A High Court ruling in the case of Allianz Funds Multi-Strategy Trust & Ors v Barclays Plc [2024] EWHC 2710 (Ch) has, importantly, narrowed the scope of protection for investors for misleading, incomplete or delayed public company information under the UK Financial Services and Markets Act 2000 (FSMA). We summarise key aspects of the decision and what it means for investors in listed securities.

FSMA - liability for misleading, omitting, delaying

In overview, under s.90A and Schedule 10A of FSMA, companies may incur statutory liability to compensate investors where:

  • financial reports or other publications relating to company securities contain information that is untrue, misleading, omits material facts or the company dishonestly delays in publishing it; and
  • investors suffer a loss as a result of buying, holding or disposing of company shares in reliance on the untrue, misleading or incomplete information, or as a result of the delay in its provision.

The investors' claims

The claimants in the case are investors who hold (or held) shares in the defendant bank. They brought claims against the bank alleging that they had suffered loss as a result of trading shares in reliance on untrue, misleading or incomplete information published by the bank between 2011 and 2016 (including in various annual reports and interim results announcements, and in a prospectus for a rights issue), or as a result of the Bank's dishonest delay in providing that information.

The investors fell into three categories:

  • Category A - investors who read and relied on the relevant published information directly;
  • Category B - investors who relied on the information indirectly - e.g. where the information was relayed to them, or they were otherwise advised by a financial intermediary who relied on the published information; and
  • Category C - investors who did not read the published information directly or indirectly, but who relied on the bank's traded share price as reflecting the contents of the bank's published information.

The bank applied: (i) to strike out the claims of the Category C investors; and, alternatively, (ii) for summary judgment on those claims, on the basis that the Category C investors had not relied on the published information within the meaning of Schedule 10A, paragraph 3 of FSMA and, therefore, had no reasonable prospect of success.

The reliance test under FSMA

The Category C investors argued that reliance under FSMA included "price / market reliance" - that the bank was a listed entity required to provide correct, complete and timely information to the market; and that its share price should therefore reflect the content of that information, such that investors could reasonably rely on share price alone as reflecting the content of accurate published information. Having relied on the bank's share price, they argued that they should be compensated if and when that share price was affected as a result of later events that demonstrated the published information was misleading or incomplete.

This formulation of price / market reliance was fundamental to the Category C investors' claims, as a large proportion of investors - in the bank and more generally - are passive investors who hold shares through a fund and so will not have traded directly or read the bank's published information.

The bank meanwhile submitted that, in order to establish reliance within the meaning of FSMA, the investors needed actually to have read the specific published information that they claim was untrue, misleading or incomplete.

Following a review of the legislation and the consultation that led to it, Leech J found that Parliament did not intend to "start afresh" with a new test of reliance when enacting the relevant sections of FSMA, but instead intended to import the settled common law test of reliance in the tort of deceit. That test "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 concluded that "the Claimants in Category C cannot satisfy this test unless their representatives read and considered that published information or third parties who directed or influenced their investment decisions read and considered that published information".

Although there were 241 funds in Category C, there was no evidence that any of those investors' human decision-makers or advisers had actually read or considered any of the published information in dispute, or relied on secondary sources. Accordingly, Leech J held that the Category C investors had no prospect of success and granted reverse summary judgment on their reliance claims under paragraph 3.

Publish and be damned - dishonest delay

Leech J also found in favour of the bank on the claims under Schedule 10A paragraph 5 of FSMA for alleged dishonest delay in providing information. The bank argued that paragraph 5 was only engaged if and when material was published. The investors, on the other hand, argued that claims could be brought under this section where relevant information was not published at all, as otherwise the bank could avoid liability by not publishing at all and "permanent silence would prevent liability".

Leech J was satisfied that paragraph 5 only imposes liability in relation to information that is actually published. The appropriate recourse for a claimant who asserts loss based on a failure to publish relevant information is instead a claim under paragraph 3 for omission, and it would make no sense for the two paragraphs to overlap. The difficulty for the claimants here is that the paragraph 3 test requires them to prove reliance and causation.

Since there was no evidence that the material in dispute had ever been published, the claimants had no reasonable claim for dishonest delay under paragraph 5.

A blow for passive investors?

While the judgment may be subject to appeal, this decision substantially narrows the scope of investor claims, for now, under s.90A and Schedule 10A FSMA. In particular, the confirmation that there is no "fraud on the market" doctrine, as in the USA, and that investors must demonstrate direct or indirect reliance on published information, as opposed to share price alone, sets a very high bar as to what claims will proceed. Passive investors who hold shares through a fund, and indeed who make up a large proportion of the market, may well find themselves excluded from bringing claims under s.90A and Schedule 10A FSMA.

For more information on the decision, or to discuss our Financial Services litigation practice more generally, please contact James Sidwell.