In an important decision for securities litigation in the UK, the High Court has dismissed a strike out application made by Tesco plc in the group litigation brought by its shareholders under section 90A Financial Services and Markets Act 2000 ("FSMA"), relating to the false and misleading statements made by Tesco regarding its commercial income and trading profits in 2014: SL Claimants v Tesco plc [2019] EWHC 2858 (Ch).
In summary, Tesco asserted that it was not liable for any untrue or misleading statement in its published information under section 90A and schedule 10A FSMA to any claimants who held the shares in a custody chain with more than one intermediary. While Tesco accepted that its construction would render the FSMA regime ineffective in relation to claims by holders of intermediated securities, it contended that these consequences flowed from a failure of the law to keep pace with the development of a dematerialised market, where transfers in certified securities are replaced with share dealing in computerised form (i.e. through CREST).
The court considered two technical questions of statutory construction in relation to section 90A and schedule 10A FSMA, namely whether claimants who held their shares through CREST:
- Had an "interest in securities" within the meaning of paragraph 8(3) of schedule 10A FSMA.
- "Acquired, continued to hold or disposed of" any interest in securities (even if, contrary to Tesco's first submission, they had one).
The court answered both questions in the affirmative, dismissing Tesco's strike out application.
The decision is significant, because the vast majority of transactions in publicly held shares in companies listed in an exchange in the UK are held in dematerialised form through CREST, and the position of the claimants was entirely typical of the dematerialised securities market. If Tesco had been correct in its submissions, the effect would have been to expose a fundamental hole in the FSMA regime. Indeed, the court recognised that, had Tesco been successful, the likely consequence would have been to undermine the legislative scheme implemented by Parliament to reflect in domestic law the European Transparency Directive with a view to encouraging accurate and timely disclosure by issuers and promoting investor protection. The court held that it:
"...must proceed on the basis that the draftsman and legislature did understand the market in intermediated securities, did not intend to strip away the rights of investors who chose that mode of holding their investment, and must have been persuaded that the words they used were appropriate to preserve and enhance those rights."
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