On 28 October 2019, the High Court gave judgment in SL Claimants v Tesco Plc [2019] EWHC 2858 (Ch). This decision provides clarification on the nature of the interest in securities required to claim against an issuer in respect of the contents or timing of certain published information under section 90A / Schedule 10A Financial Services and Markets Act 2000 (FSMA). It also provides general commentary on the nature of an investor’s legal interest in securities held through CREST.

Section 90A and Schedule 10A FSMA create a statutory liability regime for issuers of certain traded securities in relation to misleading statements or dishonest omissions in certain published information (or a dishonest delay in publishing such information). In broad terms, issuers are required to pay compensation to persons who acquire, continue to hold or dispose of an ‘interest in securities’ in reasonable reliance on published information to which the provisions apply.   This case concerned shareholder claims under these provisions against Tesco plc about statements to the market in 2014. The claimants held their shares in de-materialised form on CREST (i.e. the form in which the vast majority of shares in publicly traded companies are held).

Tesco applied to strike out the claims on the basis that:

(1) the claimants’ interest in their shares was not an “interest in securities” for the purposes of Schedule 10A, because the claimants lacked an equitable interest in the Tesco shares. Tesco’s argument was based on the fact that the claimants’ shares were held through a chain of intermediaries (banks / securities firms acting as custodians and sub-custodians) on CREST, which it argued did not amount to a proprietary interest in the shares, only an economic interest; and

(2) even if the claimants had an “interest in securities”, none of the claimants “acquired” or “disposed” of securities within the meaning of Schedule 10A. Tesco’s argument was that the most the claimants had was a beneficial interest created or extinguished on transfer, but not acquired or disposed of for the purposes of Schedule 10A.

Tesco accepted that its arguments would render the statutory regime ineffective in relation to all claims by holders of securities through intermediaries (i.e. most holders of traded securities). It argued however that this was a consequence of inadequate legislative drafting / failure to amend the statutory regime to cover securities held through a chain of intermediaries.

The High Court rejected Tesco’s arguments, holding in summary:

(1) the claimants’ rights in their shares on CREST, notwithstanding such rights being held through a chain of intermediaries, amounted to them being the “ultimate beneficial owner”. This was an equitable / proprietary right in law, a conclusion supported by In the matter of Lehman Brothers International (Europe) [2012] EWHC 2997 (Ch). Accordingly, persons such as the claimants holding intermediated securities through CREST had an “interest in securities” for the purposes of Schedule 10A; and

(2) Tesco’s approach on the scope of “acquired” or “disposed” was too narrow an interpretation. “Acquisition or disposal of any interest in securities” under Schedule 10A includes transaction(s) on CREST (through a chain of intermediaries) which cause ultimate beneficial owners such as the claimants to be vested (or cease to be vested) with securities admitted to trading on a relevant securities market.