The Persons Identified in Schedule 1 of the Claim Form (the “SL Claimants”) v Tesco Plc
| Jurisdiction | England & Wales |
| Judge | Mr Justice Hildyard |
| Judgment Date | 28 October 2019 |
| Neutral Citation | [2019] EWHC 2858 (Ch) |
| Court | Chancery Division |
| Docket Number | Claim No. FL-2017-000001 |
| Date | 28 October 2019 |
[2019] EWHC 2858 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND
AND WALES
FINANCIAL LIST (Ch D)
Rolls Building
7 Rolls Buildings
Fetter Lane
London
EC4A 1NL
THE HONOURABLE Mr Justice Hildyard
Claim No. FL-2017-000001
Claim No. FL-2016-000019
Neil Kitchener QC and Richard Mott and Simon Gilson (instructed by Stewarts) appeared on behalf of the SL Claimants
Peter De Verneuil Smith QC, Philip Hinks and Dominic Kennelly (instructed by Morgan Lewis & Bockius UK LLP) appeared on behalf of the MLB Claimants
David Mumford QC, Michael Watkins and Niranjan Venkatesan (instructed by Freshfields Bruckhaus Deringer LLP) appeared on behalf of the Defendant.
Hearing dates: 25 th – 27 th September 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
THE HONOURABLE Mr Justice Hildyard
Introduction
In these two actions, the Claimants in FL-2017-00001 (“the SL Claimants”) and the Claimants in FL-2016-000019 (“the MLB Claimants”) claim against the Defendant company (“Tesco”) under section 90A and Schedule 10A of the Financial Services and Markets Act 2000 (“section 90A”, “Schedule 10A” and “ FSMA” respectively) to recover substantial losses in respect of their investment decisions in relation to shares in Tesco which they made in alleged reliance on information published by Tesco and falling within Schedule 10A.
The shares in Tesco to which the investment decisions for which the Claimants now seek compensation relate were all held in what has come to be known as “dematerialised form” through a computer-based system called CREST (which stands for “Certificateless Registry for Electronic Share Transfer”) using custodians (which in turn used sub-custodians) to acquire, hold or dispose of those shares (as the case may be).
The Uncertificated Securities Regulations 2001 [2001 No. 3755] (“the USR”), which have enabled and prescribed the basis for title to securities to be evidenced otherwise than by a certificate and transferred other than by written instrument through CREST as the “relevant system” make clear that the legal owner is the person whose name appears on the CREST register (who must be a member of CREST). It is not the CREST member's client or anyone else in the chain of intermediaries. 1
None of the Claimants held shares in Tesco as a registered member of CREST. In the case of every Claimant in these two sets of proceedings, the shares held through CREST were registered in the name of a bank or financial institution providing custodian services, as is almost invariable in the dematerialised market. None of the Claimants, therefore, ever directly acquired, held or disposed of a legal interest in any of the shares.
Further, and again as is entirely usual, most of the shares in Tesco held by custodians are held by them, not for a claimant, but for another intermediary in what is commonly referred to as a ‘custody chain’.
In a custody chain containing only one intermediary, that is, where the custodian is the trustee of the legal title for the relevant claimant and there are no further intermediaries between the custodian and the claimant, that claimant may have a direct beneficial or equitable interest. But, as (and with the consequences) I shall come on to explain at greater length, if the custody chain is longer, the claimant at the end of it is a beneficiary not of the trust of the legal title, but of a sub-trust.
Tesco has applied to strike out both claims on the basis that in such circumstances none of the claimants in a custody chain with more than one intermediary is a person to whom as an issuer it could be liable for any untrue or misleading statement in its published information under the relevant provisions of FSMA.
More particularly, Tesco's position is that the consequence of this is that the interests of claimants in such a custody chain is not an ‘interest in securities’ within the meaning of paragraph 8(3) of Schedule 10A. Further, Tesco contends that, in any event, none of such claimants can properly be said to have ‘acquired, continued to hold or disposed of” any interest in securities (even if, contrary to Tesco's first submission, they had one).
