
So those are the key legislative provisions that tend to be the focus of securities litigation and in terms of the purpose of those provisions, it really is to provide a basic level of protection to investors in relation to inaccurate or incomplete information regarding securities issued in the UK and that protection is intended to encourage investor confidence. It gives investors comfort that if they suffer a loss as a result of these kinds of statements, there is a statutory remedy available.
00:08:08 David Lee, Host
Thanks very much and what about examples Jared? Have we seen securities litigation cases in the UK?
00:08:17 Jared Oyston, Partner
We have here, securities litigation was really jumpstarted in the UK, if you like by what's known as the RBS rights issue litigation.
This was a case that was brought by investors who had participated in the Royal Bank of Scotland's £12 billion rights issue in April 2008. This was obviously at the height of the financial crisis of 2007/ 2008 and just a few months after the rights issue in question, listeners may recall, RBS had to be bailed out by the UK Government. The effect of that bailout was to wipe out significant shareholder value and that led investors who participated in the rights issue in question, to consider whether the information they've been given in relation to the financial position of the bank when they took the decision to participate in the rights issue had been complete and accurate. Ultimately some 9000 or so investors raised a claim on the basis that statements that had been made in the listing particulars regarding RBS's liquidity, its capital position and what the reasoning for the rights issue was were not complete and accurate in circumstances where just a few months later, the bank was in a position where they had to be bailed out by the government.
The RBS rights issue case settled just before the trial, just before the trial, but it was it was the first case of its type to get that far through the English courts. It sort of provided therefore, the proof of concept for securities litigation in England and Wales, and we've seen a number of cases follow in its wake.
The RBS claim was brought under section 90 of FSMA relating to listing particulars. We've subsequently seen cases brought under section 90a, the more general provision. The most notable example of that was the Tesco shareholder mitigation that was a case relating not to listing particulars, but to public statements made more broadly by Tesco. This arose from the scandal which emerged in 2014 - you'll see a pattern emerging here that these cases do tend to emerge from high profile scandals. There was a scandal in 2014 when Tesco announced that its previous profit forecasts had actually been overstated by £263,000,000. This was a claim brought by investors for losses, which they said they'd suffered as a result of that inaccurate forecasting in Tesco's financial statements. So, investors basically saying, "if it hadn't been for that overly rosy forecasting, I would have acted differently. I wouldn't have acquired Tesco's securities or I wouldn't have held onto them as long as I did, and I've suffered losses as a result of that." And like the RBS rights issue case, that claim settled just ahead of a trial which was scheduled for October 2020.
Lest it be thought that cases like these always settle on the steps of court, in 2019 we saw the very first High Court judgement in a claim of this type that was in what's known as the Lloyds HBOS litigation. That was a claim brought by a group of investors in Lloyds Bank relating to Lloyd's acquisition of Halifax bank of Scotland at the height of the financial crisis in 2008, raising questions as to whether the information that Lloyds gave its investors when seeking approval to make this acquisition, was completely accurate. Questions around the financial position of HBOS and again, allegations that they had that these investors had suffered losses as a result of that inaccurate information, and the fact that Lloyds did go on to acquire HBOS' financial position wasn't as rosy as they were led to believe.
So those are three of the most high-profile examples we've seen in England or Wales so far.
00:12:09 David Lee, Host
I mean we are talking about some very high-profile names there, Craig, big banks, big supermarkets, have we seen any action in Scotland yet or of as this yet to kickstart in the Scottish courts?
00:12:24 Craig Watt, Partner & Solicitor Advocate
The short answer is no David, we've not seen any securities litigation yet progressed in Scotland. But I suppose the point I pick up on in relation to what Jared was talking about there is that obviously the proof of concept was in the relation to the RBS rights Issue securities litigation, and that was against a very prominent Scottish headquartered company.
So the point I draw there is that there are many publicly traded Scottish headquartered companies of various sizes and in various sectors, who could be exposed to this type of litigation - like the RBS rights issue litigation - involving a very large number of claimants seeking redress. Now, at the time that this RBS rights issue securities litigation was commenced, Scotland didn't at that point offer any procedure for that volume of claimants to go forward as a group and accordingly, it would probably have been fairly impractical for them to go through and raise their claims on an individual basis. Even though some of these individuals may have been corporate entities with very large claims, they have combined and shared the time and effort and cost to go through as a group using the English courts. I think - unless Jared corrects me - it would have been under a group litigation order.
But we've now seen group proceedings introduced in Scotland and that will have changed matters. A separate issue might have been in England at the point in time the RBS rights issue litigation was commenced, it was probably a far more sophisticated litigation funding market, which hadn't progressed or certainly hadn't been as strongly developed in Scotland where it was still very nascent then. It's moved on somewhat now and we've seen changes to the civil litigation and expenses funding regime in Scotland since that time.
A final point I would mention in relation to why it perhaps wasn't raised in Scotland at that point in time, is that at that juncture, there probably wasn't a surfeit of claimants or pursuers firms operating in Scotland specializing in financial services litigation and that has changed. The market is becoming far more sophisticated now and we do know that there are there are firms who actively monitor share prices of large corporates, including those headquartered in Scotland. They are keeping a close eye and it's not just simply when there's a scandal, albeit that is a prompt to start to look at what's being released by these companies before then, but there are there are some firms, companies, organisations, litigation funders, who are out there actively monitoring share prices and then checking to see what's been on the books beforehand accords with what they were expecting.
