Clifford Chance

High Court clarifies reliance and dishonest delay under s.90A FSMA, disposing of £332 million worth of shareholder claims against Barclays

In a recent decision in Allianz Funds Multi-Strategy Trust v Barclays PLC [2024] EWHC 2710 (Ch), the High Court ruled that under s.90A of the Financial Services and Markets Act 2000 (“FSMA”): (1) reliance cannot be satisfied in respect of published information which the Claimants did not read or consider at all; and (2) dishonest delay only imposes liability upon an issuer where publication of information has taken place. This ruling resulted in the striking out of 60% of the claims, with an asserted value of £332 million, brought against Barclays plc (“Barclays”) by its shareholders. Barclays denies any liability under FSMA.

Background

The s.90 and s.90A FSMA Claim

Barclays is facing a group action under s.90 and s.90A FSMA in relation to an alleged “dark pool” trading system known as “Barclays LX” or “LX Liquidity Cross” (“LX”) which formed part of its Equities Electronic Trading Division, and which was the subject of an investigation by the Attorney General of the State of New York (“NYAG”).

For the claim under s.90A specifically (being the focus of the recent judgment), the Claimants allege that Barclays made false and misleading statements about the LX trading system in its published information between 2011 and 2014. They allege that, in reliance on this published information, they acquired and/or held on to Barclays shares, and then suffered loss when the NYAG investigation into the LX trading system was revealed in 2014 (followed by a settlement in 2016) and the Barclays share price dropped.

Barclays denies all the claims under s.90 and s.90A FSMA.

The Application

By way of background, in order that Barclays could better understand the Claimants' case on reliance, each of the Claimants provided “Particulars of Reliance.” From the answers in these Particulars of Reliance, the Claimants were divided into three categories:

1. “Category A” consists of those Claimants who read and considered Barclays' relevant published information, and therefore relied on it directly;
2. “Category B” consists of those Claimants who relied on the relevant published information indirectly through other sources which acted as a conduit for the substantive contents of the published information; and
3. “Category C” consists of Claimants who are alleged to have suffered losses as a consequence of movements in Barclays' share price (“Price/Market Reliance”).

Barclays applied to strike out the Category C Claimants’ claims under s.90A and Schedule 10A FSMA on the basis that the pleadings disclosed no reasonable cause of action in relation to those claims or, alternatively, for summary judgment under CPR Part 24.2 because those claims have no real prospect of success (the “Application”). The claims against Barclays under s.90 FSMA were not part of the Application.

Barclays' case in support of the Application was that:

1. the Claimants do not allege and cannot prove that they acquired, continued to hold or disposed of Barclays' shares in reliance on published information within the meaning of Schedule 10A, paragraph 3 (“Paragraph 3”). Barclays submitted that on a plain reading of Paragraph 3 there could be no claim unless the investor actually read the specific statement which was said to have been untrue or misleading or the specific piece of published information which was said to have contained an omission. This position is consistent with the common law rules on reliance for misrepresentation claims; and
2. the Claimants have not alleged and cannot prove that they suffered loss as a result of a delay by Barclays in publishing information within the meaning of Schedule 10A, paragraph 5 (“Paragraph 5”). Barclays submitted that Paragraph 5 only applied where Barclays had actually published information but had done so late.

Decision

Leech J agreed with Barclays in relation to both Paragraph 3 and Paragraph 5; he found that the Price/Market Reliance claims and dishonest delay claims had no real prospect of success and therefore there was no reason to permit them to go to trial.

Paragraph 3: reliance

To assist with his analysis, Leech J considered, and relied upon, a number of previous cases (including ACL Netherlands BV v Lynch [2022] EWHC 1178 (Ch) (“Autonomy”)) as well as commentary (including the Davies Review on Issuer Liability (the “Davies Review”)).

Broadly consistent with the Davies Review, Leech J found that the common law test for inducement or reliance in the tort of deceit applied in this context, and that the test for reliance as it applies to express representations requires the 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.

He therefore agreed with the conclusion reached by Hildyard J in Autonomy that the requirement for reliance in Paragraph 3 cannot be satisfied in respect of published information which the Claimants did not read or consider at all. This does not exclude the Category B Claimants who relied on the relevant published information indirectly (via their representatives, agents or on the advice of third parties who had the read the information) but does exclude the Category C Claimants who relied purely on price movements and the market.

Leech J also found that “reliance” must mean the same thing whether investors allege that they relied on an untrue or misleading statement or on an omission. In the case of omissions, investors are not required to prove that they had relied on the omission itself (i.e. that they appreciated that the issuer had failed to include facts or matters in its published information). Rather, investors are required to prove that they relied on the published information itself (which accords with the wording in s.90A(5)(a) and paragraph 3(4)(a) of Schedule 10A).

Paragraph 5: dishonest delay

Leech J agreed with Barclays that Paragraph 5 only imposes liability upon an issuer in relation to information which has been published.

