Shareholder litigation: A round-up of interesting developments
The past six months have seen several interesting and significant judgments and developments in shareholder litigation, relating to both substantive law and procedural issues such as the structuring of claims. Broadly, the decisions have been favourable to corporate defendants rather than shareholder claimants and so will be welcomed by companies and financial institutions alike.
In this article we summarise some of the more important developments which are relevant to shareholder claims brought under s.90 and s.90A Financial Services and Markets Act 2000 (FSMA) and to other shareholder litigation such as unfair prejudice petitions and breach of duty claims.
Securities litigation and passive investors
S.90A and Schedule 10A FSMA provide that issuers of securities may be liable to pay compensation to persons who have suffered a loss because of misleading statements or dishonest omissions in certain published information relating to the securities. To qualify, a person must have acquired, continued to hold or disposed of the relevant securities in reliance on the information in question. The test for establishing reliance is therefore important as it could act as a significant limitation on the scope of securities litigation, especially for passive investors such as index tracker funds where investors may not have read or considered the relevant information.
There have been two recent important High Court decisions considering the requirement for ‘reliance’ by shareholder claimants in securities litigation under s. 90A and Schedule 10A of FSMA. In both cases summarised below, the defendant applied for “reverse” summary judgment, to strike out claims brought by claimants who had not actually read or considered the published information complained about. The two judges took different approaches, partly disagreeing on what was required to show reliance and whether it should be determined at the summary judgment stage, and so the correct legal test is currently uncertain.
In the first case, Allianz Funds Multi-Strategy Trust & Ors v Barclays Plc [2024] EWHC 2710 (Ch), Leech J held that ‘reliance’ in s90A referred to the settled common law test of reliance as used in the tort of deceit. To establish the necessary reliance on an express representation, claimants must show that they read or heard the representation, they understood it in the sense they allege was false and it caused them to act in a way which caused them loss. The judge rejected a wider US-style ‘fraud on the market’ approach to reliance, i.e. it was not enough that when making their investment decisions the claimants had relied on the company’s share price in an efficient market where the share price takes into account published information. The judge reviewed the consultation leading to the amendment of s90A and the introduction of Schedule 10A which showed that ‘reliance’ was intended to be an important control on the scope of liability to investors.
Where the relevant failure was an omission rather than a statement, Leech J decided that the test was whether the claimant had relied on the published information from which the statement was omitted; it was not necessary to show the claimant relied on the omitted statement.
Based on that analysis, Leech J ordered the strike out of approximately 60% of the value of the claims because there was no real prospect of the claimants succeeding at trial in proving reliance: the index tracker funds did not read or consider the relevant documents relating to one constituent of that index while carrying out their investments. Leech J refused permission to appeal this decision. The claim settled shortly after and so the issue was not pursued further by the parties. See our earlier article here for further details of this decision.
Relying on that judgment, the defendant made a strike out application in broadly similar s90A securities litigation in Persons Identified in Schedule 1 v Standard Chartered PLC [2025] EWHC 698 (Ch). The defendant applied to strike out those claims based on a “fraud on the market” approach to reliance, referred to in this case as the “Common Reliance Claims”. The defendant argued that as Leech J had definitively ruled in Allianz on the meaning of ‘reliance’ in the relevant paragraphs of Schedule 10A, the judge in this second case was bound to follow that decision as a matter of judicial comity unless he was convinced that it was wrong. Green J held that he was not convinced that the judgment was wrong, and indeed Leech J could well be right. However, Green J refused to strike out the Common Reliance claims. He held that this is a developing area of law, in that (prior to Allianz) there had been no decision on the meaning of ‘reliance’ in Schedule 10A, and certain elements of the test of reliance in the common law are not fully established. In his view, such disputed legal questions should be resolved on the basis of the actual facts established at trial, not on assumed or hypothetical facts in an interim application. Further, there were differences compared with the Allianz claim such that striking out the Common Reliance Claims would not substantially reduce the burden of the trial itself, for example, in Allianz there had been no directions relating to the trying of the claims that had been struck out and therefore little time and money had been spent on them.
Regarding the correct test for reliance, and the application of it on a summary judgment basis, Green J had a several concerns. He had doubts whether Parliament intended the common law test for reliance to be adopted for Schedule 10A because it resulted in an inconsistency between the test for misstatements and for omissions (as explained above) despite Schedule 10A applying the same requirement to both situations. It was arguable that a broader test was intended that would also encompass omissions. Further, the precise line between indirect reliance which might be sufficient to bring a claim (for example, a “buy” recommendation from a financial advisor based on published information) and the Common Reliance Claims based on market price influenced by the same information was not easy to draw and was a matter for evidence to be tested at trial. The law in relation to implied representations was also developing and uncertain. As Green J was deferring the question of the meaning of reliance to trial and not determining it, judicial comity did not require him to follow Leech J’s decision to grant summary judgment.
Both investor claimants and corporate defendants will be watching the development of this issue closely. We will not have a settled position on the issue until a final trial or it is considered by an appellate court.
Representative proceedings in shareholder claims
In Wirral Council v Indivior PLC [2025] EWCA Civ 40 the Court of Appeal upheld the High Court’s decision to strike out the first attempt to bring a group shareholder claim under s90/90A FSMA as a representative action under CPR19.8. The decision will be welcomed by defendants to representative actions as it emphasises the importance of the courts’ case management powers and prevents claimants and litigation funders using the representative procedure to gain a tactical advantage in the litigation.
