In May, the High Court’s long awaited full liability judgment in the Autonomy litigation was handed down ([2022] EWHC 1178). Aside from being a fraud trial of immense length and complexity, it was of particular significance in being the first time that the merits of a claim under s.90A/Sch. 10A FSMA has been fully tried. We take a short look at the judgment’s implications for future claims under those provisions.

What was the Autonomy litigation?

Autonomy was an English company which had become a leader in machine-learning software. In 2012 it was acquired by Hewlett-Packard (HP), as part of a strategy of moving into high margin software.

Not long after the acquisition, HP announced a substantial write-down in the value of Autonomy which it attributed to alleged accounting improprieties and disclosure failures. 

That led to HP entities suing, in England, two defendants; Michael Lynch (Autonomy’s co-founder and former CEO) and Sushovan Hussain (its former CFO). It was, broadly speaking,  HP’s case that the purchase of Autonomy was induced by dishonest statements and omissions in Autonomy’s published information, and other misrepresentations by the defendants.

s.90A/Sch. 10A FSMA and the proceedings 

S.90A and Sch. 10A FSMA are English statutory provisions which were introduced to impose civil liability on issuers for inaccurate statements in information published to the market on a periodic or ad hoc basis. As discussed by the Court [432-445] this statutory scheme was catalysed by the 2004 Transparency Directive. As its effect would be to introduce statutory liability into an area where, previously, there was no particularly clear route to redress (in contrast to selling documents such as a prospectus), its standard was built around fraud (rather than a wider one such as, for example, negligence). 

Sch. 10A applies to such information published on or after 1 October 2010, whilst s.90A continues to apply to information published before that date. In brief, they protect investors in an issuer’s securities who suffer loss due to such inaccuracies where the investor relied (reasonably) on the information. The core provisions of Sch. 10A can be found here, and the historic scheme under s.90A is broadly similar.

In Autonomy, one of the main routes of redress pursued by the HP claimants was based on these provisions; albeit in an unusual way. As the issuer (Autonomy) was now within the claimants’ corporate group,  Autonomy accepted liability under these sections to “Bidco” (the HP company that had acquired it). That, in turn, gave Autonomy (or, more accurately, in the proceedings, its corporate successor - ACL Netherlands BV) a direct claim against the defendants for breach of duty (it was accepted that the defendants were the relevant “persons discharging managerial responsibility” (PDMRs) for the purposes of the sections). 

Whilst the defendants took no objection in principle to this “dog leg” structure, it was also acknowledged as conceptually possible by the Court [434]. This led to some of the core aspects of the FSMA provisions being considered since, in their defence, the defendants argued that Autonomy was not, in fact, liable under them. 

In broad overview, the claimants’ factual basis for their claims stemmed from six distinct areas of Autonomy’s business and accounting. It was alleged that in relation to each of these, Autonomy’s published information either omitted material matters or presented things in a way which was misleading. These factual issues were extremely substantial, with the majority of the Court’s c.1300 page judgment consisting of a forensic analysis of them (although a summary, released earlier in the year, appears at Appendix 6 of the judgment). But, to give a flavour, one “flagship” set of claims concerned Autonomy’s treatment of hardware transactions. It was alleged, in particular, that Autonomy, in fact, used such sales to boost its revenue but never disclosed this to the market whilst continuing to present itself as a “pure software company” (hardware sales being significantly less profitable). In this, the claimants relied, in particular, on the contents of Autonomy’s Annual and Quarterly Reports throughout a relevant period.  

In the event, the Court found the defendants to be liable on the majority of these and a number of other grounds (albeit that quantum remains to be determined). Against that background, key general findings as to the operation of the statutory provisions included as follows.

Published information under Sch.10A did not extend to transcripts of earnings calls where joining details had been included in materials published by “recognised means”: Under Sch.10A, relevant information is generally regarded as “published” if done so via “recognised means” (which includes a “recognised information service” such as RNS). However, use of “other means” also qualifies if the availability of the information is announced by “recognised means”. In this respect, Autonomy’s Quarterly Reports (which were published by recognised means) contained joining details of earnings calls. The claimants therefore argued that the availability of transcripts of those calls had been announced (with the result that the transcripts would qualify as published information). This was rejected by the Court [457] (although this did not bar the transcripts as being evidence for claims based on other causes of action [459]).

Assessing whether published information contains a false or misleading statement: A condition of liability is that published information must contain such a defect (or must omit any “matter required to be included in it”). In that context, the Court made clear that ascribing a meaning to a statement “involves looking at the objective meaning of the statement, that is the meaning which would be ascribed to it by the intended readership, having regard to the circumstances at that time”[460], and it is for the claimant to prove that it understood the statement in that sense [466]. For these purposes, identifying the relevant context and characteristics of the intended representee may not always be straightforward if, for example, there were diverse potential addressees [462].

