Companies Act 2006 – Section 1270

Liability for false or misleading statements in certain publications

1636. Section 1270 inserts sections 90A and 90B into FSMA and establishes a regime for
civil liability to third parties by issuers admitted to trading on a regulated market in respect of
disclosures made public in response to provisions implementing obligations imposed by the
Transparency Directive.

1637. Although no issuer has been found liable in damages under English law in respect of
statements made in narrative reports or financial statements, the law relating to financial
markets and to the obligations of issuers to investors on those markets has been developing,
in the light of increased regulation of both domestic and European origin. The Transparency
Directive has continued that process and increased the level of uncertainty as to whether any
actionable duty is owed by an issuer and its directors to investors.

1638. The Transparency Directive sets out the periodic financial disclosures that must be
made by issuers admitted to trading on a regulated market. Articles 4 and 5 of the
Transparency Directive provide for annual and half-yearly reports, including management
statements, to be made public, and requires statements made by persons responsible within
the issuer for these disclosures (the directors in the case of a public company) that these give
a true and fair view, and that the management report includes a fair review of certain matters. Article 6 requires the disclosure of interim management statements.

1639. The Transparency Directive also sets out the minimum requirements for a liability
regime that must be adopted by the UK at Article 7, and recital (17) states “Member States
should remain free to determine the extent of the liability”.

1640. These provisions give considerable flexibility to Member States in the liability regime
they choose to adopt in respect of disclosures under the Directive. The Government has
established an exhaustive regime in relation to ensuring the delivery and accuracy of these
reports including criminal offences, administrative penalties and actions for civil damages.
The provisions in this section relate only to the position in respect of the civil liability of
issuers on regulated markets to investors in their securities. The liability regime does not
cover issuers on exchange-regulated markets. Their position remains unchanged by
implementation of the Transparency Directive.

1641. While it is intended that there be no additional liability under the Directive in respect
of the disclosures to which it relates, the regime leaves undisturbed any other liability owed
by directors to the issuer and to members of the company under UK and other national law,
and any liability under other FSA rules. It also leaves undisturbed any liability of the issuer in
respect of any loss or damage arising otherwise than as a result of acquiring securities in
reliance on the relevant statement or report.

1642. The primary liability of directors and issuers for the accuracy of the required
disclosures comprises criminal offences and administrative penalties under the provisions of
Part 15 of this Act and Part 6 of FSMA. The provisions in Part 6 require compliance with
FSA rules giving effect to the obligations in the Directive and provide for penalties in respect
of failure to comply with the rules. In addition, restitution can potentially be ordered by the
court, on application of the Authority or Secretary of State, under section 382 of FSMA or by
the Authority directly under section 384 of FSMA.

1643. The Government’s intention in developing a civil liability regime has been to provide
certainty in an uncertain area and to ensure that the potential scope of liability is reasonable,
in relation both to expectations and the likely state of the law after the implementation of the
Transparency Directive. In particular, the Government was anxious not to extend
unnecessarily the scope of any duties which might be owed to investors or wider classes of
third parties, in order to protect the interests of company members, employees and creditors.
However, as the state of the law after the implementation of the Transparency Directive is not
certain, the Government has taken a power, at new section 90B, that will enable the provision
introduced by section 1270 to be added to or amended if a wider or narrower civil liability
regime is deemed appropriate.

New section 90A: Compensation for statements in certain publications

1644. Subsection (1)(a) of new section 90A provides that the civil liability regime set out in
that section applies to those reports and statements required by provisions implementing
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Articles 4 to 6 of the Transparency Directive. Depending on transparency rules, we would
expect this to include annual and half yearly financial statements and management reports,
the sign-off by directors or other responsible parties, as well as interim management
statements.

1645. Subsection (1)(b) adds to the scope of the regime the information included in
preliminary announcements of results made in advance of the reports and statements required
by provision implementing Article 4 of the Transparency Directive, but only to the extent that
it is intended that the information will appear in the final report or statement and be presented
in substantially the same form as that in which it is presented in the preliminary
announcement.

1646. Subsection (2) sets the scope of the civil liability regime to cover securities of all
issuers for which the UK is the home Member State (whether the regulated market on which
they are traded is situated in or outside the UK), as well as to cover those issuers whose
securities are traded on a regulated market situated in the UK and for whom the UK is the
host Member State. UK holders of securities of other issuers (i.e. those for whom the UK is
neither a host nor a home State) will not be able to rely on the rights of action set out.

1647. Subsection (3) provides that issuers of such securities are liable to pay compensation
to a person who has acquired those securities and has suffered loss in respect of them as a
result of any untrue or misleading statement in a publication to which this section applies, or
an omission of a required statement from such a statement. Subsection (4) however limits the
liability of the issuer to circumstances where a “person discharging managerial
responsibilities” in relation to the publication within the issuer (see subsection (9)) knows the
statement to be untrue or misleading, or is reckless as to whether the statement is untrue or
misleading, or, in the case of omissions, where it is known to be a dishonest concealment of a material fact.

1648. Subsection (5) provides that loss will not be regarded as having been suffered for the
purposes of subsection (3) unless the person suffering it acquired the relevant securities in
reliance on the information in the publication and at a time when and in circumstances where
it was reasonable to rely on that publication.

1649. Subsection (6) limits the liability with regard to untrue or misleading statements, or
omissions, in documents to which the section applies. It sets out that issuers are not liable for
any liability other than that provided for by the section and that any person who is not the
issuer is not liable, other than to the issuer.

1650. Subsection (8) clarifies that the section does not affect Part 6 of FSMA conferring
liability for a civil penalty, liability for a criminal offence or the right to seek restitution.

1651. Subsection (9) sets out the persons who are to be considered as discharging
managerial responsibilities for the purposes of the section. This is any director of the issuer,
or where the issuer’s affairs are managed by the members, a member of the issuer. In the case
where the issuer does not have directors, or members, any senior executive with
responsibilities in relation to the publication is considered as discharging managerial
responsibilities.

New section 90B: Power to make further provision about liability for published
information

1652. Subsection (1) of new section 90B establishes a power to make further provision
about liability for published information. The new section allows the Treasury by regulations
to amend any primary or subordinate legislation relating to the liability of issuers and others
in respect of information, including the regime set out in new section 90A of FSMA. The
exercise of the proposed power could, for example, result in that regime or some other
appropriate regime applying to other classes of information, such as information that is
required to be disclosed by issuers to shareholders or markets under the Market Abuse
Directive (MAD).

1653. Regulations made under the section would be made using the affirmative procedure
(see the amendment to section 429(2) of FSMA made by paragraph 12 of Schedule 15).

Section 1271: exercise of powers where UK is host member State

1654. Section 1271 inserts a new section into Part 6 of FSMA: section 100A.

1655. New section 100A sets out the Authority’s ability to exercise powers in relation to
infringements of prospectus rules and transparency rules or related provisions where issuers’
home State is not the UK. Subsection (2) clarifies that the enforcement powers extend only to
cover infringements required by the relevant directive. Subsection (3) sets out the process by
which the Authority must engage with the home State competent authority when it finds there
has been an infringement. Subsection (4) sets out limitations on the Authority’s ability to act
in those circumstances, but subsection (5) provides that, in the appropriate circumstances, it
must take all appropriate measures to protect investors.

1656. Subsection (6) imposes an obligation on the Authority to inform the Commission
where it takes action to protect investors.