FSMA s90A: proving reliance

Section 90A of FSMA requires investors to prove they relied on the issuer's misleading statements or omissions. In this article, we look at how this requirement is proving to be a difficult hurdle for claimants to cross.

The reliance test

Both Section 90A and its 2010 replacement, Schedule 10A, state:

A loss is not regarded as suffered as a result of the statement or omission unless the person suffering it acquired, continued to hold or disposed of the relevant securities-

a) in reliance on the information in question, and
b) at a time when, and in circumstances in which, it was reasonable for him to rely on it.

It is clear that investors bringing s90A misstatement or omission claims must prove they relied on the issuer's information when dealing in their shares. Based on the HP/Autonomy and Tesco litigation, it also now seems pretty clear what the statute contemplates by the information in question: each claimant must state specifically on which misleading statement or omission it relied, and provide proof that it relied on that statement when dealing in the shares. This means an investor cannot say that it relied on the truthfulness of an annual report as a whole; rather, it must say precisely which words were untrue or misleading.

An investor's ability to do this credibly may depend on the nature of the misleading information. It is (relatively) easy to see how an investor might be able to show reliance where an issuer misstates its key financial or accounting metrics. To an outsider, a clear-cut case may be the Tesco claim: an issuer publishes a trading update overstating its profits. It will be harder for an investor to show that it relied on allegedly misleading non-financial information. Consider the example of a clothing retailer whose share price falls after its supply chain is exposed to be heavily polluting. Can an investor say credibly that, in deciding to acquire the company's shares, it relied on generic ESG or supply chain transparency statements in the company's annual report as conveying that it caused no, or minimal, environmental damage? It will be a high bar.

The question then arises: even if an investor claims to have relied on the ESG/transparency statements as providing a clean bill of health, was it reasonable for it to have done so? Where is the line to be drawn between generic descriptions of the company's activities and specific statements that investors might be expected to rely upon? What if the company's factories were situated in countries well known for having low environmental standards: does that qualify the reasonableness of the investor's reliance?

Proving reliance therefore remains a serious obstacle to s90A claims. HP withdrew several allegations during the Autonomy trial as it could not show that anyone at the company actually read (much less relied upon) certain parts of Autonomy's published information. In the Tesco case, proving reliance involved the claimants filing over 15 separate reliance particulars of claim and, had the case not settled, reliance witnesses would presumably have been called and cross-examined.

In order to try to get around the problem of reliance, claimants often recast omission claims as dishonest delay claims, for which proving reliance is unnecessary. In the claims that have been issued to date, claimants have also argued that a presumption of inducement or the fraud on the market theory applies to s90A claims.

The first of these derives from deceit-based claims and would mean that, if a claimant could show that the misleading information was of such a nature as to be likely to induce a person in the claimant's position to acquire shares, the burden shifts onto the defendant to show that the claimant was not so induced. This is one of the issues that is likely to be considered in the forthcoming HP/Autonomy judgment.

The idea behind the fraud on the market theory is that an efficient market prices all available information into a share price. Therefore, by acquiring the shares, the investor relies on all that available information, including the misleading parts. This theory is one of the reasons why securities claims are much easier to bring in the US. By the time of the first CMC in Tesco, about 40 claims based on the theory were removed (in the face of a strike-out application). While this means no ruling on the point yet, claimants who seek to engage the theory will have to overcome the general impression after Tesco that the theory has no application in the UK.

This article is part of a series exploring practical issues arising out of the components of a Section 90A of FSMA claim. Find the other articles in the series under ‘Related links’ on the right-hand side.