Securities litigation – cometh the hour!


1. Published information: transcripts of earnings calls after 1 October 2010 (when Sch 10A came into force) that were not themselves published did not constitute “published information” for the purposes of Sch 10A simply because the earnings calls were referenced in announcements that were made by the issuer by recognised means. The announcement by recognised means made no mention of any transcript. All that was announced by recognised means was the information necessary to enable participation in the call itself. This was not sufficient to elevate the transcripts of earning calls to “published information” for the purposes of Sch 10A.

2. False or misleading statement: The first step in establishing whether the said statement is false or misleading is to establish its objective meaning, i.e. “the meaning which would be ascribed to it by the intended readership, having regard to the circumstances at that time”. The Judge went onto say “a statement is not to be regarded as false or misleading where it can be justified by reference to that range of views”. If there is genuine ambiguity in a statement, the court will not look to establish its more likely meaning (unlike contractual interpretation) – such ambiguity is likely to work against the claimant, unless the claimant can show the ambiguity was contrived by the defendant. If a statement is held to be false, the claimant must still establish that it understood the statement in the same way the court is construing it.

3. Guilty knowledge: The next step is to prove that a person discharging managerial responsibility (PDMR) knew the “the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading” or the PDMR “knew the omission to be a dishonest concealment of a material fact”. The Judge held that:

a. It is “not sufficient that a person knows the facts which render a statement untrue: he will only be liable if those facts were present to his mind at the moment when the statement is made, such that he appreciates that the statement is untrue”.

b. In the case of an omission “the PDMR must have applied his mind to the omission at the time the information was published, and appreciated that a material fact was being concealed (i.e. that it was required to be included, but was being deliberately left out)

c. Reckless means “not caring about the truth of the statement, such as to lack an honest belief in its truth. Honest belief in the truth of a statement defeats a claim of recklessness, no matter how unreasonable the belief (though of course the more unreasonable the belief asserted the less likely the finder of fact is to accept that it was genuinely held)”.

d. A PDMR must have the relevant guilty knowledge in respect of each false statement or omission alleged to give rise to liability – it is not sufficient to show that at least one statement in the published information that was false. Although, as noted further below, individual statements or omissions may be seen as a sum of their parts to create a false impression.

4. Reliance: A claimant must then demonstrate “reliance on the information in question, and … at a time when, and in circumstances in which, it was reasonable for him to rely on it”. This raises the following points:

a. Reliance by whom: It has to be the claimant that has to have relied on the said statement. This can be particularly acute in, for example, the circumstances of the Autonomy case where the claimant entity is an SPV that is incorporated only days before a deal closing and cannot realistically be said to have relied on the said statements. The Judge held that the fact that there is an SPV that is used as the purchasing vehicle but, in reality, it was the parent/group company that did the due diligence and is said to have relied on statements by the issuer will not defeat a s.90A/Sch 10A claim, particularly where it can be shown the parent/group company that relied on the statements is the controlling will and mind of the SPV.

b. Reliance on what: A claimant must demonstrate that it actually applied its mind to the said alleged statements. It is not sufficient to show that statements were false, if a claimant cannot then provide evidence that it was induced by the said statement. However, the Judge did state that: “statements (or omissions) may in combination create an impression which no single one imparts. In my view, if the overall impression thus created is false it may found a claim, if the other conditions of liability are also met”.

c. What degree of reliance: The Judge held that the “presumption of inducement” applies to FSMA claims. It is enough to show that the misstatement had an impact on the mind of the claimant. There is no additional “but for” hurdle to overcome to establish liability, i.e. what the claimant would have done had it been told the truth. Although for calculating loss (as discussed below), the counter-factual that is relevant is what would have happened had the false statements or omissions not been made.

d. When is reliance reasonable: The requirement for reliance to be reasonable was held to not introduce a defence that a claimant could have discovered the truth with more diligence or a means to be critical of a claimant’s efforts to find out the truth. The test relates to the form and timing of the statement and what is reasonable for a claimant to make of what it is told in the circumstances in which the statement is made. This is a fact-sensitive inquiry.

5. Loss: The exercise of assessing loss involves, first, establishing, what would have happened had the false statements or omissions not been made. It was common ground that in such a scenario the true information would have been published and this would have affected the issuer share price. The claimants argued that when measuring loss, they ought to be allowed to elect between a measure of loss that calculates the difference in price and a measure of loss on ‘no transaction’ basis, i.e. absent the fraud the transaction would not have taken place at all and the claimants should be allowed to increase damages by claiming losses from not entering into an alternative transaction. The Judge recognised that these are novel and difficult issues but held that the prima facie measure of loss in this case was the price paid less issuer’s true value at the time of the acquisition. This was intertwined with a fact-sensitive inquiry into whether the claimants would have entered into an agreement at a lower price. The Judge did go onto address the position if a ‘no transaction’ approach was adopted and held on a provisional basis that in such a scenario credit should be given for the value received by the claimants, including the synergy value “where that was the strategic purpose of the acquisition and the asset has been voluntarily retained”.

Dog-leg claim against Defendant directors

Another interesting feature of this claim arose because Hewlett-Packard (via its specially incorporated SPV) was acquiring 100% of the shares in Autonomy. Under Schedule 10A (and section 90A), only the issuer of the securities (i.e. Autonomy) is liable to pay compensation to investors in respect of untrue or misleading statements or dishonest omissions. However, it would make no practical sense to bring a claim against its new wholly owned subsidiary. Accordingly, Autonomy admitted its own liability to the Hewlett-Packard BidCo SPV and the proceedings involved a claim by Autonomy against two of its directors (Mr Lynch and Mr Hussain) under paragraph 7(2) of Schedule 10A. These directors were the PDMRs for the purposes of the FSMA claim and who it was alleged were liable for various breaches of duty owed to Autonomy. In the proceedings, the Claimant had to demonstrate (i) that Autonomy was right to admit liability to the Hewlett-Packard BidCo SPV and (ii) that the two directors were liable to Autonomy. This was referred to as the “dog-leg” nature of the claim and the Court confirmed that this approach was legally permissible. This is an important confirmation and sets a precedent for future claims by claimants who acquire 100% of the shares of a listed company via an SPV.

A word of caution

The Claimants "substantially succeeded in their claims" and quantum will be dealt with in a separate judgment. However, in reaching its decision, the Court did put a marker down for future claims by noting that the courts "should not interpret and apply [sections 90A/Schedule 10A] in a way which exposes public companies and their shareholders to unreasonably wide liability" (see paragraph 445 of the judgment). Therefore, it appears that a narrow approach will be taken to claims under these sections.


This was one of the longest trials and longest judgments in UK history. The judgment on quantum is still awaited. However, for present purposes, this decision provides guidance in a relation to a part of the FSMA regime that has, so far, had limited judicial consideration. The decision of Mr Justice Hildyard in parts may be seen by some as not making the route to a claim under s.90A/Sch 10A of FSMA an easy one but in others it is likely to reinforce the developing enthusiasm for such claims in England.

For a copy of the judgment please click here.