Are you a "person discharging managerial responsibility"? High Court clarifies meaning of PDMRs under FSMA

The judgment carefully balanced respect for the clear parliamentary language with the underlying purpose of s90 FSMA, leaving plenty of room for claimants to obtain remedies for prospectus non-disclosure.

In a recent interim decision in Allianz Global Investors GmbH and Ors v G4S Ltd (formerly G4S plc) [2022] EWHC 1081 (Ch), Mr Justice Miles clarified the scope of the expression "persons discharging managerial responsibility" ("PDMRs") for the purpose of establishing liability under s.90A and Schedule 10A of Financial Services and Markets Act 2000 ("FSMA"). S.90A and Schedule 10A contain a regime for the civil liability of issuers of publicly traded securities for publication of false or misleading or incomplete information and for dishonest delay in publication of information to the capital markets. Liability under s.90A only arises where a PDMR within the issuer knew or was reckless about the offending statement or dishonestly concealed material facts or a PDMR acted dishonestly in delaying the publication.

The claimants, institutional investors in G4S Limited (formerly G4S plc) ("G4S"), brought claims against G4S for breaching market disclosure rules. The defendant applied to strike out all or parts of the claims and/or for summary judgment in respect of the claimants' allegations that certain named individuals were PDMRs of the defendant within the meaning of s.90A FSMA. Miles J declined the defendant's application on the basis that there was a real prospect of the claimants establishing civil liability at trial for statements made by senior management, but only if the claimants could establish that the senior management on whose conduct they rely were its de jure, de facto or (arguably) shadow directors at the relevant times.

The facts

The case arises out of three related actions brought by institutional shareholders against G4S, a formerly listed company carrying out security and related outsourcing activities.

The UK government was and is a major customer of the defendant and its subsidiaries.   The relevant services were provided by its indirect, wholly owned subsidiary, G4S Care & Justice Services (UK) Ltd ("G4SCJS") to the Ministry of Justice and consisted of various contracts for the tagging of prisoners.  In July 2020, the Serious Fraud Office and G4SCJS entered into a deferred prosecution agreement in relation to allegations of (i) wrongful billing (in particular, charging the government for dealing with prisoners who were never tagged or who had died) and (ii) providing fraudulent financial models to the government for the purpose of calculating the costs of providing services.

The claimants are bringing claims against G4S as a follow on action and contend that, because of the above matters, information published by the defendant to the market contained untrue and misleading statements, or omitted required information, and that the claimants are entitled to compensation as a consequence. Claims are also brought for compensation for dishonest delay in publishing information.

An important factual component in this case is that the defendant's group was organised as a publicly listed holding company with a board comprised of two or three executive directors (and a majority of non-executives) and the majority of operational functions of the group being run by and through subsidiaries.  The shareholders were of course shareholders in the listed parent holding company, and the potential FSMA s90A claims relate to the shares in that company, and not G4SCJS in which the misconduct took place. Of the five PDMRs identified by the claimants, only the fifth person (P5) was a formally appointed (de jure) director of the defendant. The other four (P1 to P4) were de jure directors of G4SCJS, the trading subsidiary in which the alleged wrongful billing and financial model fraud took place. P1 to P5 were also directors of other subsidiaries of the defendant.

The defendant applied to strike out all or parts of the claims and/or for reverse summary judgment in respect of the claimants' allegations that P1 to P4 were PDMRs of the defendant within the meaning of s.90A FSMA.

Issue 1: The construction of the term PDMR for the purposes of liability under section 90A and Schedule 10A

Section 90A and Schedule 10A of FSMA contain a regime for the civil liability of issuers of publicly traded securities for publication of false or misleading or incomplete information and for dishonest delay in publication of information to the capital markets. The liability arises when a "person discharging managerial responsibility" within the issuer knew or was reckless about whether a statement was untrue or misleading and extends to dishonest omissions of relevant information and dishonest delay in publishing such information.

Schedule 10A, paragraph 8(5) sets out the definition of a PDMR:

"(a) any director of the issuer (or person occupying the position of director, by whatever name called);
(b) in the case of an issuer whose affairs are managed by its members, any member of the issuer;
(c) in the case of an issuer that has no persons within paragraph (a) or (b), any senior executive of the issuer having responsibilities in relation to the information in question or its publication."

The claimants argued that PDMRs for the purposes of liability under s.90A and Schedule 10A extended beyond directors of the issuer to include other senior executives responsible for managerial decisions affecting the future developments and business prospects of the issuer and/or those business units. This was on the basis that in defining the term PDMR the legislature had adopted an autonomous concept of European law said to be found in EU financial regulation. The defendant argued that the term PDMR was restricted, in accordance with the language of the statute, to directors of the issuer.

Miles J upheld the defendant's argument that the definition in paragraph 8(5) of Schedule 10A is clear and unambiguous and should be given its natural reading, such that PDMRs of the defendant for the purposes of the section 90A claim had to be directors of the issuer at the relevant times. In reaching this conclusion, Miles J paid close attention to the legislative history of the PDMR concept in UK law, and he considered and rejected the claimants' argument that in defining the term PDMR the legislature adopted an autonomous concept of European law.

However, Miles J concluded that (as the defendant had conceded) a PMDR did not have to be a formally appointed de jure director of the issuer, and could include de facto or (arguably) shadow directors of the issuer.   

Issue 2: Do the claimants have a real prospect of establishing at trial that P1-P4 were directors of the defendant?

Having found that only directors of an issuer can be PDMRs (including de facto and, arguably, shadow directors), Miles J considered whether the claimants had properly pleaded a case that the contested PDMRs were de facto directors of the defendant which had real prospects of succeeding at trial.

Miles J held that there was an arguable pleaded case that the four individuals identified by the claimants as PDMRs were de facto directors of the defendant at the relevant times (although he commented on a lack of clarity and precision in the pleadings which he considered would be desirable to correct).  . He observed that establishing whether P1-P4 were de facto directors of the defendant required an "intensely fact specific" inquiry. The judge considered that would likely require disclosure by the defendant and cross-examination of witnesses to develop a full picture of the defendant's corporate governance structure and the roles, decision making and actives of the contested PDMRs. On this basis, Miles J declined to strike out the claimants' claims or to grant summary judgement to the defendant on this issue.  It was a matter which was suited for determination at trial.

The significance of the ruling

This is an important decision on the scope of PDMRs for the purposes of liability under s. 90A and Schedule 10A of FSMA.  The outcome is not surprising given the clear text of the parliamentary language.  While Miles J held that as a result PDMRs for the purposes of s.90A are restricted to directors (in some sense) of the issuer company, he concluded that the term "director" is broad enough to encompass not only de jure, but also de facto and at least arguably shadow directors. Moreover, he stated that there is "some potential for elasticity in the application of the concept of de facto directorship in light of the purposes of the statute" (i.e. FSMA and s.90A in particular).  He also observed that the authorities on de facto directorship have so far not grappled with how that concept should operate in the context of a holding company which performed all of its operations through subsidiaries.  These were all helpful observations, which the shareholder claimants will no doubt have welcomed. 

How these further questions will be resolved will be followed with interest as the matter progresses. The judgment carefully balanced respect for the clear parliamentary language with the underlying purpose of s90 FSMA, leaving plenty of room for claimants to obtain remedies for prospectus non-disclosure.