‘loss suffered as a result of reliance by any person on—
(i) an untrue or misleading statement in a publication to which this section applies, or
(ii) the omission from any such publication of any matter required to be included in it,’.
The amendment is necessary to ensure that the statutory liability regime governing the transparency directive disclosures has appropriate boundaries and in particular that it covers all claims for damages in respect of losses suffered as a result of the reliance on transparency directive disclosures.
The background to the amendment is the Government’s decision—strongly supported by a wide range of stakeholder opinion and taken during the Bill’s passage through the other place—to introduce a statutory liability regime to cover disclosures required by the transparency directive and the narrative reporting requirements by UK companies. That was necessary to remove uncertainty over the liability regime, which risked constraining important disclosures by companies in, for example, the narrative reports to be included in annual reports, thus reducing their effectiveness and the accountability of directors.
Accordingly, following discussion with stakeholders, liability provisions were introduced in the other place. However, in the light of our more detailed consideration of those provisions, it has become apparent that they do not fully capture the scope of the intended liability regime. In particular, they would provide a statutory liability regime that covered only shareholders who made decisions relying on those disclosures. As I said, the regime is supposed to provide a statutory liability regime and give the benefit of certainty in all cases in which someone has made decisions relying on those disclosures. The regime should apply to shareholders and non-shareholders alike, and the amendment will correct that omission.
The amendment is needed to ensure that the liability regime has the correct scope, as discussed with stakeholders. It will ensure that issuers and investors, actual and potential, face a clear and consistent statutory liability regime with regard to losses arising from reliance on periodic financial information disclosed under the transparency directive.
For completeness, hon. Members will note that there are still certain stringent conditions that must be met before losses can be recovered by those parties within the scope of the statutory liability regime. The losses must be suffered as a result of reliance on a transparency directive disclosure; the disclosure must contain statements that are untrue, misleading or made recklessly, or omissions that dishonestly concealed material facts; and the person suffering loss must be a shareholder and suffer loss as a result of acting in reliance on such a statement, at a time and in circumstances in which it was reasonable so to rely.
Those requirements reflect a number of circumstances, including the Government’s desire to avoid radical change to the law in this area, to respect the preferences of stakeholders and, especially, to ensure that company resources are not inappropriately diverted from shareholders, employees and creditors to the benefit of a much wider group of actual and potential investors.
I hope that the Committee will support the amendment.
‘(9) The provisions of this section shall also extend to—
(a) preliminary statements of results and other announcements to the market by listed companies permitted or required by the Disclosure Rules and the Transparency Rules,
The FSA is satisfied with the clause, which deals with liability for false or misleading statements in certain publications, and said that it was watertight in legal terms. However, the Institute of Directors raised a problem with its narrow scope. It welcomed the Government’s willingness to introduce some limitation on directors’ liability in respect of narrative reports and statements, but recognised that defining the scope of the limitation in the area of transparency obligations is not helped by the parallel development of such obligations. It also said that it is important to extend protection to all companies, including alternative investment market and European economic area companies that have to make such disclosures. It believes that that could be achieved by the wording in the amendment.
That position was backed up recently by the CBI, which said that it strongly welcomed the Government amendments introduced on House of Lords Third Reading for some limitation on the legal liability of companies and directors under companies legislation, and amendments to the Financial Services and Markets Act 2000 in connection with implementation of the EU transparency obligation directive.
However, the CBI believes that the provisions on liability in clause 899 should extend to
“preliminary statements of results and other announcements to the market by listed companies permitted or required by the Disclosure Rules and the Transparency Rules” issued by the FSA. It strongly believes that the same liability regime should apply to requirements and obligations under both sets of rules to ensure fairness and consistency.
The same liability regime should also extend to companies with securities quoted on the alternative investment market so that such companies and their directors are treated in an equivalent and fair manner. There is also a wish from those companies affected that a liability regime should extend to companies trading on an EEA-regulated market in situations where UK law is the applicable law.
