Corporates and Dealmakers Must Prepare for Increased UK Class Action Claims

While class actions are well established in the US, they are increasingly common in the UK, driven by market volatility, availability of litigation funding, legal reforms, regulatory settlements, and growing scrutiny of companies by consumers, investors, and activists. The versatility of available procedures in England make it an attractive jurisdiction for litigation and we foresee more, and larger claims, whether instead of or in parallel to US proceedings.

Our expert cross-border teams have significant class action experience and are currently acting in a number of the largest cases in this area in the English courts. In this article, we share our insights from such cases — with a focus on the growing threat of claims under Section 90A of the Financial Services and Markets Act 2000 (FSMA).

Whatever the grounds for a claim, it is clear that class actions can be very costly. Corporates and M&A deal teams therefore need to engage meaningfully and early by leveraging expert outside legal counsel.  

Spotlight: Section 90A FSMA

While the UK offers multiple routes to bringing a class action, including common law and a range of competition, data, and ESG claims (see “Common Grounds for UK Class Action” box), UK shareholder claims are in the spotlight. The number of Section 90A FSMA cases is currently still relatively modest and the availability of class action shareholder claims in the UK — when compared with the US — is somewhat more limited (and can only — so far at least — be pursued on an “opt-in” basis, i.e., requiring shareholders to actively sign up to the litigation). However, we are seeing more of such actions being pursued, with numbers ever-increasing.

Several factors are driving this growth. Following a US Supreme Court decision which effectively barred US securities actions without a US nexus and necessitated investors to pursue such claims in other jurisdictions, potential claimants are looking beyond the US, particularly in relation to securities claims. Further, the extension of legislation in recent years to cover corporate disclosures other than in financial statements, and to include liability for dishonest delays in publishing information, has created a valuable right for shareholders to claim against UK listed companies under Section 90A FSMA. Section 90A FSMA claims are of specific relevance to listed companies, but deal teams contemplating a take-private transaction also need to consider carefully the possibility of shareholder action in the UK as against the previously publicly listed company.

When actions are progressing, they are complex, costly, and need to be closely managed. The first Section 90A FSMA claim to go to trial in the UK was heard in 2022, providing some limited guidance for the progress of future claims. However, outstanding questions remain regarding the nature of disclosures necessary, and the resulting liability regime in respect of any failures. In particular, questions remain around the materiality thresholds for disclosures in companies’ public statements and the extent that investors bringing claims will be required to prove reliance on the companies’ statements (or failure to make statements). Care also needs to be taken around matters that companies might consider to be privileged, but which might potentially be disclosable to shareholders in any subsequent action. Companies should be careful not to create unnecessary, potentially disclosable, documents and should engage early with external counsel to consider how to best record (and preserve) decision-making and other information.

Other UK Class Action Developments to Watch

Another of the key trends we expect is for class actions to come to the forefront in areas including environmental, social, and governance (ESG) (where mandatory climate-related financial disclosures potentially heighten the risk of shareholder claims), competition law (where “opt-out” class actions are more common), and data-intensive sectors (where increased regulation has led to an uptick in efforts to obtain compensation on behalf of data subjects, the number of which can reach into thousands, or even millions, of people). We have also seen a growing trend of investors, activists, or, indeed, litigation funders shoe-horning complaints into either Section 90A FSMA or the competition opt-out regimes, including complaints that are not really about misleading investors or typical anti-competitive behaviour. Instead, if activists consider that a company has not met certain ESG standards, claims, or adopted goals, they are looking to pursue class actions either through the Section 90A FSMA regime (claiming that the company has misled the market around its ESG compliance) or through the competition regime (claiming that the ESG non-compliant behaviour only arose because of an abuse of a dominant position). A cross-practice approach to responding to such claims is essential.

In terms of the market more generally, the UK Financial Conduct Authority (FCA) wants to attract and retain more listed companies in the UK. One of the FCA’s proposed regulatory changes is the removal of the requirement to publish a circular or receive shareholder approval for significant M&A transactions. Instead, Class 1 transactions will only trigger a requirement on the company to release a detailed transaction announcement. This reform would make more UK listed companies competitive in M&A auction processes by reducing the regulatory burden. However, while it is currently anticipated that less information has to be disclosed, the provided information will be more heavily scrutinised, and so companies should remain alive to increased litigation risk around such statements.

Mitigate Risk by Engaging Early

Companies need to ensure that all disclosures and announcements are accurate, defensible, and supported by good internal record-keeping and governance to audit and evidence the basis for making the statements in the first place. This is the case even in respect of seemingly anodyne statements (for example, statements around having good corporate governance structures in place). Expert outside counsel can help to review the accuracy, scope, and framing of disclosures and other announcements, mindful of the potential for future claims.

In the context of M&A transactions specifically, deal teams need to be alive to the risk that shareholders may push an agenda to challenge the direction of a deal. Beyond that, corporates seeking to stem class action risks should leverage experienced legal counsel and work to manage communications internally (e.g., with the board, so they can validly sign off on disclosures and help to assuage the concerns of senior individuals, such as directors, who could find themselves targeted with personal liability for certain statements being made) and externally (e.g., with the market, target investors, and insurers). Particular care needs to be taken in take-private transactions, as historic claims could be raised against the company in future years (and typically they are not pursued in the UK until right at the cusp of the expiration of limitation periods). Careful diligence regarding the risks of any such claims needs to be undertaken and should be discussed with experienced counsel teams.

Conclusion

Although we are still in the relatively early stages of usage and management of class action processes in the UK, the UK is moving closer to the US system through the introduction of opt-out class actions in competition law and developing jurisprudence regarding other ways of the courts managing group litigation, which removes some of the burden of forming a claimant class.

Class actions remain viable, potentially highly lucrative, and increasingly attractive. As claimants continue to push boundaries in seeking paths to redress, companies need to get ahead of the curve.

This post was prepared with the assistance of Emma Bunting in the Hong Kong office of Latham & Watkins.