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Banking & financial disputes
High Court rules investors have sufficient interest in Tesco PLC securities to be able to make a claim following its accountancy scandal, despite the securities being held through the CREST system.
4 November 2019
On 28 October 2019, the High Court dismissed a strike-out application that Tesco PLC made arguing that the £600m shareholder group action brought against it by investors about its false accountancy scandal in 2014 should fail because the shares were held indirectly through the CREST system.
The High Court ruled that such investors have sufficient interest in Tesco PLC securities to be able to make a claim against Tesco PLC under section 90A Financial Services and Markets Act 2000 (“Section 90A”) despite the securities being held through the CREST system.
The CREST system is the dominant means in the UK for investors to hold listed securities. It would therefore have been surprising if the High Court had held that a claim under Section 90A was unavailable to investors through CREST. Nevertheless, given the paucity of case law concerning Section 90A, this decision still brings some helpful clarity to anyone thinking of using Section 90A to bring a shareholder action.
As is well known, on 22 September 2014, Tesco PLC announced that its recent trading update had overstated its profits in the previous six months by over £250 million. This announcement caused a dramatic fall in the price of Tesco PLC shares.
This false accountancy scandal has since been the subject of an £85m compensation scheme imposed by the FCA, and of a Deferred Prosecution Agreement with the SFO under which Tesco PLC agreed to pay a fine of £129m.
It is also the subject of a £600m shareholder group action being brought by investors in Tesco PLC securities using Section 90A.
Section 90A FSMA 2000
Section 90A is a potential weapon for claimants in the growing field of group shareholder actions, but it has so far been largely untested in the courts.
Section 90A requires investors to show that they suffered loss by relying on information published by Tesco PLC which “persons discharging managerial responsibilities” within Tesco PLC knew to be untrue or misleading. It is available to persons who “acquire, continue to hold or dispose” of securities in reasonable reliance upon published information. The statute makes clear that this extends to the “acquisition or disposal of any interest in securities” (emphasis added).
In its strike-out application, Tesco PLC argued that the Claimants’ indirect holding of Tesco PLC securities through the electronic CREST system was not sufficient for them to be able to use Section 90A.
The CREST system
These days, most investors hold listed UK securities in “dematerialised” form through the electronic CREST system (CREST stands for “Certificateless Registry for Electronic Share Transfer”).
Within this system, the legal owner of a security is the person whose name appears on the CREST register. These persons must be members of CREST, and they tend to be banks or other financial institutions. They act as “custodians” for others, sometimes directly for an investor, but more commonly there will be a number of intermediaries in a so-called “custody chain” between the custodian and the ultimate investor. Shares held in this way are known as “intermediated” securities.
Tesco accepted that Section 90A extends to those with an equitable proprietary interest in securities. This would have included any investors with a direct relationship with a custodian on the CREST system. The Claimants in this case, however, hold Tesco PLC securities through a number of intermediaries.
Tesco argued that this is not sufficient for Section 90A. It amounts to a mere contractual or economic interest, whereas Section 90A requires some form of proprietary interest in the securities themselves. This can be seen in the language “any interest in securities” (emphasis added). The Claimants’ proprietary interest is only in a sub-trust of the securities, and not in the securities themselves.
Tesco argued that a broader reading of Section 90A could expose listed companies to the risk of facing multiple claims in respect of the same share transaction. A number of persons within the custody chain could claim to have some form of interest in the securities. Furthermore, people could have economic interests in Tesco PLC securities through a variety of means at an even further remove from the company.
Somewhat unattractively, Tesco accepted that their interpretation of Section 90A would render it ineffective for intermediated securities, which now make up the bulk of the market in listed shares. Tesco said that this represented “a failure of the law…to keep pace with developments in the market” and a “failure in the legislative drafting” to cater for intermediated securities. Judges should not take it upon themselves to bridge the gap between the law and current market practice – this would amount to an “impermissible form of judicial legislation”.
In reply, the Claimants drew attention to the wide drafting of Section 90A, laying emphasis instead on the phrase “any interest”. The Claimants argued that this encompassed contractual and economic rights. Alternatively, if a proprietary interest is required for Section 90A, then the Claimants’ holding of the securities through a custody chain properly amounts to a proprietary interest.
The Claimants also argued that, to the extent that there was any ambiguity in the statutory language, then this ambiguity should be resolved in favour of the statute’s clear purpose in providing a cause of action to those who had suffered loss by making investment decisions on the basis of false published information.
High Court’s conclusions
Mr Justice Hildyard was clearly mindful of the dominance of the CREST system, stating that “the intermediated securities market is of great practical importance and huge significance to the financial strength of UK plc”. In this context, he accepted that it was “surprising”, even “unsettling”, that Section 90A did not explicitly address the legal position in respect of intermediated securities.
Nevertheless, Mr Justice Hildyard did not accept that the draftsman had “simply overlooked” the intermediated securities market. Rather, he agreed with the Claimants that the statutory language was intentionally very broad, and that the draftsman “must have been persuaded that the words they used were appropriate” to encompass intermediated securities.
Mr Justice Hildyard agreed with Tesco that the phrase “interest in securities” must “denote something more than a contractual right or economic interest”. If any personal or economic interest were sufficient, then the class of potential claimants would indeed be too wide and indeterminate.
However, the judge agreed with the Claimants that there is “legally no doubt” that a holder of intermediated securities holds an equitable proprietary right in the securities themselves. Indeed, it would be “odd to deny that the ultimate investor has such an interest” as “no one but the investor can claim any right of ownership beneficially”.
Furthermore, the judge considered that Tesco’s concerns about facing multiple claims in respect of the same share transaction from different persons in a custody chain were “more theoretical than real”. This is because only the ultimate investor in the securities would have made any form of investment decision, and could therefore fulfil the requirement in Section 90A of showing that they had suffered loss by relying on published information.
This decision provides welcome further clarity in this developing area of law and will provide comfort to investors through CREST that the law protects them in relation to published information and investments.
 Omers Administration Corporation and others v. Tesco PLC; Manning & Napier Fund Inc. and another v. Tesco PLC  EWHC 2858 (Ch)
 Paragraph 3(1) Schedule 10A FSMA 2000
 Paragraph 8(3) Schedule 10A FSMA 2000
4 November 2019
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