There seems to be a consistent message coming from business, with which we agree, that a wider variety of documents should attach the same liability as documents subject to the clause, and that that liability should attach to all listed companies rather than just fully listed companies.
The amendment proposes several changes to extend the scope of the liability provisions beyond that required to address the risks of liability of issuers and their senior management in damages that may arise. It may be helpful to give some history of why we have introduced the clause.
The Government’s decision to propose statutory provisions governing liability in damages arising from transparency disclosures was determined by specific circumstances. The wording of the transparency directive led the Government to conclude that, were they not to implement a statutory liability regime, there would be a substantial risk that the courts would decide that the Government had not implemented the directive correctly. However, the same situation does not apply to the classes of disclosure to which the amendment would extend the liability regime.
Liability is a complex issue. It is linked to other aspects of the Bill, such as directors’ duties and the purposes for which statutory reports are produced. A statutory liability regime clearly has the potential to provide greater certainty than one resting on common law, but implementing one in areas related to, and with different contexts from, the transparency directive is a difficult matter, which may carry with it many disadvantages. For that reason, a regime in those other areas would be different from, although broadly similar in structure to, the provisions of the clause, which deal purely with potential liability flowing from the implementation of our obligations under the transparency directive.
The classes of disclosure to which the amendment would extend the directive statutory liability regime vary in their purposes, formats, content, standards for disclosure and the level of reliance placed on them. All those factors need to be considered when determining the scope of any liability for disclosures. A statutory liability regime may establish liability in areas that currently have no or very low risks of liability. Introducing a statutory regime also risks losing the flexibility that might be associated with the common law and regulatory liability regime. Those risks have led the Government to limit the scope of the proposed statutory liability regime to those disclosures for which a compelling case has been made. A compelling case has not yet been made to increase the scope in the areas that are the subject of the amendment.
Nevertheless, arguments have been advanced that suggest that there may be some advantages—as the hon. Gentleman laid out—in introducing a broader liability regime to cover some of those areas. With that in mind, the Government are considering the matter further in close liaison with stakeholders, and will advise on the outcome of that consideration. We hope to do so on Report.
The Minister says that the Government hope to return to the matter on Report. I do not think that there is anything after Report, so I hope that they do so before we discuss the Bill then and that we might hear from them over the summer so that we can prepare for our deliberations.
The Government say that they have done the minimum, and clearly they have. We are pleased to hear that, but a number of business organisations have raised valid points. When I sat down and looked at what they were saying, I could see that they had a fair point. Why should the clause apply only to some documents and not others? Why should a director not get cover because he happens to be a director of a named company rather than a fully listed company?
Does my hon. Friend agree that although there are some differences in terms of the overall membership of alternative investment market listed companies as contrasted with officially listed companies, quite often similar institutions do exist, so it seems a strange paradox that one regime may operate for one type of company and a different regime for another type?
Yes. Of course, there are different regimes for the two markets, and I will not say that they should be merged, because this country obtains a huge competitive advantage from having a different regime. However, I cannot see an argument for the liability that attaches to directors when producing company documentation being greater in respect of writing wrong things in one document than in respect of doing so in another. Likewise, the protection that directors have should be similar.
My hon. Friend is right to highlight the different regimes and the fact that AIM is intended to be lighter-touch regulation. In many ways, that acts in a very competitive way in the capital markets on an international basis, but one of the clear threats is the robustness of the market to ensure that people can rely on documentation and that the market is not drawn into disrepute. Provisions to ensure that there are proper protections and that documents are correct and can be relied on are important in that context.
I accept that point; my hon. Friend is right.
The Minister started off in a robust manner and I thought that she was bluntly rejecting our reasonable proposals, but at the end she seemed to pull back and said that she would consult further. She has made the right decision, and I thank her for offering to keep us in the loop over the summer, because obviously we will want to prepare for Report, which is shortly after that. On that basis, I beg to ask leave to withdraw the amendment.