Liability For Misleading Or Untrue Statements: ACL Netherlands BV v Lynch

• Published date: 09 November 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Financial Services, Corporate and Company Law, Securities
• Law Firm: Norton Rose Fulbright
• Author: Ms Rebecca Dulieu and Andrew Berriman

In an historic first, the High Court has delivered a judgment on liability arising from a breach of s 90A and schedule 10A, Financial Services and Markets Act 2000 (FSMA) in the case of ACL Netherlands BV & Ors v Lynch & Anor [2022] EWHC 1178 (Ch). These provisions impose liability on issuers of securities to pay compensation to persons who have suffered loss as a result of misleading or untrue statements made by the issuer. Two conditions of liability must be met: (i) that a person discharging managerial responsibility (PDMR) within the issuer knew that the statement was untrue or misleading; (ii) that the claimant reasonably relied on the statement.

As it is the first decision on the merits of such a claim, it is one of the most important judgments in recent times for fraud and financial services lawyers. Running to 1,657 pages, it is also one of the longest judgments ever published by the High Court.

The decision, which found the defendants liable for untrue or misleading disclosures to the market, is significant for several reasons:

1. The court provided some helpful analysis of the constituent elements of the cause of action provided by section 90A and schedule 10A.
2. The judgment covers in considerable depth the practices for which the defendants were held responsible and the fraudulent vice of each. Some of these practices are explained below. Familiarity with these practices is valuable for financial services and fraud lawyers alike.
3. The judgment considers what is and is not a 'recognised information service', these being important gateways to liability under schedule 10A, FSMA.
4. The judgment articulates certain principles as to what will constitute 'guilty knowledge' on the part of the PDMR (given actual knowledge of the PDMR is one of the conditions to establishing the liability of the issuer of the securities under s 90A and schedule 10A).

This article analyses these issues.

Summary of the decision

The claimants included ACL Netherlands BV (ACL) and Hewlett-Packard BV (BidCo). ACL received the assets and liabilities of Autonomy Corporation Inc (Autonomy) from BidCo, which purchased the assets and liabilities of Autonomy in the first instance.

Mr Justice Hildyard found the defendants Michael Lynch and Sushovan Hussain, directors of Autonomy, liable for disclosures to the market which were untrue or misleading. The disclosures regarding Autonomy's financial performance were untrue because they did not accurately reflect Autonomy's practices of re-selling hardware at a loss and selling to parties not at arms' length on terms that would never be enforced. ACL and BidCo relied upon those disclosures when making their decision to purchase Autonomy's business. Had the true position been revealed, ACL and BidCo would have paid considerably less for Autonomy's business.

Background

Autonomy was a highly successful UK start-up listed on the FTSE 100 and subject to IFRS accounting standards. Ostensibly the revenue that Autonomy received reflected the success of IDOL, which is an advanced software program. However, it was found that Autonomy was artificially inflating its revenue by at least six different methods. These methods became the focus for the claims made by ACL and BidCo. Two of these practices are explained in detail below. It was considered that each practice had the aim of accelerating the booking of revenue well in advance of receiving it and/or creating the appearance that Autonomy was more profitable than it actually was.

Autonomy's annual and quarterly reports recorded that it regularly met or exceeded its revenue targets. The reports did not disclose the practices described below. Likewise, the defendants did not disclose any of the practices during earnings calls held with market analysts. Once the claimants obtained access to all of the books and records of Autonomy, the position became clearer.

As set out above, s90A and schedule 10A FSMA contain a framework for imposing liability on issuers for misleading or dishonest statements. In this instance, the issuer of the securities was Autonomy, now owned entirely by BidCo. As it would have been pointless for BidCo to sue its own subsidiary, Autonomy formally accepted that it was liable to BidCo and Autonomy and then pursued the defendants. The claimants sought to fix the defendants with liability on the basis of clause 7(2) of schedule 10A, which gives the issuer a right of action against persons involved in the publication of untrue or misleading statements that cause others to suffer loss. The defendants are liable under that provision as PDMRs.

To succeed against the defendants, BidCo would have to establish liability as against Autonomy and then Autonomy...