Schedule 10A FSMA (the successor to section 90A FSMA) provides investors with redress against an issuer of securities for misleading statements or omissions in "published information", such as quarterly or annual reports and trading updates, in circumstances where: a "person discharging managerial responsibilities" ("PDMR") of the issuer (i) knew that, or was reckless as to whether, the statement in question was untrue or misleading; or (ii) knew that the relevant omission involved the dishonest concealment of a material fact; and the person acquiring the securities relied on that published information in circumstances where such reliance was objectively reasonable.
The meaning of "reliance" is a central question in claims based on section 90A / Schedule 10A FSMA, particularly given the increasing popularity in the UK of funds whose investment processes are wholly or partly "passive", "index-linked" or "tracking" in nature, meaning that they track a particular market or index, such as the FTSE 100, and aim to match its performance. Passive investors cannot, of course, evidence direct reliance on the published information of the companies in which they invest. Instead, as in this case, investors have advanced "price / market reliance" arguments akin to those deployed in US securities litigation in order to seek to meet the reliance requirement under section 90A / Schedule 10A FSMA. These arguments are predicated on the assumption that, in an efficient market, all publicly available information on a company is reflected in the market price of its securities. This would mean that passive funds which invest on the basis of the share price were (indirectly) relying on the company's published information in doing so. As discussed in our previous article "Key Issues and Emerging Trends in Securities Litigation", reliance arguments advanced in Various Claimants v Serco Group plc [2023] EWHC 119 (Ch), another shareholder mass claim in this jurisdiction, include (i) "market reliance", defined as a "decision, including an automated decision to acquire, continue to hold or dispose of shares in the market at the (inflated) price at which they were in fact acquired and held"; and (ii) "price reliance", defined as market reliance in circumstances in which the claimant is also aware of "(a) the price of the shares and (b) the published information being true, complete and accurate".
Within the group action against Barclays, the claimants were divided into three categories: (i) "Category A" Claimants, who had "read and considered Barclay Plc's relevant Published Information", such that they relied on it directly; (ii) "Category B" Claimants, who relied on the relevant published information indirectly through sources which acted as a conduit for the substantive contents of the information; and (iii) "Category C" Claimants, who alleged that they exhibited "price / market reliance", in the sense that the price of Barclays' shares would have been influenced by the contents of or omissions from its published information as described above.
Barclays' application related to the 241 claimants which comprised Category C. In brief, Barclays' case was that to meet the reliance requirement under section 90A / Schedule 10A FSMA, a claimant must prove that they actually read or considered the specific statements containing the allegedly untrue or misleading statements on which they claimed to have relied, or the publication from which they allege information was omitted.
After extensive consideration of the statutory background, Leech J ultimately concluded that Parliament must have used the term "reliance" to limit the recovery of compensation pursuant to s.90A/Schedule 10A to those investors who were able to prove that they had actively relied on the published information in question. He found that the appropriate test was the common law test for inducement or reliance in the tort of deceit, which requires a claimant to prove that "they read or heard the representation, that they understood it in the sense which they allege was false and that it caused them to act in a way which caused them loss." Accordingly, Leech J decided that a statement can only cause an individual to act or operate on their decision-making process if they hear or read it, or if the statement (or the gist of it) is communicated to them by a third party.
On omissions, Leech J stated that investors are required to prove that they relied on the incomplete published information when deciding whether to acquire, hold or dispose of the shares in question, provided that such reliance was reasonable. They are not required to prove that they had relied on the omission itself.
Accordingly, Leech J found that the Category C claimants had no real prospect of proving reliance within the meaning of Schedule 90A / Schedule 10A FSMA.