00:15:19 David Lee, Host
I just wonder, Craig, do you want to say a little bit more about that connection between group proceedings and what we might see in future with securities?
00:15:41 Craig Watt, Partner & Solicitor Advocate
Sure, I never miss an opportunity on that front. I feel as if I'm that's all I talk about most of the time with you, but I do think that it's a game changer for securities litigation in Scotland.
As I mentioned, there are many large publicly traded companies with their headquarters in Scotland. Shareholders in these companies will likely be geographically spread, not simply across Scotland and the UK, but possibly off of these shores.
So, the natural way of establishing jurisdiction is to look to the headquarters, the headquartered address or registered office of the defender company, which on the hypothesis we're talking about, might be a Scottish headquartered company and accordingly the claimants' group might naturally look to the Scottish courts to bring any claim and as such, the group proceedings structure has now changed the way in which they can do that they can.
They can create a volume of people coming together or institutions coming together to look to bring their action, minimising time, cost and effort and crucially, if the group is large enough litigation funders are going to be interested, who will often want bang for their buck and they will back that group of claimants far more easily than they might do if it was just a handful, or lots of individual claims being progressed. So, I think that litigation funding is certainly a crucial reason why group litigation is going to be successful or not, but we have seen the Scottish courts show a willingness to allow group litigation to progress against institutions, including those who have their principal operations outside of the UK.
Thinking there in terms of the Kenyan tea farmers dispute - which I've mentioned in the in our previous podcast. There are many reasons why claimants' groups might look to the Scottish courts rather than English courts. Anecdotally, as I understand it, it's often perceived as a more cost-effective way to progress disputes in the Scottish courts and the English courts, in addition, the Scottish courts have shown themselves willing to progress group litigation promptly and in line with commercial court timetables, which can often move matters further forward towards. For example, an evidential hearing or a substantive legal debate far quicker than they might do in English courts.
So accordingly, from the claimant's perspective, it may well be more attractive to progress securities litigation in Scotland than it would be elsewhere.
00:18:19 David Lee, Host
So, we're talking here a bit about forum shopping potentially, that there's an option. It doesn't necessarily have to be that a company is headquartered in Scotland, it could just be an office here and that could lead to claims being brought forward in Scotland on the base of an office, and potentially on the basis that Scotland is a more cost-effective place to do it, is that what you're saying?
00:18:40 Craig Watt, Partner & Solicitor Advocate
Yeah, I think that's right in terms of the efficiencies but I'd expect the majority of securities litigation raised in Scotland will be against companies with the registered office in Scotland.
I think it's perhaps possible for the Scottish courts to accept jurisdiction if the company has a Scottish office, particularly if the untrue or misleading statements that we're talking about here originated from the office in Scotland.
There might be reasons why the claimant or group may want to raise it in Scotland, for example, if the majority are resident in Scotland, they might have engaged Scottish solicitors and accordingly they want to fight on home terrain. Ultimately for claimaints it will be at their gift - at least initially - as to where they choose to raise the group litigation. So it's open to the company to argue that the Scottish courts don't have jurisdiction, or if they do have jurisdiction, and that they're not the most convenient forum to hear that dispute.
As I mentioned in a slightly different context, the Scottish courts have considered arguments about jurisdiction and forum non conveniens in relation to a dispute. and a group litigation context in the Kenyan tea farmers case, where the court has shown themselves well placed to deal with these sorts of issues and in some views reluctant to cede jurisdiction on the basis of certain arguments about the convenience of the forum.
00:20:04 David Lee, Host
So, I think what you're saying there, Craig, is it's when rather than if we'll start seeing securities litigation in Scotland.
Who's actually driving this and why are the stakes potentially so high in terms of securities litigation cases?
00:20:19 Craig Watt, Partner & Solicitor Advocate
I think the key driver, David is certainly money. Securities litigation is the largest proportion of all group litigation that goes before the US and the Australian courts. There are many claimants, law firms in the US who are going to be driving the UK claimant's groupings forward. They can also ensure that the claimant's groups are benefiting from US litigation funding arrangements where they've certainly led the way in that respect.
Accordingly, many of the barriers to progressing group litigation in a securities context have been removed. The recent securities litigations that have gone through the English court suggests that there's an increasing appetite and awareness of this type of litigation and it's widely anticipated that this will continue to uptick.
The stakes aren't simply about the value of the claims they might face -these could be worth hundreds of millions, if not billions of pounds, depending on the number of shareholders and how egregious the alleged breaches are. But these companies mainly have built up reputations over many decades, if not centuries and claims of this type really resonate because they get a lot of press attention. So whilst the company might be able to write off their exposure to the pounds and pence of the actual claim, it's far harder for them to build up their reputation in the public eye, and that can take many years, if not decades. So, the stakes are very high.
