Andrew Sweeney and Craig Watt

Brodies’ group proceedings team takes a brief look at these and how they might interact to increase the risk of securities class actions being raised.

Securities litigation

Securities are a catch-all term to describe types of investments in companies (or a government) that you can buy and sell. They include shares – or “stocks” – in a company. Securities litigation is a court action brought by those who argue they have suffered loss because of the actions of a company that issued or sold them securities.

Market volatility

With the recent market volatility, and a drop in some share prices, shareholders may reappraise their investments. Where losses are incurred, investors could turn their attention to the company in which they invested. They may argue that information was concealed or risks misrepresented, which resulted in losses when the share price fell.

Opt-out procedure

The current procedural system for progressing class actions in Scotland is an “opt-in” procedure. This system requires those who want to make a claim to actively join the class. Recently, however, the Scottish Civil Justice Council consulted on the introduction of an “opt-out” system. This would make larger class actions more likely, which significantly increases the litigation risk for anyone operating in Scotland. As we wrote recently, “by automatically including those who have claims unless they actively opt out, these proceedings are likely to create far larger claimant groups and, in turn, higher-value claims”. As shares are often held by a great many people, a large class can be clearly identified making securities litigation ripe for an uptick from the introduction of the opt-out procedure.

Rise of ‘fraud on the market’ arguments

Finally, the English courts have left open the door to securities litigation where investors have not actively relied on information published by the company which they claim was misleading. Sections 90 and 90A of the Financial Services and Markets Act 2000 (FSMA) allow an investor to bring a claim against the issuer of shares for untrue or misleading statements or omissions.

Section 90 creates a liability for misleading statements or omissions in documents published when a company is listed or securities are offered to the public. Section 90A creates a continuing disclosure obligation. These claims will include a lot of investors, be high-value, and be driven by those with large funds.

Initially, the English High Court was not receptive to an argument that a claim could be brought under section 90A and schedule 10A of FSMA where the claimants had not read or considered any of the published information in question. The legislation required there to be “reliance” on the information in question before their claim could succeed. Without considering the published information, an investor could not have relied on it and could not succeed. This view removed a large number of potential claims based on alleged misleading published information. However, the English High Court has reconsidered this view. Some claimants have brought cases using the “price/market reliance” or “fraud on the market” argument. This argues that shareholders have relied on the market to set the price of the shares, which took account of the published information. The High Court has recently allowed a trial of the facts on this argument. Those defending securities class actions may now be forced to proceed to evidential hearings on the published information, its impact on the market and the decisions of the Claimant class. It is also unlikely to be the final word from the courts in this area.

Conclusion

For listed companies with a presence in Scotland, recent events may have increased their exposure to the risk of securities class actions. Market volatility increases the chances of shareholder losses and greater attention on the information previously published to the market. If a shareholder does seek to raise litigation, the potential introduction of the opt-out procedure might increase the chances that proceedings are raised and the size of the claimant group. And the recent refusal by the English courts to strike out particular claims by investors who did not read or consider alleged misleading publications by the company further increases the scale of securities litigations and the exposure to these actions proceeding to a full evidential hearing.

Andrew Sweeney is a senior solicitor and Craig Watt is a partner at Brodies LLP