High Court dismisses strike-out application in high-profile investor claim

OMERS Administration Corporation & ors v Tesco Plc; (1) Manning & Napier Fund, Inc. (2) Exeter Trust Company v Tesco Plc

Mr Justice Hildyard has today dismissed an application by Tesco to strike out claims for over £700m brought by two groups of institutional investors. The claims relate to Tesco’s profit overstatements, which were revealed in September 2014 and have led to widely-reported regulatory and criminal proceedings. The proceedings are the first claims to be brought under s.90A and Schedule 10A FSMA, provisions which were introduced to regulate the liability of issuers of UK securities for fraudulent financial reporting. The civil proceedings were issued in 2016/17 and are due to go to trial in June next year.

As is typical in the intermediated UK securities markets, the claimants were not the registered legal owners of the Tesco shares. Their investments in Tesco were held indirectly via custodians and nominees. In most cases, the registered legal owner of the shares was a sub-custodian or sub-nominee which was trustee of the legal title to the shares for another intermediary. Where the ‘custody chain’ involved more than one intermediary, the claimant was a beneficiary of a sub-trust of the shares.

In view of this, Tesco argued that the claimants do not have a claim under s.90A/Schedule 10A because (a) where the custody chain involved more than one intermediary, the claimant’s interest was not an “interest in securities” within the meaning of Schedule 10A, and (b) whether or not the custody chains involved multiple intermediaries, none of the claimants can be said to have “acquired, continued to hold or disposed of” any interest in securities, as required by the statute.  Tesco’s position was that the registered legal owners were unlikely to have a claim either, because they did not rely on Tesco’s financial reporting.

As Hildyard J observed, the issue raised by the application “is a systemic one of considerable importance” because, if Tesco’s argument is correct, “there is a fundamental hole in FSMA”. The provisions which were designed to enable investors in UK securities to vindicate their rights would be unfit for purpose.

Hildyard J rejected both limbs of Tesco’s argument, holding that (a) in each case the claimants have a sufficient “interest in securities” to claim and (b) any process by which the ultimate beneficial ownership of dematerialised securities comes to be, or ceases to be, vested in a person constitutes “the acquisition or disposal of any interest in securities” for the purposes of the legislation.

The judgment is available here.

Neil Kitchener QC, Richard Mott and Simon Gilson appeared for the SL Claimants (instructed by Stewarts).