Extension Of The UK Statutory Regime For Liability Of Issuers Of Securities

In January 2007, in response to the Transparency Directive,

the UK's Financial Services and Markets Act 2000 (FSMA)

was amended by the insertion of section 90A so as to introduce

a statutory civil liability regime for untrue or misleading

statements in all periodic disclosures made to the market by

issuers of securities. This regime enables investors who

acquire securities and suffer losses as a result of a

fraudulent misstatement, or the omission of material

information from such disclosure, to be compensated by the

issuer pursuant to a civil statutory action.

As part of the same package of legislative amendments,

section 90B was introduced to enable the Treasury to extend the

section 90A regime to make further provisions about liability

for published information. The Treasury is currently

considering exercising the powers granted to it by section 90B

to iron out certain inconsistencies in the liability regime in

relation to disclosures which were highlighted by the interplay

between section 90A and the Disclosure and Transparency Rules

(DTR).

Provisions Of Section 90A Of FSMA

By way of introduction, section 90A of FSMA applies to: (a)

issuers with securities admitted to trading on a UK regulated

market (such as securities traded on the Main Market of the

London Stock Exchange but not AIM) and (b) issuers with

securities that are traded on a regulated market outside the UK

and issued by a company whose home member state is the UK.

Under section 90A of FSMA, subject to the knowledge and

reliance requirements described below, an issuer is liable to

pay damages to any person who has acquired securities and

suffered loss as a consequence of any untrue or misleading

statement in, or omission of any information required to be

disclosed in any of the disclosures required by the DTR,

including: (a) an annual report, (b) a half yearly report, (c)

an interim management statement, and (d) any voluntary

preliminary statement published in advance of a report or

statement published pursuant to the DTR. However, no liability

attaches to the issuer for a delay in making an

announcement.

However, the issuer is not liable unless:

a "person discharging managerial

responsibilities" (such as a director, an

issuer's member managing the issuer's affairs

or a senior executive) in relation to the publication knew

that the statement was untrue or misleading, was reckless as

to whether it was, or knew the omission was a dishonest

concealment of a material fact; and

the investor acquired securities in reliance on the

information and at a time when, and in circumstances in

which, it was reasonable for him to rely on that information.

Therefore, the issuer will not be liable if the person

discharging managerial responsibilities was merely

negligent.

Criminal And Common Law Liability Regime

When it was implemented in 2007, the statutory civil

liability regime introduced by section 90A of FSMA supplemented

the pre-existing criminal liability regime under section 397 of

FSMA whereby a person commits a criminal offence if he

knowingly or recklessly makes misleading statements,

dishonestly conceals material facts or engages in a misleading

course of conduct so as to induce, or to the effect that he

does induce, another person to enter into or refrain from

entering into an agreement to buy or sell securities or to

exercise any rights...