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From 1 October 2010 investors in publicly-traded companies will have a new statutory right to claim compensation from their company (but not its directors) if they suffer loss as a result of relying on an announcement made by the company to the market, or a document published for the benefit of the market, that is misleading or delayed. But an investor will have to show that the announcement or document was misleading due to deliberate or reckless behaviour by one or more of the company's directors, or that one or more directors acted dishonestly in delaying publication, and in either case that it was reasonable in all the circumstances for him to rely on it in deciding to buy, sell, or hold on to, the company's securities. Annual, preliminary, half-yearly and quarterly financial results could potentially form the basis of such a claim; as well as documents published in connection with takeover offers, and ad hoc announcements about, for example, price-sensitive developments, transactions, dealings by directors and changes in major shareholdings. Circulars sent to a company's shareholders might sometimes contain information on which a claim could be brought.

The new regime will be set out in an amended section 90A and a new Schedule 10A of the Financial Services and Markets Act 2000 (FSMA). Companies affected are:

● All companies (wherever incorporated) with equity or debt securities, or depositary receipts (DRs), traded with their consent on either the UK Official List (Main Market), AIM or PLUS markets. 

● UK-incorporated companies, and companies incorporated outside the EEA whose home member state is the UK, with equity, debt or DRs traded with their consent on a non-UK market that is similar to those UK markets – e.g. NASDAQ or the New York Stock Exchange. In practice, the new right of compensation in relation to these companies will be available only where the court hearing the claim decides that the question of liability should be governed by English law.

The opinions expressed do not constitute investment advice and specialist advice should be sought about your specific circumstances.

Published on our website on Sept.17, 2010