FSMA section 90 and 90a: what GCs need to know about securities litigation

Historically, the UK has lagged behind the USA and Australia in terms of securities litigation. But a rapid rise in investor-driven group actions under FSMA section 90 is changing that perception.

Improved access to funding is allowing a greater number of cases to be brought, while institutional investor activism has increased appetite for litigation. Behind the scenes, sections 90 and 90a of the Financial Services and Markets Act 2004 (FSMA) are the core statutory engines of this trend.

– Partner, Global law firm

Under the statutory framework, there are two mechanisms of interest for UK securities litigation consulting: section 90 and section 90a. Each section has its own applications and features.

Section 90 of the Financial Markets and Services Act 2004 applies to prospectus and listing particulars for any securities issuance. This section specifies that there is no reliance or dishonesty requirement. The issuing company must also operate under a near strict liability regime.

Only individuals or bodies who have acquired securities may make an FSMA section 90 claim.

Section 90a applies to continuous disclosures, such as annual reports and regulatory news service (RNS) announcements.

For a successful FSMA section 90a case, claimants must be able to prove reliance and dishonesty on the part of a person discharging managerial responsibilities (PDMR). Section 90a permits a broader claimant base that includes those who acquired, held or disposed of securities.

As you can see, Section 90 is much easier to prove – but it has a relatively narrow scope. Section 90a permits more parties to litigate, but they must also meet a much higher evidential burden.

Despite having been on the statute books for more than two decades, it is only relatively recently that we have started to see Section 90 and 90a activity becoming significant. Much of this is uptick is driven by changing investor behaviour – investors are more willing to seek redress than absorb losses.

– Commercial and Corporate Litigation lawyer, London

There has been a corresponding increase in funding too. Attracted by high-value claims and settlement-driven outcomes, funders are more willing to provide the funds required to pursue a claim. This has become a virtuous circle, with more cases being brought as claimants’ financial risk falls.

– Commercial and Corporate Litigation lawyer, London

From what we have seen, the most common reason for launching a Section 90 action is a significant share price drop. These losses are often linked to regulatory findings, ESG disclosures or fraud allegations that may affect company operations and profitability.

Notably, very few Section 90 or 90a cases ever reach judgement with most settling pre-trial. For claimants pursuing a an FSMA Section 90a case, concerns about meeting the reliance test offers an incentive to end litigation early.

UK securities litigation consulting has also encountered some strategic risks to seeing a claim through to judgement. Experience shows that as the trial progresses, claimants may lose some of their leverage, reducing their chances of winning. Similarly, defendants risk opening the floodgates to many more cases in the event of a loss.

Early settlement typically means both claimant and defendant reach an agreeable compromise. However, without a lack of precedent doctrinal clarity is lost. It also means that both parties have increased negotiation leverage, potentially increasing costs and legal complexity.

The key to a successful FSMA Section 90a case is proving reliance. Claimants must be able to show they were aware of published information, that they believed that information to be accurate and that it directly influenced their decision to buy, hold or sell shares.

This burden of proof can be hard to meet, however. Institutional and passive investors are much less likely to follow RNS announcements for instance, making it almost impossible to prove awareness. Courts have already struck out some claims because litigants have been unable to prove reliance.

This is still an emerging area though, so it is likely that some of these claims will be escalated to the appellate courts. Conceivably, we may see some reach the Supreme Court as UK securities litigants test and clarify the FSMA and its provisions.

Over time, these has been an emergence of two stage (bifurcated) trials. In the first stage, the court attempts to determine whether there has been any wrongdoing by the defendant. In the absence of sufficient evidence, the case will be dropped. If the trial proceeds, the court when attempts to determine claimant reliance. They must also demonstrate quantum – the value of money lost as a result of their reliance.

In a bifurcated case, early pressure is placed on defendants to prove they have not misled their investors. Later, pressure shifts to the claimant as their reliance is tested.

The decision on whether to proceed with a bifurcated case is made by the court. Section 90 and 90a hearings are tailored to case size and complexity to arrive at the correct judgement (assuming the case reaches that stage).

– Commercial and Corporate Litigation lawyer, London

There are three areas where FSMA claims are growing:

Any one of these factors can affect share prices and, when handled badly, could lead to an FSMA Section 90a/90 claim.

As we touched on earlier, the balance of power between claimant and defendant changes as each case progresses. At the earliest stages of any case, the claimant holds the balance of power, able to apply pressure to reputation or through litigation cost exposure.

As the trial approaches, power shifts until defendants reclaim the balance. The risk of having to prove reliance, and the inherent difficulty of that task, may incentivise claimants to accept a settlement.

Understanding this shifting balance of power means that settlement timing is a core tactical decision for any UK securities litigation consulting strategy.

General counsel must prepare for the possibility that they may, one day soon, have to defend against an FSMA Section 90 claim. Preparation begins with disclosure controls, heightened scrutiny of RNS statements and financial reporting to ensure it is accurate and that nothing has been concealed, deliberately or accidentally. This can then be strengthened by raising board level awareness of PDMR exposure, again ensuring that all information shared with investors is accurate.

GCs also need to prepare for the reality that they may not be able to prevent claims. Early evidence preservation on reliance issues will be critical to resolving disputes and demonstrating compliance. It is also worth investigating coverage under directors’ and officers’ liability insurance and whether you are protected against large group claims.

It is likely that experienced external counsel may be better placed to assist with these preparations.

Chambers’ rankings can help you find excellent UK law firms and individual lawyers specialising in FSMA Section 90 claims and other commercial litigation.

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