The HP v Autonomy litigation: a £4.5 billion dog leg
The English High Court recently released a summary of its conclusions (the Summary) on civil liability in the proceedings brought by Hewlett-Packard (HP) against two former Autonomy executives, Dr Lynch (former Chief Executive Officer) and Mr Hussain (former Chief Financial Officer).
The proceedings relate to HP’s acquisition of Autonomy in 2011 for approximately US$11.1 billion. HP claimed that it overpaid for Autonomy, because Dr Lynch and Mr Hussain had fraudulently distorted Autonomy’s true financial performance. The High Court ruled that HP had "substantially succeeded" in its claims. The full judgment will be handed down in due course and the amount of damages will be determined at a later stage.
It is of particular interest that this was the first time that a claim under Section 90A and Schedule 10A Financial Services and Markets Act 2000 (FSMA) (FSMA Claim) has been considered during a full trial. HP also brought claims under the common law and the Misrepresentation Act 1967 directly against Dr Lynch and Mr Hussain, but we focus below on the FSMA Claim (which was the largest of HP’s claims) and its potential implications for prospective claimants.
The FSMA claim
In the Summary, the Court confirmed that “the gist of the FSMA claim is fraud on the part of the issuer (Autonomy) in respect of statements or omissions in its published information on which the Claimant relied in making an investment decision. It is claimed that “persons discharging managerial responsibilities within the issuers” (PDMRs) knew those statements or omissions to be untrue or misleading, or to amount to the dishonest concealment of a material facts [sic]”.
This neatly reveals two of the primary elements required for a FSMA Claim: (i) untrue/misleading information must be published to the market, which the claimant relied upon when making an investment decision; and (ii) PDMRs must be aware that these statements/omissions were misleading/untrue, i.e. they must have been dishonest. The defendants in this case did not dispute that they were PDMRs for the purposes of Schedule 10A FSMA, but all substantive aspects of the claims, including allegations as to their dishonesty, were contested.
The problem faced by HP was that a straightforward FSMA Claim by HP against the issuer (Autonomy) would mean that HP would be effectively suing itself, as HP now owns Autonomy, and liability can only attract to the issuer. As a result, the FSMA Claim was brought by HP under what the Court called a “dog leg” structure, by taking the following steps:
- HP notified Autonomy of the FSMA Claim against Autonomy
- Controlled by HP, Autonomy admitted both liability for and the amount due in respect of the claim and
- Autonomy sued Dr Lynch and Mr Hussain for the loss. Autonomy was able to do this because the provisions of FSMA enable an issuer to lay off its own liability by suing PDMRs on the basis that they were responsible for, or at least had knowledge of, the falsities.
This decision is an important development in the arena of claims in relation to losses of this kind suffered against the background of distorted financials. A FSMA Claim was also considered in the Tesco litigation, which related to losses suffered by investors following Tesco’s public over-statement of profits in 2014. However, in that case, prosecution of the allegations of dishonesty against the directors, Chris Bush and John Scouler (essentially, the PDMRs), were effectively subsumed into criminal proceedings brought by the Serious Fraud Office against the Tesco directors for fraud and false accounting. Although the criminal proceedings would not be dispositive of liability in the civil proceedings, the issue of PDMR dishonesty in the civil proceedings was nonetheless stayed pending the outcome of the criminal trial. In the event, Messrs Bush and Scouler were acquitted in 2018 following the collapse of the first trial and the retrial.
The Tesco litigation is to be contrasted with HP’s claims because Tesco remained an independent, going concern which was solvent and could be sued by those who had suffered loss, whereas HP was compelled to use the dog leg structure, having acquired Autonomy in its entirety.
It appears likely that it will become commonplace for prospective claimants to advance a FSMA Claim on the basis of this dog-leg structure in circumstances where there has been a take-over or acquisition of a controlling interest, or where there are problems with the solvency of the issuer which may be alleviated by pursuing PDMRs, who may themselves have assets that provide a source of redress. The dog leg structure enables claimants in this position to pursue a FSMA Claim that might otherwise be impossible or unviable, significantly bolstering the artillery of available claims beyond misrepresentation and deceit. The structure also ensures that the PDMRs themselves, against whom dishonestly is alleged, are sufficiently proximate and responsive to the proceedings, allegations, and evidence against them.
This novel formulation of the FSMA Claim has expanded the circumstances in which these claims may have application and the judgment is eagerly awaited so that the full reasoning behind the decision and impact on future claims can be assessed.