Representative actions for investors under 19.8 – to be or not to bifurcate
The Supreme Court in Lloyd v Google LLC [2022] AC 1217 (“Lloyd v Google”) shone a light on the availability of representative proceedings under CPR 19.8 (which was then CPR 19.6). In the recent decision of the High Court in Wirral v Indivior [2023] EWHC 3114 (Comm) the availability of the representative action procedure has been examined again, this time in the context of shareholder claims under ss90 and 90A of the Financial Services and Markets Act 2000 (“FSMA”).
Background
The factual basis of the claims centre on allegations that the defendant pharmaceutical companies engaged, through a US subsidiary, in a fraudulent scheme in the US. The fraudulent scheme is said to have taken place between 2006 and 2013 when the defendant companies were involved in the fraudulent marketing of a drug under the brand name “Suboxone” for treatment of opioid addiction. Upon the revelation of the scheme, the share price of the defendant companies fell significantly, resulting in losses to investors.
The focus of this judgment was whether the court would allow claimants to use the representative action procedure under CPR 19.8 in order for the court to dispose of issues relating to liability and the defendants’ conduct.
Wirral Council, acting as administering authority of Merseyside Pension Fund and as the representative claimant, brought “Representative Proceedings” on behalf of institutional and retail investors in the defendant companies who held, acquired or disposed of shares in the two defendant pharmaceutical companies (the “Claimants”). In Lloyd v Google, the Supreme Court indicated that the representative procedure could be suitable for claims of this sort, in particular in disposal of those issues relating to liability that were common to all claimants, referred to in this case as “defendant-side” issues, and this is the first time that this has been attempted for securities claims under these provisions of FSMA since the judgment in Lloyd v Google was given (and indeed ever).
The defendants issued applications to strike out the “Representative Proceedings” on the basis that representative proceedings were not appropriate for these claims. The defendants stated that the claims should be brought in the usual way by ordinary multi-party proceedings, with each purportedly represented person being a claimant. Of particular relevance in this case was that such proceedings had been issued by a large group of institutional investors, including those who sought to be represented by Wirral Counsel (the “Multi-Party Proceedings”). The Multi-Party proceedings were stayed pending resolution of these applications and became a feature of how the court disposed of the application.
The court’s case management powers
Under s90A FSMA, issuers of securities are potentially liable to investors who have suffered loss as a result of misleading statements or dishonest omissions in certain “published information” relating to the securities or a dishonest delay in publishing such information. Wirral’s case is that the defendants were required to disclose the facts and potential consequences of the fraudulent scheme and that the defendants knew that disclosure of the information would reduce the price at which the defendants’ shares would trade. It is a condition of liability under s90A and Schedule 10A FSMA that a person discharging managerial responsibility (a “PDMR”) within the issuer knew the published information contained an untrue or misleading statement or was reckless as to this.
In the interests of cost-efficiency, Wirral Council proposed a bifurcated process of the kind contemplated to by the Supreme Court in Lloyd v Google, proposing an initial representative trial of "common issues" of liability, and of the knowledge of a PDMR within the defendants of or recklessness as to the publication of misleading information, which were not dependent on any issue particular to any investor. This left a number of issues that were not common to the parties, and it was proposed that these would be heard subsequently on a multi-party basis, including: (i) the Claimants' standing; (ii) reliance on published information; (iii) causation; (iv) limitation; and (v) assessment of quantum.
The Claimants made submissions as to the advantages of the representative action mechanism, including the ability to avoid front loading costs for the Claimants and access to disclosure at an early stage. The Claimants argued that the benefits in terms of efficiency and access to justice applied both to institutional investors and retail investors. In the Representative Proceedings more retail investors would have access to funding and therefore an ability to partake in the claim.
The court determined that bifurcation was not an objective in itself, but a means to enable representative actions to proceed, particularly when there would be no other way for the proceedings to be brought, and in this case the presence of the Multi-Party Proceedings clearly demonstrated that there was another way for such proceedings to be brought. Allowing the Representative Proceedings to proceed in this instance would mean that a judge had no power to decide the best way to manage the claim (and the Multi-Party Proceedings) by reference to all relevant factors, and that would take away from the court "one of its prime functions to manage and deal with cases justly and at proportionate cost". The defendants also argued that the Representative Proceedings may impede settlement opportunities between the parties and would mean that the burden of litigation would not be shared between the parties.
Access to justice
The court noted that Lloyd v Google does not give claimants a unilateral entitlement to the bifurcated approach. The court determined that, in this instance, the proceedings would be dealt with more expeditiously overall if the Claimants were required to provide material in support of their individual claims and to engage with the proceedings from an early stage. The existence of the Multi-Party Proceedings showed that those claimants already had access to justice and therefore representative proceedings were not held to be required in this instance. The court held, at [48], that “"where there are perfectly feasible non-representative proceedings, the Court should be able to weigh whether those are preferable to representative proceedings both from the parties' and the Court's point of view".
Comment
Whilst the use of the representative action procedure under CPR 19.8 to bring shareholder claims under of the provisions of FSMA was refused in this instance, the door remains open for its use in a case with the right factual matrix, in particular where it can be shown that the proposed representative proceedings would not deprive the court of its ability to appropriately manage claims before it, and where the claims would not otherwise be capable of being brought. In this sense the judgment was in many ways responsive to the overall approach adopted in these particular proceedings and may have limited application to others that are structured differently and are without concomitant group proceedings.