Tesco Plc v. SL and MLB Claimants: Establishing Investor Standing in Intermediated Securities under the Financial Services and Markets Act 2000

Introduction

In the High Court of England and Wales (Chancery Division) decision dated October 28, 2019, the case SL Claimants v. Tesco Plc ([2019] EWHC 2858 (Ch)) was adjudicated. This case centered around claims filed by the SL Claimants and the MLB Claimants against Tesco Plc under section 90A and Schedule 10A of the Financial Services and Markets Act 2000 (FSMA). The Claimants sought compensation for substantial financial losses incurred from investment decisions based on allegedly misleading information published by Tesco. A pivotal issue was whether the Claimants, whose shares in Tesco were held indirectly through a chain of intermediaries via the CREST system, possessed an "interest in securities" sufficient to bring a claim under FSMA.

Summary of the Judgment

The Court scrutinized Tesco's application to strike out the claims, which argued that none of the Claimants held a direct or equitable interest in the Tesco shares within the meaning of Schedule 10A of FSMA. Tesco contended that the intermediated securities held through multiple custodians did not qualify as an "interest in securities" deserving of protection under FSMA. However, the judge concluded that the Claimants did possess an "interest in securities" sufficient for standing, thereby allowing the claims to proceed. The judgment clarified the interpretation of "interest in securities" in the context of intermediated holdings, affirming that ultimate beneficial owners retain proprietary rights enabling them to seek redress under FSMA.

Analysis

Precedents Cited

The Judgment extensively referenced several pivotal cases and statutory provisions to elucidate the nature of interests held in intermediated securities:

Re Lehman Brothers International (Europe) [2010] EWHC 2914 (Ch) and [2011] EWCA Civ 1544: These cases established that in a chain of trusts, only the immediate trustee holds a "true trust" of the property, not allowing ultimate beneficiaries direct proprietary claims against issuers.
Vandervell v IRC [1967] 2 AC 291: This case highlighted that transferring legal title does not equate to disposing of an equitable interest, provided there is no direct dealing in that interest.
Akers v Samba Financial Group [2017] AC 424: Reinforced the principle that disposing of legal title does not necessarily constitute disposing of an equitable interest.
Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669: Emphasized that equitable interests must relate directly to the trust property to be considered proprietary.
Saunders v Vautier (1841) Cr. & Ph. 240: Discussed the rights of beneficiaries to collapse trusts when all beneficiaries are of legal age and capacity.

Legal Reasoning

The court's legal reasoning hinged on interpreting the statutory language of FSMA in light of existing legal principles governing trust and equitable interests. The key points of reasoning included:

Definition of "Interest in Securities": The court determined that "any interest in securities" encompasses proprietary interests, including equitable interests held by ultimate beneficial owners through intermediaries.
Proprietary vs. Economic Interests: Distinguishing between proprietary interests, which grant direct rights, and purely economic or contractual interests, the court affirmed that ultimate beneficial ownership constitutes a proprietary interest.
Interpretation of Acquisition and Disposal: The court interpreted "acquisition" and "disposal" broadly to include any process whereby investors gain or relinquish interests in securities, even indirectly through intermediaries.
Statutory Purpose and Legislative Intent: Emphasizing fulfilling the legislative intent to protect investors and align with the European Transparency Directive, the court favored an interpretation that avoided rendering FSMA ineffective.
Precedential Consistency: The court ensured that the interpretation was consistent with established case law on trusts and equitable ownership.

Impact

This judgment has significant implications for the landscape of intermediated securities and investor protection:

Investor Standing: The decision affirms that investors holding securities indirectly through intermediaries possess sufficient "interest in securities" to seek redress under FSMA, enhancing their protection against misstatements by issuers.
Legal Clarity: Clarifies the scope of FSMA in the context of modern securities holding practices, bridging gaps between traditional certifiated securities and dematerialized systems like CREST.
Market Stability: By ensuring that investor protections apply uniformly across various holding structures, the ruling promotes confidence and stability within the financial markets.
Legislative Considerations: Highlights areas where statutory language may need refinement to keep pace with evolving market practices, potentially guiding future legislative amendments.

Complex Concepts Simplified

Intermediated Securities

Intermediated securities refer to shares or other financial instruments held not directly by the investor, but through a network of custodians and sub-custodians via systems like CREST. This creates a "custody chain," where each intermediary holds the security on behalf of the next in line, ultimately for the ultimate beneficial owner.

CREST System

CREST ("Certificateless Registry for Electronic Share Transfer") is a computerized system in the UK that facilitates the dematerialized holding, transfer, and settlement of securities. It eliminates the need for physical share certificates by maintaining electronic records of ownership.

Proprietary vs. Economic Interests

A proprietary interest grants direct legal rights over an asset, allowing the holder to enforce these rights directly against the owner or issuer. An economic interest, however, pertains to the financial benefits derived from an asset without conferring direct legal ownership or enforceable rights.

Ultimate Beneficial Owner

This term refers to the individual or entity that ultimately enjoys the benefits of ownership of an asset, even though the asset is held in an intermediary's name. In banking and securities, the ultimate beneficial owner is the person for whom the intermediary is holding the asset.

Schedule 10A of FSMA

Schedule 10A of the Financial Services and Markets Act 2000 outlines the liabilities of security issuers to compensate investors who suffer losses due to misleading or false information provided by the issuer. It is a critical component of investor protection mechanisms within UK financial law.

Conclusion

The decision in Tesco Plc v. SL and MLB Claimants serves as a landmark judgment in clarifying investor standing within the complex framework of intermediated securities. By affirming that ultimate beneficial owners possess a proprietary interest in securities, the court reinforced the protective scope of FSMA against misleading information from issuers, irrespective of intermediary holding structures. This resolution not only bridges a critical gap in investor protection but also ensures that the legal framework remains resilient and responsive to modern financial practices. Moving forward, this judgment provides a robust precedent for similar cases, ensuring that investors retain essential rights and that issuers uphold their obligations to provide accurate and truthful information.