PDMRs in Securities Fraud Litigation: Various Investors v G4S

William Harman |

On 10 May 2022, Mr Justice Miles handed down the first substantive decision on the meaning of a “person discharging managerial responsibilities” (“PDMR”) under section 90A and Schedule 10A of the Financial Services and Markets Act 2000 (“FSMA”).

In Various Investors v G4S Limited (formerly known as G4S plc) [2022] EWHC 1081 (Ch), the Court held on a strike out / summary judgment application by the defendant that the definition of a PDMR is restricted to the de jure, de facto or (arguably) shadow directors of the defendant. However, the defendant had not persuaded the Court that the claimants lacked a real prospect of establishing at trial that certain alleged PDMRs were de facto directors of the defendant at the relevant times. Accordingly, the application was dismissed.

Shail Patel of 4 New Square Chambers acted for the successful claimants.

The Statutory Regime

Section 90A and Schedule 10A of FSMA contain a regime by which investors can claim statutory compensation for loss suffered in respect of untrue or misleading statements, material omissions and dishonest delays relating to certain categories of information published to capital markets by issuers of publicly traded securities in the United Kingdom.

Under paragraph 3(2) of Schedule 10A, an issuer is liable in respect of an untrue or misleading statement only if a PDMR within the issuer knew the statement to be untrue or misleading or was reckless as to whether it was untrue or misleading. Paragraphs 3(3) and 5(2) impose an equivalent PDMR knowledge requirement on claims in respect of material omissions and dishonest delay.

Paragraph 8(5) provides that for the purposes of Schedule 10A the following are PDMRs: (a) any director of the issuer (or person occupying the position of a director, by whatever named called); (b) in the case of an issuer whose affairs are managed by its members, any member of the issuer; and (c) in the case of an issuer that has no persons within categories (a) or (b), any senior executive of the issuer having responsibilities in relation to the information in question or its publication.

The Decision in G4S

In G4S, the claimants bring three claims under section 90A alleging that wrongful billing practices and the provision of fraudulent financial models to the government rendered statements by the defendant in its published information untrue; and that the failure to disclose these matters was a material omission and constituted an actionable dishonest delay. The claimants also allege that five individuals were PDMRs with the requisite knowledge. One of those alleged PDMRs was a de jure director of the defendant and the other four were only de jure directors of subsidiaries of the defendant.

The defendant issued a strike out / summary judgment application in respect of the claims relating to the four alleged PDMRs who were not de jure directors of the defendant (the “Disputed PDMRs”).

It was common ground between the parties that the definition of PDMR in paragraph 8(5) of Schedule 10A is exhaustive and that the relevant part of the definition in G4S is paragraph 8(5)(a) (as the defendant had directors and its affairs were not managed by its members). Further, the defendant accepted for the purposes of the strike out / summary judgment application that the definition of a PDMR extends beyond de jure directors to de facto and (arguably) shadow directors of the issuer.

Against that background, two main issues arose on the application:

  1. Is the definition of a PDMR under paragraph 8(5)(a) of Schedule 10A restricted to the defendant’s de jure, de facto or (arguably) shadow directors under English law; or does it also include other persons who are senior executives responsible for managerial decisions affecting the future developments and business prospects of the issuer and/or its business units?
  2. On the narrower interpretation, do the claimants have a real prospect of establishing at trial that the Disputed PDMRs were directors of the defendant?

On the first issue, Mr Justice Miles found, at [133]-[149], that the definition of a PDMR under paragraph 8(5)(a) does not extend beyond the English company law concepts of de jure, de facto and shadow directorship. In reaching that conclusion, the Court rejected, among other things, the claimants’ invitation to read into Schedule 10A the wider definition of a “person discharging managerial responsibilities” deriving from the EU market abuse regime, including Article 1 of Commission Directive 2004/72/EC which expressly refers to other senior executives.

On the second issue, the Court held that the claimants did have a real prospect of persuading the Court that the Disputed PDMRs were de facto directors of the defendant on the basis that, among other things:

  1. The cases show that whether a person is a de facto director of a company is “intensely fact-specific” and a question of “fact and degree” (at [174]).
  1. The court is also required to consider what the relevant individuals actually did rather than merely considering the roles formally assigned to them in the corporate structure (at [175]).
  1. Prior to disclosure the full details of such relevant factors as the actual activities of the Disputed PDMRs, their role in decision making, the scope of their authority and accountability, and how they were held out by the defendant had not been revealed to the claimants (at [176]).
  1. There was an adequate evidential foundation for the claimants’ contention that the corporate governance structure of the defendant and its business was complex and elaborate and that the claimants do not yet have a full understanding of the structure (at [177]).
  1. None of the existing cases on de facto directorship appear to have considered a corporate governance structure of the kind operated by the defendant where the top company is essentially a holding company and the business is operated through various subsidiaries; and it would be desirable to consider that novel factual scenario in the light of the full facts found at trial (at [179]).
  1. The cases also show that there is some potential for “elasticity” in the application of the concept of de facto directorship in light of the purposes of the relevant statute; and, again, it would be desirable to test the concept of what constitutes a de facto director for the purposes of section 90A and Schedule 10A on facts as found at trial rather than in a factual vacuum (at [180]).

Discussion

This is an important decision for securities fraud litigation in this jurisdiction. Defendants will seek to rely on the Court’s findings on the statutory construction issue and claimants will point to Mr Justice Miles’ conclusions as to the potential flexibility of the concept of de facto directorship in this context (both in response to any future applications for summary dismissal in this area and at trial).

The decision in G4S also leaves a number of significant issues to be explored further in future cases, including:

  1. Whether the definition under paragraph 8(5)(a) of Schedule 10A extends beyond de jure directors to de facto and shadow directors. As set out above, the defendant in G4S only accepted that it does for the purposes of the strike out / summary judgment application and it is defendants’ pleaded case in a number of other section 90A claims proceeding in the Financial List that it does not.
  2. How the concept of de facto directorship applies to corporate structures involving businesses operated through subsidiaries. Many (if not most) issuers of publicly traded securities in the United Kingdom are, to a greater or lesser extent, holding companies and, as noted by Mr Justice Miles in G4S, there does not appear to be any authority directly dealing with such a scenario.
  3. How the purposes of section 90A of FSMA affect the application of the concept of de facto directorship in this area. As set out above, Mr Justice Miles noted in G4S that some “elasticity” is introduced into the concept of de facto directorship by the need to consider the purpose of the provision in question, referring in particular to Mrs Justice Falk’s decision in Re Keeping Kids Company [2021] EWHC 175 (Ch) in the context of director disqualification legislation. In the present context, this will necessitate, among other things, careful consideration of the EU transparency regime and the Davies Review commissioned by the UK Government which sit behind section 90A and Schedule 10A in their current form.

Disclaimer: this article is not to be relied upon as legal advice.  The circumstances of each case differ and legal advice specific to the individual case should always be sought.

© William Harman, 4 New Square Chambers | 11 May 2022