The question as to the nature of the interests held in a dematerialised market thus raised is a systemic one of considerable importance. Most transactions in publicly held shares in companies listed in an exchange in the UK are in dematerialised form through CREST. The position of the Claimants is entirely typical of the dematerialised securities market. The market is very considerable indeed. The availability of remedies for untrue or misleading statements which have been the reason for investment decisions is obviously of great importance.
If Tesco is correct in its submissions as to the true construction of the relevant provisions there is a fundamental hole in FSMA: the provisions enabling investors to
Facts
For the purpose of this strike-out application, it is common ground that the Court must assume that (a) Tesco's published information was false (b) Tesco knew that the information was false (c) the SL Claimants and the MLB Claimants acted in reasonable reliance on that information and (d) they have suffered loss as a result. The evidence has gone to the workings of the market in dematerialised securities, and the manner in which the various Claimants held their investments in Tesco. It may be helpful to summarise key aspects of the CREST system.
CREST in greater detail
CREST went live in July 1996. Until then, most transfers of interests in registered securities in the UK were effected by transfers of paper certificates. This system came under increasing pressure as trading volumes rose and brokers and transfer agents were unable to keep pace with the administration required.
A system for title to shares and transfers of such title in a computer-based system (a ‘central securities depository’ or ‘CSD’) became essential. CREST is the only CSD in the UK approved by HM Treasury. CREST is operated by Euroclear UK & Ireland Ltd which is the “Operator” for the purposes of the USR. The shares of most listed companies in the UK are now held in dematerialised (sometimes referred to as ‘uncertificated’) form through CREST.
The operation of CREST is regulated by statute. Only securities registered in the UK, Republic of Ireland, Isle of Man, Jersey and Guernsey are eligible for registration on CREST. Since 1997 the Listing Rules have required listed securities to be eligible for electronic settlement, and thus in practice all UK-listed securities are capable of settlement via CREST. An issuer can elect to make its securities wholly dematerialised; and paper shares are due to be phased out by 2025 at the latest.
Under the CREST system, shares are registered in the name of the CREST member. There are “system-members” and “personal members”. It is possible for an investor itself to become a CREST member, and some investors do so, but that is very expensive, and so it is more usual to use a “system-member”. Thus, the principal members of CREST are custodian banks and other large financial institutions.
Every system-member must nominate a bank to be its settlement bank. It is, therefore, usual for the ownership structure to include a chain of intermediaries (as in this case), with the CREST member at one end of the chain (referred to as a custodian) holding for another intermediary (e.g. another custodian) and so on until the ultimate investor at the other end of the chain.
The chain of ownership is in another sense indirect because fungible securities such as the Tesco Shares are typically pooled at each stage/link of a custodianship chain. Each CREST member has an omnibus account with CREST in which all securities of a particular issuer (such as Tesco) are held. Those securities are allocated in the books and records of the CREST member (but not of CREST itself) to its clients.
Where the CREST member is a sub-custodian, the custodian it holds for will typically have only an omnibus account with the sub-custodian which is operated in the same way. These omnibus accounts are segregated from the custodian's own assets and the client has the right to call for the delivery up of the legal title to the securities to it or its order. The legal analysis apparent from the case law is that where the intermediary holds the securities for its account holders in a common pool the individual investor is co-owner in equity with other investors. 2
The key feature of intermediated securities held in a custody chain is that the ultimate investor (meaning the person for whose account the securities are ultimately held) is given the benefit of a right without holding the right itself. 3 It has a “right to a right”. An investor in intermediated securities cannot enforce the rights attached to the shares (or other securities) against the issuer, although it is entitled to expect that those rights will be exercised in accordance with its wishes as expressed through the chain of interests.
Dematerialised securities are transferred by way of computerised book-entry transfers in the accounts of different CREST members. A useful summary of the working of the CREST system may be found in paragraphs 5 and 6 of the judgment of Lewison J (as he then was) in ...
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