Statutory regime for Issuer Liability

Background

In 2006, a new section 90A of the Financial Services and Markets Act 2000 (FSMA) established a statutory civil liability regime for misstatements to the market by issuers of securities admitted to trading on regulated markets, under which issuers would be liable for fraudulent misstatements in periodic disclosures to the market as required under the Transparency Directive (2004/109/EC). This clarified the previously uncertain common law regime.

The scope of the statutory regime was restricted to the area in which statutory provision was required by the Transparency Directive because of the differences of opinion among stakeholders with regard to the impact of any further extension. However, anticipating the benefits of expansion, the Government was granted in section 90B of FSMA, powers to extend the scope of the regime by regulation.

In response to stakeholder concerns about the consistency of the new statutory liability regime and whether common law rights of shareholders were at risk, Professor Paul Davies of the London School of Economics was asked to advise on potential changes to ensure that the regime was comprehensive and soundly based. He reported in 2007 and the Government now proposes to implement proposals that substantially follow his recommendations.

Consultation on extending the statutory regime

The Government published its proposals to extend the statutory regime on issuer liability on 17 July 2008.

The extensions proposed to the scope of the statutory regime follow Professor Davies' recommendations, with adjustments to reflect the implementation issues arising during preparation of the proposals. The following changes are proposed:

from the current scope of issuers with securities admitted to trading on regulated markets (such as the Main Market of the London Stock Exchange) to include issuers with securities admitted to trading on UK multilateral trading facilities (MTFs, such as AIM and the PLUS-quoted market);
to issuers with securities admitted to trading on an EEA regulated market or MTF (provided they have a registered office in the UK or the UK is their home state under the Transparency Directive);
to a broad range of ad hoc and periodic disclosures to markets (at present the regime is restricted to periodic disclosures required under the Transparency Directive). This is to be achieved by extending the regime to information disclosed by issuers by means of a recognised information service. A recognised information service would be defined as any service used to publish regulated information under the Transparency or Market Abuse Directives or information required to be published under the rules of an MTF. The person claiming damages would not have to show that the relevant information was obtained from the recognised information service;
to permit sellers of securities to recover losses incurred through reliance on fraudulent misstatements (at present only buyers are permitted to recover);
to permit recovery for losses resulting from dishonest delay of a disclosure. An issuer would be liable where the delay is a dishonest act and is for the purpose of enabling a gain to be made or to cause loss to another or expose another to a risk of loss.

The consultation document is available in Adobe Acrobat Portable Document Format (PDF). If you do not have Adobe Acrobat installed on your computer you can download the software free of charge from the Adobe website. For alternative ways to read PDF documents and further information on website accessibility visit the HM Treasury accessibility page.

Extension of the statutory regime for issuer liability (PDF file, 350KB)

Responses to the consultation are due by 9 October 2008 and should be sent to:

Issuer Liability Consultation
Savings and Investment Team
Room 3/20
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ

Or by email to: issuerliability@hm-treasury.x.gsi.gov.uk

Final report of the Davies Review

The Final Report of Professor Davies’ review was published on 4 June 2007, providing a thorough analysis and clear explanation of the recommendations to the Government. The Review made the case for exercising the powers conferred by the new section 90B of FMSA 2000 to:

extend the statutory liability regime to cover ad hoc as well as periodic disclosures;
extend the statutory liability regime to apply to disclosures by issuers with securities traded on exchange-regulated markets, including AIM and Plus Markets;
identify relevant disclosures to be covered by the statutory regime as all RIS announcements, but without prejudice to the rights of shareholders and others arising out of company circulars addressed to them;
ensure that the statutory regime encompasses liability for dishonest delay in making RIS announcements;
extend the statutory regime to confer rights on both buyers and sellers of shares, but to exclude those who continue to hold (or not buy) shares from suing in respect of misstatements in RIS announcements.

The full Final Report can be accessed at the link below.

Final Report of the Davies Review of Issuer Liability (PDF file 327KB) ISBN: 978-1-84532-306-6

Responses to Professor Davies' Discussion Paper

In March 2007, having reviewed in more depth the issues raised by respondents to the Government's previous consultation, as well as considered research and information from other interested parties, Professor Davies published his analysis by way of a discussion paper. The purpose of his paper was to invite further comments from interested parties and to seek views on a number of questions arising.

Liability for misstatements to the market: A discussion paper by Professor Paul Davies QC (PDF file 372KB) ISBN: 978-1-84532-299-1

Professor Davies received over 40 responses to his discussion paper. Unless respondents asked for their submission not be posted on the Davies Review website, these can be viewed through the following link:

Responses to the Davies Review

Academic reviews of issuer liability in foreign markets

Professor Davies commissioned academic reviews of the liability for misstatements to markets in France, Germany, Australia and the US.

Professor Paul Davies QC: biography

Paul Davies has been the Cassel Professor of Commercial Law at the London School of Economics since 1998 and is one of the foremost company law experts. He has written widely on company law and is editor of Gower's Principles of Modern Company Law. He played a major part in the recent Company Law Review and other policy working groups. Professor Davies was appointed an honorary Queen's Counsel (QC) in October 2006, an award made in recognition of outstanding contribution to English law.

Terms of Reference of Davies Review

The Davies Review will:

Consider the law relating to liability in damages of issuers of securities traded on a regulated market or alternative markets (such as AIM or Plus Markets) in respect of statements and publications made to the market and which are incorrect, false or misleading or have not been made promptly;
Consider how any such liability may be affected by regulatory obligations attaching to issuers and directors;
Consider the case for providing for a specific right to damages by those relying on such statements and publications in the context of securities market activities, in particular: the circumstances that might give rise to a right, against whom a right might be enforceable and the consistency with the effect of corporate governance and conventions, standards or rules affecting the information that issuers publish to shareholders and others and how they publish it;
Consider the impacts on:
- issuers, markets, investors and others;
- the quantity and quality of information disclosed;
- the competitiveness of the UK as a good place to do business;
Take into account the liability of issuers and their managements in other centres of financial services in Europe or more widely including the USA;
Make recommendations to the Treasury on whether to exercise the section 1270 power and, if so, how.

In making recommendations to the Treasury, the Review will advise on:

options for a new regime if recommended;
who might bring actions to sue for damages;
the kinds of damages that might be awarded and potential effects of paying those damages on issuers, including effects on their business and employees, directors or senior executives, and on the supply of qualified individuals willing to take on director and non-executive director roles in consequence;
and other related matters.

Background papers and related links

The full text of the Ministerial statements relating to developing a liability regime for damage suffered by reliance upon disclosures required by the Transparency Directive and the full Terms of Reference for the Davies Review are available below.

Government's previous consultation documents on the Transparency Directive and extending the scope of the statutory damages regime.

Full text of the Companies Act 2006 and section 1270 (OPSI website)

The documents on this page are available as PDF documents. If you do not have Adobe Acrobat installed on your computer you can download the software free of charge from the Adobe website. For alternative ways to read PDF documents and further information on website accessibility visit the HM Treasury accessibility page.