00:21:52 David Lee, Host
Thanks very much, Craig. To come back to you, Jared, what do Brodies' clients who might be exposed to securities litigation cases need to know? And what's the broad advice that you would give?
00:22:05 Jared Oyston, Partner
I think the key thing that clients need to be aware of is that securities litigation is coming. It's only going to grow over the next few years. I think it can be easy to retain almost a sense of false sense of security due to the fact that even in England and Wales, we still have relatively few cases that have been brought and even fewer that have made it to court and as Craig has said, we haven't had any in Scotland yet. But what that masks is the very significant infrastructure that has built up over the last 10 to 15 years around this type of claim. By infrastructure, we mean the fact that the group proceedings regime in England has been properly tested through these kinds of claims over the last couple of decades. We now have that mechanism in Scotland.
In addition, we have had - certainly in England and Wales - a very rapid development in recent years of a robust litigation funding industry, which can and does play an important role in making this type of claim viable for large and diverse groups of investors.
Likewise, as Craig has already mentioned, the growth of law firms specialising in this type of claim. They are really very focused on spotting potential bases of claims and that's not just chasing the latest scandal in the newspapers, it's really quite forensic in terms of spotting stock drops and the potential for claims to be brought based on statements that have been made. They're very adept at publicising potential claims and bringing together large and otherwise unwieldy groups of claimants. They've developed expertise and experience in managing those claims efficiently and effectively before the courts and of course, in putting in place appropriate funding arrangements. Without all of that, actually bringing claims under section 90 or Section 98 of FSMA would be a daunting prospect for many investors, but with that infrastructure now in place, it's never been easier to pursue this type of claim.
I'm not saying for a moment that it's easy to succeed with them but a lot of the obstacles to getting started are now much easier to negotiate with the range of funding and representation models that are available.
So, I think the reality is that public companies and their offices, the scrutiny that they now face and the potential for those disclosures and statements that they make to result in legal claims have really never been greater.
In terms of what advice we would give to them, that falls into two categories. Firstly, how do you protect yourself against these types of claims coming your way in the first place? And second, what to do if, despite your best efforts, you find yourself facing or threatened with this type of claim?
I think in terms of how to avoid this type of claim, it's probably beyond the scope of this discussion to provide an overview of the importance of making accurate public statements and the processes companies should adopt to ensure, as far as possible, the accuracy, completeness of their financial statements and listing materials. Companies who are going through those processes, whether it's your annual accounts or preparing for listing new securities, they obviously have that they're supported by auditors, accountants, lawyers who guide them through that process.
What I would say is, I think it's really important to make sure that the processes you have in place around ensuring that the information you publish is complete and fully updated in light of the growing threat of securities litigation. It's about asking questions like;
- Do our directors have up-to-date training on their obligations relating to public disclosures and their potential liability arising from situations where that goes wrong?
- Are the company's auditors and accountants and other advisers properly focused on this issue or are they taking a more business as usual approach?
- Does the company have adequate insurance in place to address this growing risk?
So I think it's really about ensuring that the company's policies and processes and the external advice and assistance that it's receiving are refreshed and updated in light of this growing risk.
In terms of how to deal with claims that are actually being brought or threatened, I think it's really important to seek specialist advice as early as possible.
Most businesses, particularly large publicly listed companies, will be used to dealing with litigation, but securities claims bring with them features and dynamics that a company may not be familiar with if it hasn't been involved in this type of claim previously. So the strategy to be adopted in relation to a securities claim may differ quite markedly from what a company might adopt with more traditional litigation.
The fact that in this type of claim you'll have a large and diverse, possibly rapidly growing group of claimants often funded by a third-party funder, means that procedural aspects of the claim might differ quite markedly from more traditional litigation. The dynamics and economics around potential settlement discussions, things like PR strategy, may all be quite different from what you'd adopt in more regular litigation.
So, it's crucial, I think, that clients seek that specialist advice as early as they can, to make sure that the approach they're adopting is fit for purpose in what is still quite a novel and rapidly developing area of dispute resolution.
00:27:56 David Lee, Host
And just to finish off, Craig, get your crystal ball out! If we're talking about this again in five or ten years' time, will we have seen securities litigation cases in Scotland do you think?
00:28:10 Craig Watt, Partner & Solicitor Advocate
Well, I'll be shocked if I've not seen an increase in securities litigation going before the English courts and by extension, I'll be similarly shocked if we haven't seen at least some Scottish corporates facing securities litigation before the Scottish courts!
So whilst the group proceeding structure is still fairly new, we're starting to see an increasing number of cases progress through the Scottish courts on a group proceedings basis, and if we look to Australia and the USA, where they've got far more developed group proceedings or class action structures, we anticipate that at least a proportion of the group litigation going before the Scottish courts in five years' time will be securities litigation, given that it's such a dominant part of their legal landscape at the moment.
00:28:55 David Lee, Host
Great stuff. Thanks very much, Craig and Jared for your terrific insights today. This episode is part of Podcasts by Brodies, where some of the country's leading lawyers and special guests share their Enlightened Thinking about issues and developments that are having an impact on the legal sector and what that means more broadly for organizations. Businesses and individuals across the UK economy and wider society.