Assessment of “guilty knowledge”: A further condition is that liability only arises if a PDMR “knew” the statement to be untrue or misleading or was “reckless” as to the same (or, in the case of an omission of matters required to be included, knew that this was the dishonest concealment of a material fact). In the Court’s view, relevant knowledge for these purposes requires the PDMR to have the facts or omission in mind at the time the statement is made/information is published, and also appreciate that it is untrue/that a material fact is being concealed [469]. Recklessness in the above context meant not caring about the truth of the statement, such as to lack an honest belief in its truth [470]. The Court also considered the relevance, to a finding of dishonesty, of professional advice received. This would, in short, depend on the circumstances. For example, it contrasted a situation where the relevant statement is within the scope of the professional advice and expertise, with a situation where advisors have conducted a more limited review of material which the directors were in a better position to assess [474-476]. Finally, assessment of a PDMR’s guilty state of mind takes place on a statement/omission basis; that is if there were ten alleged misstatements but a PDMR only knew of one, liability potentially attaches only to that one [477].

Aspects of “reliance”: Whilst it is clear that a claimant must rely on the published information and at a time when, and in circumstances in which, it was reasonable to do so, the Court considered some key components of this test:

Reliance could, on the facts, be attributed: One problem faced by the claimants was that Bidco had only been established late in the acquisition process. In reality it was, therefore, HP (specifically its board) which had relied on Autonomy’s published information in deciding that Bidco should proceed. Did this mean that Autonomy could escape liability to Bidco? The Court held not; on the facts HP could be treated as Bidco’s controlling mind for this purpose and its reliance should be treated as Bidco’s. This outcome was, in the Court’s view, consistent with the statutory scheme and avoided a “counter-intuitive conclusion, that the use of an SPC which had no purpose or business…except as a pocket in HP’s trousers, should invalidate the claim” [500]. 

Reliance must be on specific misstatements/omissions: It is not enough for a claimant to claim that it relied, in a general sense, on published information which happened to contain a misstatement or material omission. There must be reliance on that statement or omission in the sense that the claimant applied its mind to it and it induced the acquisition or transaction [503].

The false statement only need “influence” the claimant’s judgment: To what degree must a claimant be impacted by the statement/omission in the published information? The Court favoured a lower test which only required “an impact on the mind” or an “influence on the judgement” of the claimant. Furthermore, in situations where an otherwise actionable misstatement had been made, the Court was prepared to accept that there is a natural, factual, presumption (rebuttable on the facts) that the representee was induced by that statement [515]. 

Reasonableness is fact-sensitive: In this respect it was no defence that the claimants might have had the means of discovering the truth [519]. More generally, the test of reasonableness should be applied by reference to conditions at the time that the claimant relied on a statement. Circumstances, caveats etc which qualified the reliability of it therefore fell to be taken into account [519-520].

Measure of loss was to be measured against price that would have been paid: The judgment also contains instructive analysis of the basis upon which damages were to be assessed on the facts of the case. Applying the usual “but for” approach to tort damages, the Court sought to ask what would have happened if accurate information had been provided. Its primary conclusion was that, as Autonomy had been of special value to HP, the appropriate measure was one which assumed HP would have gone through with the transaction (i.e. difference between the price paid and that which it would have offered had it known the truth), rather than not at all [524-539].

Some observations; a curate’s egg for claimants?

Despite the Court’s observation that the statutory provisions should not be interpreted in a way “which exposes public companies…to unreasonably wide liability” [445], aspects of its judgment will likely be cast as providing succour to potential claimants. For example, the Court was pragmatic on issues such as the “dog leg” nature of the claim, or the attributed nature of Bidco’s reliance. And, whilst the former may be a more unique aspect of this case, the involvement of an SPV to acquire securities may be less so. The result, claimant success in the first s.90A/Sch. 10A case to run to full trial, will also resonate.

Such observations need to be tempered, however, with an appreciation that facts remain paramount. Autonomy was a decision in the context of an acquisition of the company by a sole investor; the application of the relevant principles to more general shareholder actions will have to wait for another day. In that regard, certain aspects, such as the requisite state of mind of a PDMR, illustrate that there are significant factual hurdles for claimants that they might (in the more usual case where they have not wholly acquired the issuer) lack knowledge of to inform a claim (at least initially). And, beyond that, there are many other legal aspects of a claim which remain highly fact dependent (for example, the specific nature of the reliance that a claimant must place on any misstatement, or the reasonableness of the reliance placed on it). Whilst the Autonomy case was uniquely complex, the length of the trial, and of the judgment itself, also illustrate the potential for battlelines to be drawn over such matters; cases involving allegations of fraudulent conduct or dishonestly, are unlikely to ever be straightforward.