Prior to the Covid-19 crisis the UK was already seeing an uptick in claims brought by shareholders against companies and directors.

In particular, there have been a number of high-profile class actions brought by shareholders in UK publicly listed companies based on claims that the company and its directors made false and misleading statements to shareholders to induce them to invest in the company or to approve substantial transactions which did not bring the returns that were anticipated. The UK courts have accommodated the bringing of class actions (whether pursuant to a Group Litigation Order or otherwise) and there are now well-established claimant law firms, backed by third party funders, who can quickly mobilise to present claim opportunities to shareholders on a largely “risk free” basis. Securities litigation has been big business in the US for many years and the UK market is following suit.

Where companies have suffered a significant financial downturn, claimant law firms and shareholders will be analysing whether any claims can be brought against the company or directors. Where companies are looking to raise funds via rights issues or similar transactions with shareholders this also brings with it the risk of claims based on misleading statements made to shareholders. We are also seeing an increasing number of enquiries being raised by FCA in connection with the timing and content of market announcements. Investigations,  if made public, or regulatory findings can also exacerbate the risks of claims.      

A growing trend in shareholder claims are class actions based on sections 90 and 90A FSMA. These provide shareholders in a public company with a cause of action where misleading/untrue statements are made in:

• listing particulars (section 90); and
• other information published by a public company (section 90A).

Section 90 and 90A liability is not limited to whether what is said is untrue or misleading but also extends to omissions of relevant information. In the case of section 90A, the liability also extends to a dishonest delay in publishing information.

The interaction of sections 90 and 90A can be seen as follows:

• When a company issues securities for the first time or as part of a further round of capital raising and provides a listing particulars – section 90 is applicable in relation to misleading/untrue statements or omissions of information required to be included in the listing particulars.
• Once the securities are issued and trading the issuer’s liability operates under section 90A in relation to subsequent information published by it (e.g. its quarterly or annual accounts).

In relation to private companies, shareholders have various types of claim available to them including derivative claims on behalf of a company against directors.

We can expect that upward trend in shareholder actions to continue.  To mitigate these risks and also to ensure they can appropriately respond to any regulatory enquires from the FCA, companies and boards of directors should ensure:

• All public statements or other communications with shareholders are properly verified and accurate.
• Where advisors or other experts are responsible for the content of statements, this should be made clear.
• If inaccuracies in statements to shareholders are identified, these should be corrected as soon as possible. Where possible, the company should keep a record of what led to the previous statement being made and any evidence to support the position that it was reasonable to have made the statement at the time it was made.
• Written records should be kept of key decisions taken by directors and professional advisors and the reasons for them. Not only will these be needed to respond to regulatory enquiries but claims are likely to come to court a number of years after the events in question and having a complete documentary record of contemporaneous decisions that are taken can be very helpful in defending claims.
• Comprehensive insurance coverage should be maintained whether specifically for public offerings or more generally for directors and officers.
• If a company becomes aware of potential grounds for shareholders to pursue claims, an active damage limitation/risk management strategy should be developed rather than being reactive to a claim.
• All communications and internal investigations in relation to the subject matter of potential claims by shareholders should be carefully managed, particularly with regard to whether legal professional privilege can attach to such communications and work product. This can be fertile ground for exploitation by claimants seeking disclosure of copies of documents relating to such investigations to help support their claim.