Securities litigation - meaning of "persons discharging managerial responsibility" under FSMA

Introduction

In a recent decision the English High Court has clarified the meaning of “persons discharging managerial responsibility” for the purposes of establishing liability under s.90A/Sch 10A of FSMA. In doing so the High Court declined the defendant’s application for strike out and summary judgment of the institutional investors claim in Allianz Global Investors GmbH and Ors v G4S Ltd (formerly G4S plc) [2022] EWHC 1081 (Ch), on the basis that there was a real prospect of the claimants establishing civil liability at trial for statements made by senior management, but only if the claimants could establish that the senior management on whose conduct they rely were its de jure (i.e. statutory), de facto or (arguably) shadow directors at the relevant times.

Section 90A and Schedule 10A liability under FSMA

Section 90A and Schedule 10A of the Financial Services and Markets Act 2000 (FSMA) contain a regime for the civil liability of issuers of publicly traded securities for publication of false or misleading or incomplete information and for dishonest delay in publication of information to the capital markets.

The liability arises when a “persons discharging managerial responsibility” (PDMRs) within the issuer knew or was reckless about whether a statement was untrue or misleading and extends to omissions of relevant information and dishonest delay in publishing such information.

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Schedule 10A(5) sets out the definition of a PDMR as follows:

1. any director of the issuer (or person occupying the position of director, by whatever name called);
2. in the case of an issuer whose affairs are managed by its members, any member of the issuer;
3. in the case of an issuer that has no persons within paragraph (a) or (b), any senior executive of the issuer having responsibilities in relation to the information in question or its publication.

The factual background

The claimants are bringing claims against G4S as a follow on to findings against G4S regarding (i) wrongful billing (i.e. charging the government for dealing with prisoners who were never tagged or who had died) and (ii) providing fraudulent financial models to the government for the purposes of the calculation of the costs of providing services.

The claimants contend that as a result of the above matters, information published by the defendant to the market contained untrue and misleading statements, or omitted required information, and that the claimants are entitled to compensation as a consequence. Claims are also brought for compensation for dishonest delay in publishing information.

The practical issue in this case was that the defendant entity is a publicly listed holding company with operational companies beneath it. Of the 5 PDMRs identified by the Claimant, only the fifth person (P5) was a de jure director of the defendant. Persons one to four (P1 to P4) were de jure directors of the trading subsidiary in which the alleged financial model fraud and wrongful billing took place. P1 to P5 were also directors of other subsidiaries of the defendant.

The decision

The defendant applied to strike out all or parts of the claims and/or for summary judgment in respect of the claimants' allegations that P1 to P4 were PDMRs of the defendant within the meaning of section 90A.

There were therefore two key issues:

1. The meaning of PDMRs for the purpose of liability under 90A and Schedule 10A and whether, as the claimants argued, it extended beyond directors to include other senior executives responsible for managerial decisions affecting the future developments and business prospects of the issuer?
2. If the defendant's construction of the statute was right (i.e. only directors of an issuer can be PDMRs (including de facto and, arguably, shadow directors)), had the claimants properly pleaded at least a factually realistic case that the contested PDMRs were de facto directors of the defendant and that the case had real prospects of succeeding at trial?

In respect of the first issue – the claimants argued that PDMRs for the purposes of section 90A/Schedule 10A included senior executives responsible for managerial decisions affecting the future developments and business prospects of the issuer and/or those business units. This was on the basis that in defining the term PDMR the legislature had adopted an autonomous concept of European law found in EU financial regulation. Mr Justice Miles, however, agreed with the defendant’s argument that the definition in paragraph 8(5) of Schedule 10A is clear and unambiguous and should be given its natural reading. When read as a whole it clearly stipulates that where, as in the case of the defendant, the issuer has directors, those directors will be the PDMRs. It was also noted that there was no reason for thinking that the expression director should not be given its usual, well-established legal meaning, which importantly for the second issue includes de facto and (arguably) shadow directors.

In respect of the second issue – Mr Justice Miles found that, while the claimants’ pleaded case was not particularly clear, the claimants had a real prospect of establishing at trial that those persons on whose conduct the claimant relied on were de facto directors of the defendant at the relevant times. This meant the claimants were given the opportunity to demonstrate, as a question of fact, that those persons on whose conduct they relied were held out as directors by the company and carried out actions which may, or should, only be carried out by a board director. Given this was a question of fact and degree, this would likely require disclosure by the defendant and cross examination of witnesses to develop a full picture of the defendant’s corporate governance structure and the roles, decision making and actives of the contested PDMRs. As such, Mr Justice Miles refused to strike out/grant summary judgment to the defendants on this issue.

Conclusion

Securities litigation in the UK (with claims brought under s.90 or s.90A of FSMA) is a growing area but there have been limited court decisions on the application of the statutory regime. This is an important decision in a developing line of cases providing clarity on how the securities litigation regime under FSMA operates in practice.

It is quite possible that certain alleged PDMR’s in the context of future section 90A/Schedule 10A claims will fall outside the limited number of de jure directors of the listed defendant entity. This decision therefore provides guidance on the tests that need to be met for such individuals to amount to PDMRs under FSMA. Importantly, the judgment also makes clear that the assessment of the role played by an individual will be fact specific and is not likely to be suitable for summary determination.

Article co-authored by Alex Hamilton, Trainee Solicitor at CMS.