Looking at the wording of the statute, he noted that Paragraph 5 only imposes liability to pay compensation to a person who acquires, continues to hold or disposes of securities as a result of “a delay by the issuer in publishing information to which this Schedule applies.” Paragraph 2 defines the information to which Schedule 10A applies. The schedule only applies to information “published by the issuer” either “(a) by recognised means” or “(b) by other means where the availability of the information has been announced by the issuer by recognised means.” Leech J found it follows that Paragraph 5, and Schedule 10A, has no application to an issuer unless or until it has published the relevant information. In essence, dishonest delay does not apply to information that is simply omitted from the published information. Omissions fall within Paragraph 3, which requires the Claimants to establish reliance.

Leech J reasoned that to allow otherwise would be to introduce liability for delay in Paragraph 5 which overlapped to such a degree that it would render Paragraph 3 almost redundant, and he could see no reason why Parliament would have intended that.

Discussion

From a UK perspective, with this judgment the direction of thinking from the Court as to the reliance requirement under s.90A FSMA becomes increasingly clear. Leech J's findings add further weight to the decision by Hildyard J in Autonomy that Price/Market Reliance is not sufficient to meet the reliance requirement under the statute.

In addition, Leech's J conclusion regarding dishonest delay will affect any claimants bringing s.90A claims whose pleadings rely on the failure to publish the information in relation to both liability for omissions under Paragraph 3 and liability for delay under Paragraph 5. Given Leech J's finding that there is no concurrent liability under Paragraph 3 and Paragraph 5, claimants will need to rely on additional facts should they want to put forth a dishonest delay claim under Paragraph 5.

Taken together, the decision means that claimants who have not actually read the published information they claim to have relied upon cannot circumvent the requirement for reliance either by claiming Price/Market Reliance or by presenting a claim based on omissions as a dishonest delay claim. The decision has significant consequences in this case where 241 different funds, with a total asserted claim of £332 million (representing 60% of the total value of the claims), were advancing a Price/Market Reliance case. It will also have an impact on passive investor claimants in other current and future s.90A cases. In circumstances where an estimated 15% of the FTSE 100 is held by index funds, this impact is likely to be significant. Some commentators have described this as a ruling that dramatically alters the landscape for investor claims and have questioned if this judgment will bring s.90A claims to a halt. This seems highly unlikely. In any event, the decision is not a radical departure for the English Courts. As Leech J's judgment sets out, the test for reliance in other forms of misrepresentation claims has consistently required claimants 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. Had the Court adopted the Claimants' preferred approach to reliance in this case, that would have marked a radical departure.

Aside from the impact on passive investors, as a result of the Autonomy decision and this decision, active investors (including fund managers) will need to disclose records of their investment decisions, supported by witness statements, to support s.90A claims. This will expose differences in record-keeping regarding investment decision-making between fund managers in different jurisdictions, given high levels of international ownership of shares on the London Stock Exchange, especially amongst large-cap stocks. Claimants will not be able simply to subscribe to s.90A litigation; they will have to allege and prove reliance, just as any claimant would in any other form of misrepresentation claim, unless this decision is overturned on appeal.

It is also worth noting that the Court was not required to determine (and left open for determination at trial) two further legal issues on reliance: (a) whether it is necessary for the Claimants to prove that their decision-makers or advisers applied their mind to the specific misleading or untrue statements relied upon (as opposed to the published information generally); and (b) whether “indirect reliance” (i.e., Category B, described above) satisfies the requirement for reliance under s.90A.

From a global perspective, the rise in group actions in the UK in recent years has resulted in a look to the US, where group actions are a long established and substantial part of the legal landscape, and the question of whether the UK is heading in the same direction. However, Leech J's decision on reliance in this case works to solidify a divergence between the UK and the US approach to these types of group actions.

Classes of investors suing under the general antifraud provision of US federal securities law typically seek to establish their reliance on a defendant's misstatements or omissions by invoking a rebuttable presumption based on the "fraud on the market theory." The premise underlying this theory is that because the price of shares trading in an efficient market reflects all publicly available information (including the published information containing the misstatements or omissions) investors in that security presumptively rely on all such available information when transacting at market prices. This presumption permits US plaintiffs to supplant showings of individualised reliance with evidence common to all class members.

The express reliance requirement in the UK legislation has long been noted as a distinguishing feature from the US position (including in the Davies Review from 2007); however, while the exact meaning of the reliance requirement under s.90A FSMA was yet to be determined by the UK Courts, there was a question as to how much in practice the positions diverged. This decision, coupled with the decision in Autonomy, poses a new challenge to passive investor claimants in the UK; they will need to be prepared to plead an individualised reliance case involving contemporaneous conscious thought and, most likely, to produce the associated reliance disclosure.

The UK group actions landscape is far from being entirely settled; it will continue to take shape as more s.90 and s.90A FSMA cases reach the Courts. In this instance, it seems likely that the Claimants will appeal the judgment, in which case we will have to wait and see if the Court of Appeal decides to provide a further word on these issues.

Clifford Chance has represented and is representing defendants in previous and ongoing s.90 and s.90A FSMA cases