Civil Liability

Question 1

What is s. 90 liability?

Answer 1

S. 90 FSMA: False and Misleading Statements
S. 90 FSMA sets out the most important investor remedy against a false or misleading statement in a prospectus.
- It requires a person responsible to pay compensation to a person who has acquired securities to which the particulars apply and suffered loss in respect of them as a result of any untrue/misleading statement or omission.
- Persons responsible are those as listed in PRR 5.3.2R(2)

Question 2

Advantages of a s. 90 FSMA action:

Answer 2

• No need for injured party to show reliance which would be necessary to prove negligent misstatement; only need a causal connection between the misstatement and the loss suffered
• No need to show inducement (which would be necessary to prove misrep)
• Available to both original investors and subsequent purchasers (though a longer time interval will make it difficult to show causal connection)

Question 3

Defences?

Answer 3

• However, liability under s.90(1) may be avoided if an exemption is applicable under Schedule 10 FSMA:
  i) Para 1(2): no liability where person reasonably believed (having made enquiries) that the statement was true and not misleading or matter was properly omitted and the condition in para. 1(3) are satisfied.
  This provision highlights the importance of verification as evidence of D’s reasonable belief
  ii) Para 3: no liability if before the relevant securities are acquired either:
  a) a correction has been published in a manner calculated to bring it to the attention of persons likely to acquire the securities.
  b) the person concerned has taken all such steps as are reasonable to secure such publication and reasonably believed that publication had taken place.
  • If a mistake or inaccuracy comes to light before the securities are admitted to trading, then the publication of a supplementary prospectus (see paragraph 7 of this Lecture) is likely to provide a Schedule 10 defence to the directors.
  • If it comes to light after the securities have been admitted to trading, the directors may face liability in relation to the original prospectus if they knew about the matter at the time of publication and have not since published a correction.
  • However, if they have corrected such matter before the acquisition of the securities (e.g. through an RIS announcement), Schedule 10 FSMA will again protect them.
  iii) Para 6: a director may also be able to avoid liability under s.90(1) or (4) if he or she satisfies the court that the person acquiring the relevant securities:
  a) knew that the statement was false or misleading; or
  b) knew of the omitted matter; or
  c) knew of the change or new matter.

Question 4

Liability for breach of the LPDT Rules

Answer 4

• Ss.91(1), 91(1A), 91(1B) and s.91(2) FSMA: the FCA can impose penalties for breaches of the LPDT Rules and also of the Prospectus Regulation itself.
• This could include, for example, a breach by the applicant company of its obligation:
  a) under PRR 3.1.4R to take all reasonable care to ensure that its prospectus contains all of the necessary information required by Art. 6, Prospectus Regulation and all of the information items required in the relevant Annexes of the PR Regulation; or
  b) under PRR 3.1.5R to take all reasonable care to ensure that any prospectus submitted for approval for which it is responsible is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import.
  IMPORTANT - Note that the FCA is entitled to impose penalties under s.91 FSMA even if the relevant breach did not cause loss to any investor. This contrasts with the position under s. 90 FSMA.

Question 5

Other civil liabilities

Answer 5

Other liabilities may arise from the tort of negligent misstatement (Hedley Byrne v Heller), breach of contract or misrepresentation.
• Negligent misstatement – only available if a duty of care is owed, the duty is breached, and loss is suffered (reliance needed)
• Misrepresentation – may allow rescission or damages, need to show inducement
• Breach of contract – possible claim for loss of bargain i.e. for the value of what the securities would have been worth had the statement in the prospectus been correct.