Every little helps: High Court declines to strike out group shareholder litigation against Tesco

The claims in SL Claimants v Tesco Plc¹ are significant examples of securities class actions in the UK. Two claimant groups are seeking recovery of losses arising from investments in Tesco shares which they allege were purchased after reliance upon misleading and dishonest statements published by the company in 2014².

Tesco sought strike out on the basis the shares were held in de-materialised chains, which did not fit the definitions governing issuer liability under s.90A and Schedule 10A of FSMA³. Tesco’s application was refused by the High Court - a decision which will be embraced by potential claimants whose shares are also held in this common investment structure. The outcome of the pending appeal will have a significant impact on the likelihood of further class actions.

The statutory position

FSMA provides a framework for shareholders to bring claims against an issuer of securities. Under s.90A, an issuer is liable to pay compensation to a person who has suffered loss as a result of a misleading public statement or dishonest omission, following published information regarding the securities. Schedule 10A confirms that compensation is to be paid to a person who acquires, continues to hold or disposes of securities in reliance on the above. Paragraph 8(3) to Schedule 10A confirms that the acquisition or disposal can be of “any interest” in the securities.

Dematerialised market

The shares in question were held in a de-materialised form through CREST. The legal interest in the shares remained with CREST; none of the claimants directly acquired, held or disposed of a legal interest in the shares. For this reason, under the first limb of its application, Tesco claimed that the claimants did not hold a qualifying interest in securities under Sch 10A. Tesco alleged that by reason of the chain of intermediaries, the claimants only had an economic interest in the shares and not a proprietary one. Alternatively, under the second limb of its application, Tesco claimed that even if the claimants were found to hold an interest in securities, they could not be said to have acquired or disposed of that interest.

The judgment

Mr Justice Hildyard held that:

• the investor claimants had a “right to a right” in the securities chain which “is, or can be equated to, an equitable property right”. This was deemed sufficient to establish the necessary interest in the securities; and

• in respect of Tesco’s second argument, the terms “acquire” and “disposal” for the purposes of Sch 10A logically should be given a broad meaning, encompassing the creation and termination of the interest in the securities.

Practical impact

In today’s world, it is typical for publicly listed shares to be held in de-materialised form. Therefore, the finding that the holders of such shares have standing to bring a claim for potential compensation under FSMA, where there has been financial misreporting, is an important one. Indeed, to have held otherwise would have, as the judge said, left a “fundamental hole” in FSMA and resulted in an overt failure of the law to keep up with developments in the market.

This decision will inevitably result in an insurgence in securities class actions arising from accounting breaches by PLCs, especially as news of high profile accounting irregularities frequently hits the headlines. The third party funding sector, which funds class actions, has already grown enormously in recent years, alongside claims management companies. No doubt they will now be looking to invest further in potential shareholder class actions. However, it seems unlikely that this decision will lead to opportunist claims. Notably, the judge commented⁴ that he considered his interpretation gives sufficiently certain meaning to confine the class of potential claimants so as not to expose the issuer of the shares to indeterminate liability to an indeterminate class. Even so, the growing prevalence of shareholder class actions creates further legal risk for publicly listed companies, a risk which should be managed by ensuring accounting processes and procedures are effective and robust.

Permission to appeal

Tesco has been granted permission to appeal, which leaves potential claimants and third party funders alike, to watch keenly from the side lines to see whether the Court of Appeal upholds this decision. Notably, there is no previous case law on the interpretation of s.90A, so this case, unless it is overturned on appeal, sets a significant precedent.

If the High Court decision is upheld it will also be interesting to see how the losses suffered by the Tesco claimants are calculated as damages at trial. The court’s interpretation and award of damages will influence the attractiveness of further securities class actions.

¹ [2019] EWCH 2858 (Ch)
² It is well publicised that Tesco was fined by the SFO and FCA for making false and misleading accounting statements to the market in 2014.
³ Financial Services and Markets Act 2000
⁴ See para 84 of the judgment