CPR 19.8 provides that where more than one person has the “same interest” in a claim, one person may bring a claim as a representative on behalf of the group. In this case, the claimant brought a representative action on behalf of various institutional and retail investors pursuant to s.90/90A of FSMA in respect of alleged fraudulent statements and dishonest information published by the defendant company. The claimant structured its claim as a ‘bifurcated’ claim i.e. it proposed to use the representative action to seek a declaration on the issues common to the represented class, with individual claims to follow on. The common issues related solely to the defendant’s knowledge of or recklessness regarding the publication of the misleading information. The ‘claimant issues’, including their reliance on the information, causation and loss, would be determined in the follow-on claims. Under this approach, the whole burden would be on the defendants at the initial representative stage and the individual claimants would not be required to develop or particularise their case.
The Court of Appeal held that the Courts have discretion on whether to allow a claim under CPR 19.8 to proceed even if the ‘same interest’ test is met, noting that the Supreme Court in Lloyd v Google did not suggest that in a comparative exercise, representative proceedings would always prevail over multi-party proceedings. The Court of Appeal emphasised the importance of the courts maintaining their case management powers. The object of using the bifurcated representative procedure in this case was to avoid the court using its case management powers to order the claimants to advance some of the claimant-sided issues in parallel with the defendant-sided common issues (as had been ordered in other s.90 FSMA claims proceeding as multi-party claims). The effect of using the procedure would be to make the litigation burden very one-sided at the initial stage and, critically, to deprive the court of its powers to strike out speculative unmeritorious claims. In particular, the claimants would not be required to identify which head of reliance they relied on following the decision in Allianz discussed above, which would enable speculative litigation to continue. The Court of Appeal held that the continued pursuit of the claims by way of the multi-party proceedings was feasible and in accordance with the overriding objective. The court could still adopt a bifurcated approach with a trial of common issues at the first stage, but importantly it would have case management powers to order disclosure of evidence in relation to individual issues to be produced in tandem.
While the decision was made on the facts of the case, these considerations will limit attempts to use bifurcated representative proceedings in a similar way in other securities litigation and other group claims. See further information in our article here.
Privilege – the ‘Shareholder Rule’
The so-called Shareholder Rule is the principle that a company cannot assert legal privilege against its shareholders save in relation to documents created for litigation against that shareholder. The Shareholder Rule has become an important issue in litigation against listed companies where shareholder claimants have relied on the Rule to seek disclosure from the company of privileged legal advice the company had previously received.
In a recent important decision, a High Court judge conducted a detailed review of the previous authorities and held that, contrary to the longstanding view, the Shareholder Rule does not exist in English law with the consequence that companies can assert privilege generally against their shareholders. The parties have sought permission from the Court of Appeal to appeal this decision (the Supreme Court having declined to hear a direct “leapfrog” appeal). This judgment followed a 2023 decision in which a different High Court judge cast doubt on the foundations of the Rule but ultimately did not have to decide whether it should be applied as on the facts further disclosure was refused for case management reasons. We understand that the Rule is also due to be considered by the Privy Council in the first half of 2025 in an appeal from the Bermudan Court of Appeal.
The status of the Shareholder Rule is therefore uncertain, as are potentially important ancillary issues such as whether it ought to be held to apply to indirect shareholders, former shareholders, successors in title and subsidiary companies within a corporate group. For now, parties will need to tread carefully if they are facing such issues in litigation or there is a prospect of potentially sensitive privileged advice being sought as part of disclosure in litigation.
Litigation funding
Group claims, including shareholder actions, are often backed by litigation funders. However, following the Supreme Court’s judgment in PACCAR (explained further below) there remains uncertainty around the structuring of litigation funding agreements (LFAs). The current position is that we await the potential legislative response to PACCAR and possible further regulation of the litigation funding sector; this may impact how viable and attractive shareholder claims are to funders, which in turn could impact on the ability of claimants to bring claims.
In PACCAR, the Supreme Court ruled that LFAs that remunerate the litigation funder by reference to a proportion of the damages ultimately recovered constitute damages-based agreements (DBAs), with the effect that many LFAs were likely to be unenforceable because they would not satisfy the stringent conditions required for DBAs. This had several consequences. From a political and regulatory perspective, the previous government proposed legislation to reverse the effect of PACCAR but it was not enacted before the UK general election was called in 2024. The current government does not plan on introducing any legislation to address litigation funding until the Civil Justice Council (CJC) concludes its review and report on third-party civil litigation funding. The CJC’s final report is not due until Summer 2025. While the CJC did publish an interim reportion on 1 October 2024, it did not make any recommendations; rather it set out the background to the development of litigation funding and included consultation questions regarding the regulation and operation of third-party funding. As a result, some regulation of the litigation funding sector is anticipated, but it remains to be seen how it will affect the remuneration of funders and when relevant legislation will be brought forward.
In the meantime, following PACCAR, many funders amended their LFAs to avoid being caught by the decision, for example by changing the remuneration basis in their LFAs from a percentage of damages to a multiple of sums invested and providing that remuneration based on a percentage of damages would only be payable to the extent permitted by the applicable law. We have seen several challenges to the legitimacy of amended funding agreements, including in competition claims such as the claims against Apple and Sony. The Competition Appeal Tribunal held that LFAs in which the funder’s fee was based on a multiple of the funding provided, rather than a proportion of damages recovered were not DBAs. Appeals against these decisions to the Court of Appeal were stayed when the previous government looked set to legislate quickly to overturn PACCAR. However, the Court of Appeal has now ruled that the appeals should be allowed to progress because, as set out above, any decision on the future of litigation funding, let alone any legislation, is some time away. The appeals are due to be heard in the first part of 2025. It will be interesting to see how this issue develops over the next year or two.