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The Government is overhauling the liability rules on statements made by share issuers. Alasdair Steele looks at what is in the pipeline

As part of the implementation of the European Union (EU) Transparency Directive, the Companies Act 2006 introduced section 90A into the Financial Services and Markets Act 2000 (FSMA). This section brought in new rules relating to issuers of securities admitted to trading on either a UK-regulated market or another European Economic Area (EEA)-regulated market, if the issuer treats the UK as its ‘home member state’ for the purposes of the Transparency Directive.

In June 2007, Professor Paul Davies QC reported on whether any changes were needed to the regime contained in section 90A of the FSMA. In response to that report, the Treasury recently published draft regulations that are proposed to be introduced in late 2008.

Existing regime

Section 90A of FSMA applies to companies with securities listed on a regulated market and states that the issuer is liable to pay compensation to any person who:

(a) acquired securities in the issuer relying on information in the relevant publication at a time when, and in circumstances in which, it was reasonable for the claimant to have relied on that information;

(b) suffered loss in respect of those securities because of any untrue or misleading statement contained in, or any omission from, an announcement to which the regime applies.

Liability under section 90A is restricted to the issuer of the securities, and excludes any personal liability on the part of the directors (or other officers) of the issuer. However, section 90A is limited. It only applies to companies listed on a regulated market (and therefore not to Alternative Investment Market (AIM)-listed companies) and to people who acquire (but not sell) securities based on the misleading or incorrect information and statements. This information must be contained in the issuer’s annual or half-yearly reports, any interim management statements or any preliminary statements in respect of annual reports – but not other announcements.

To establish liability, the directors (or those with equivalent managerial responsibility) must be shown to have known the statement was untrue or misleading, have been reckless as to whether it was misleading or have known that the omission was the dishonest concealment of the material facts.

Proposed extension of the regime

On 17 July, 2008, the Government issued a consultation document responding to the recommendations contained in Professor Davies’ report, which included draft legislation to implement the proposed changes.

The main proposals set out in the consultation paper are:

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