Caveat emptor - Institutional investor due diligence tips
1 Recent judgments in the English Courts send a clear due diligence warning to institutional investors
As our most recent newsletter explained, recent decisions in the English courts have put investors in London's international securities market on notice of the need to review thoroughly all new issue offering materials, including prospectuses if, later in the prosecution of any misselling claim, they are to plead reliance on representations made in those offering documents.
2 Protections afforded to investors in new issues of securities listed in London
Section 90 of the Financial Services and Markets Act 2000 is designed to protect investors in securities that are listed on the London Stock Exchange.
It provides that “Any person responsible for listing particulars is liable to pay compensation to a person who has
(a) acquired securities to which the particulars apply; and
(b) suffered loss in respect of them as a result of— (i) any untrue or misleading statement in the particulars; or (ii) the omission from the particulars of any [prescribed information]".
Such prescribed information includes "all such information as investors and their professional advisers would reasonably require, and reasonably expect to find there, for the purpose of making an informed assessment of:
(a) the assets and liabilities, financial position, profits and losses, and prospects of the issuer of the securities; and
(b) the rights attaching to the securities".
Crucially, there is no reliance requirement that the investor should have read or relied on the listing particulars for claims under section 90.
3 The risks for investors in transactions not listed in London
No such protections exist in English law in respect of new issues of securities that are not listed on the London Stock Exchange. So what is the position in relation to securities that are structured in, or sold out of London, such that there is sufficient nexus for the English courts to accept jurisdiction to hear any misselling claim brought by primary investors?
Express representations
Express representations made in new issue offering documents must be read, understood and relied upon by an investor at the time of the new issue, if those representations turn out to have been false and the investor seeks to bring a misselling claim in the English courts.
Moreover, there exists no general requirement in English law for investors to be provided with all such information as would be required to make an informed assessment of the transaction (as is required by section 90 of FSMA).
Implied representations
An investor may seek to allege the breach of an implied representation in certain circumstances. These include situations where, subsequent to any new issue of securities,
i. facts come to light that adversely affect the market price of the securities (or indeed, that trigger an event of default, in the case of debt securities); and
ii. those facts were known to the issuer (or to the arranging bank or bank underwriters) but not disclosed in any offering documents.
Aggrieved investors that seek to bring an action in the English courts for misselling will not be able simply to allege failure to disclose material facts or a particular state of affairs. Rather, it is now very likely that an investor will need to show that it had given conscious thought, at the time of purchase, to the possibility of those material facts or state of affairs existing.
With regard to implied representations then, a claimant investor will need to identify particular knowledge which an issuer can be shown to have possessed, but did not disclose in the offering documents. It will not be sufficient for the investor to argue that it would have been a reasonable assumption that such knowledge would have been disclosed in the offering documents.
Instead, it will be necessary for the investor to show that the facts or state of affairs which were not disclosed at the time of issue, but which have subsequently caused, or contributed to, the loss suffered by the investor were scenarios that it had indeed given thought to. Further, the investor must be able to prove that had those facts or state of affairs been disclosed in the offering documents, then that disclosure would have had a material bearing on its investment decision.
4 Affected transactions
Affected transactions will comprise new issues of securities that are both:
- structured in London and/or sold/syndicated from London (which may include equity, straight debt or structured finance transactions (including securitisations)); and
- securities listed on the Luxembourg Stock Exchange or any other stock exchange, except the London Stock Exchange, and any unlisted securities.
5 Conclusion
Recent cases show that investors wishing to preserve the right in future to bring misselling claims in the English Courts (other than in relation to London-listed securities) should:
i. put in place "read and take note of" procedures to identify express representations in all offering documentation provided to them by or on behalf of the issuer; and
ii. address the challenge of identifying those reasonable assumptions that they may make in relation to any matter potentially relevant to the issue of the securities, but which have not been addressed in the offering documents.
Any institutional investor in the international capital markets wishing to receive further background on this subject, should contact us here.