Quoted companies not only face regulatory sanctions if they make false announcements to the market, they may also be sued by investors who lose money as a result.
Complex case law on deceit and negligence is being replaced by a statutory regime, clarifying the liability of companies and directors in this area. Whilst the statutory regime strengthens investors' hands in relation to fraudulent misstatements, it prevents claims in negligence and gives additional protection to directors.
With effect from October 2010 this statutory regime has been significantly revised and extended.
Which companies are affected?
All quoted companies are affected by these changes.
Companies with a standard or premium listing previously operated under two liability regimes in relation to their market announcements. Their potential liability to investors for most announcements was governed by case law, whereas a statutory regime applied to their periodic financial reporting. This statutory regime has now been revised and will apply to all market announcements made by listed companies.
Other quoted companies, including AIM and PLUS-quoted companies, have now also been brought into the statutory regime for all their market announcements.
The statutory regime also now applies to any UK company whose securities are traded on an overseas securities market, where English law is held to apply to a claim made by an investor.
What announcements are covered?
The statutory regime now applies to all announcements made through a regulated information service (RIS), or any other information service used for the dissemination of information required to be published by the rules of the market on which the company's securities are traded. It also applies to out-of-hours announcements which would otherwise have been made through an RIS or other such service.
In addition to periodic financial reporting, the regime covers announcements of price sensitive information, directors' dealings, substantial shareholders, significant or related party transactions and other ad hoc announcements required by the Disclosure and Transparency Rules, Listing Rules, AIM Rules for Companies or other market rules. (Liability for misleading prospectuses will continue to be governed by separate statutory rules.)
The regime also applies where an announcement refers to information being available, for example, on the company's website. This means that an announcement that the company's accounts have been published on its website will bring the accounts themselves within the regime.
An announcement made through an RIS (a market announcement) is covered by the statutory regime, even if the company is not required by market rules to make the announcement. Liability for any false information published by way of a press release, on the other hand, will continue to be governed by the old case law.
When will liability arise?
As under the old case law, a company is liable in relation to a market announcement if a director knows or is reckless as to whether it contains untrue or misleading information.
The statutory regime also imposes liability on the company if a market announcement omits any information it ought to contain and a director knew the omission to be a dishonest concealment of a material fact. Concealment will be dishonest if the director knew that it would be regarded as dishonest by people who regularly trade on the securities market on which the company's securities are traded.
However, if a company puts out a misleading market announcement other than in the circumstances outlined above, the statutory regime will protect it from investor claims that it has been negligent. Although it has historically been difficult for investors to bring such claims, there was concern that the case law might develop in this direction with the increase in regulatory reporting requirements.
Liability for negligence is retained in circumstances where the company does something outside the normal reporting process to assume responsibility to a particular investor in relation to a particular statement, for example, if information is specifically provided to a potential investor to encourage them to invest. Liability for breach of contract and under the Misrepresentation Act 1967 is also preserved.
What about late disclosures?
Although companies face regulatory fines and penalties if they are late in making required market disclosures, there used to be no potential liability to investors for such delay. This has now changed so that, for example, someone who purchases shares shortly before the price drops may be able to claim against the company if the price movement was caused by a profits warning or other negative announcement which should have been made before he bought his shares.
For liability to investors to arise, a director must have been aware that delaying publication of the information would be regarded as dishonest by people who regularly trade on the securities market on which the company's securities are traded. This protects companies where the delay is justified, for example, to give the board time to consider the implications of disclosure, for contractual negotiations to be concluded or for the accuracy of the announcement to be checked. Companies should ensure board discussions on the reasons for any delay in publication are fully minuted.
Who can sue?
Companies now have potential liability under the statutory regime for market announcements to a person who suffers loss as a result of:
acquiring shares in the company (as is the case under the current statutory regime for periodic reporting by listed companies);
- selling shares in the company
- actively deciding not to sell shares in the company.
To bring a claim, an investor must show that his loss was caused by the company's delay in announcing information to the market, or that in making his investment decision he relied on a misleading market announcement and that it was reasonable for him to do so. This will be a particular issue for an investor who decided not to sell shares, who will have to show, for example, that he cancelled a sell order as a result of a misleading announcement by the company.
However, unlike under the case law, it is not necessary for the investor to show that the company intended him (or people like him) to rely on the announcement in making his decision to buy or sell shares. This hurdle has in the past made it difficult for an investor to bring a claim even where fraudulent announcements have been made by companies.
The company will have no liability to anyone else who may suffer loss as a result of a misleading or delayed market announcement, for example, someone who actively decides not to buy shares in the company.
Are directors personally liable?
Although the test for liability to investors under the statutory regime turns on the knowledge and intent of directors, it is only the company that can be sued by investors. This contrasts with the old case law, which left open the possibility of directors being sued personally.
Directors of listed companies were previously protected from direct liability to investors in relation to periodic financial disclosures and this protection now applies to directors of all quoted companies in relation to all market announcements.
Directors remain liable to their companies in negligence, and may be sued by the company (or by shareholders on behalf of the company by derivative action) if the company is itself sued by disgruntled investors.
Directors also remain liable to civil regulatory penalties if they are knowingly concerned in a contravention of the Listing Rules or the Disclosure and Transparency Rules by their company.
Click here to view the Financial Services and Markets Act 2000 (Liability of Issuers) Regulations 2010.
For further information, please contact:
0330 222 1838
Given your interest in Capital Markets law, you may find some of our other updates particularly useful. Corporate, for example, has been selected by many of our clients who have signed up to Capital Markets. To register for additional bulletins, guides and seminars, visit Sign Up.
Please feel free to forward on this bulletin to friends and colleagues who may find it of interest and wish to subscribe themselves.
This briefing is written as a general guide only. It is not intended to contain definitive legal advice which should be sought as appropriate in relation to any particular matter.