UK Listed Companies Face Rising Tide of US Style “Stock-Drop” Claims
In recent years, we have seen more class action securities claims against UK listed companies — akin to US style “stock-drop” litigation.
These claims are typically brought by groups of investors, backed by financing from specialist litigation funders, in relation to a company’s published information — such as an annual report. The company would be liable under these claims if the company’s senior management knew, or were reckless as to whether, the information in the published information was false, and the investor relied on that information when deciding to invest, subsequently suffering a loss from a share price drop when the “true” position became known.
Similar claims can also be brought in relation to prospectuses or other listing documents in connection with capital raisings, with investors facing fewer regulatory hurdles in proving such claims.
Claims have primarily resulted from corporate criminal convictions and regulatory settlements, but are increasingly arising from whistleblowers or media investigations, including over the accuracy of ESG-related statements. The scope of statements attracting potential claims is also likely to expand in light of the recent adoption of an enhanced disclosure regime under the UK Listing Rules.
Listed companies should consider carefully the accuracy of statements when releasing published information, in particular in respect of blanket culture or compliance statements or where a known regulatory risk exists. In addition, when corporate governance issues surface, even minor ones, a proactive approach to market disclosures and legal advice are crucial to mitigate litigation risks.
Key Takeaways From the FCA’s Latest Primary Market Bulletin
On 13 December 2024, the FCA released Primary Market Bulletin 53, which sets out proposed and confirmed updates to its guidance on the listing regime. This is a continuation of the FCA’s phased approach to updating its technical guidance following the implementation of the new UK listing regime in July 2024.
Although the bulk of the changes to the technical notes are consequential edits to reflect the new UK listing rules, sponsors and listed companies should note the following:
- Guidance for Sponsors: The FCA has finalised its guidance on certain aspects of the sponsor role initially consulted on through PMB 50, covering specialist due diligence, record-keeping, and the FCA’s approach to reviewing sponsors. The FCA anticipates adding a Q&A section to the technical note on record-keeping to encourage proportionate record-keeping practices. The FCA is also reconsulting on updates to TN 710 (Sponsor Services: Principles for Sponsors) to include additional examples to help clarify when a sponsor service may exist when the sponsor undertakes preparatory work or provides initial advice. For example, although a listed company is not required to appoint a sponsor on a significant transaction, initial advice or guidance on class tests will be treated as a sponsor service where they relate to a request for FCA guidance or a modification of certain UK listing rules.
- Dealing With the FCA in an Open and Cooperative Manner: The FCA proposes to update its technical note TN 209 to clarify that the listing principle obligation to deal with the FCA in an open and cooperative manner also applies if companies may have to approach the FCA prior to a transaction or if the company is no longer in compliance with its continuing obligations. For example, the FCA expects companies to proactively contact the FCA if the company is no longer compliant with the free float requirement. Companies should also be open and cooperative when responding to enquiries from the FCA on the company’s disclosure obligations following media speculation or unexplained share price movement.
- New UK Corporate Governance Code: Although the FCA is still updating various references within the UK listing rules to reflect the new edition of the UK Corporate Governance Code 2024, it reminds companies to adopt the 2024 Code from 1 January 2025.
Learnings From the FRC’s Review of Climate-related Financial Disclosures
On 21 January 2025, the Financial Reporting Council (FRC) published its thematic review of Climate-related Financial Disclosures (CFD) by AIM-traded and large private companies, following the first cycle of mandatory reporting under the Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022. The review found inconsistent quality among the reports, although the companies sampled had tried to meet the CFD requirements.
The findings in this review are relevant to UK-registered listed companies that are subject to both the CFD requirements and the “comply or explain” requirements in connection with the Task Force on Climate-related Financial Disclosures (TCFD).
The FRC identified the following key disclosure issues:
- Scenario Analysis and Targets: Companies are reminded to provide their analysis of business resilience under various climate scenarios. Many struggled with this disclosure. Improvement is also needed in disclosing targets and key performance indicators (KPIs). Only half of the companies sampled provided complete information.
- Governance and Risk Management: Most companies disclosed governance on climate risks, but often lacked structure, with information spread throughout the annual report and lacking clear cross-references. Further, although there were sufficient disclosures concerning climate risk management processes, some lacked detail on risk identification.
- TCFD Versus CFD: Some companies voluntarily based their disclosures on the TCFD but missed disclosures required under the CFD. Although there is significant overlap between CFD and TCFD, the disclosures required by the TCFD framework are provided on a “comply or explain” basis and can be presented outside the annual report and accounts. In contrast, the CFD disclosures are mandatory (unless an exemption applies) and must be set out within the annual report and accounts.
FCA Proposes to Reduce Procedural Requirements for Follow-on Capital Raisings
On 31 January 2025, the FCA released a consultation (CP25/2) which proposes (amongst other things) to remove the listing application process for further issuances. This means that the FCA would treat further issuances by a listed company of the same class of listed securities as automatically listed, without the listed company needing to undertake a listing application process for those newly issued securities. Block listings would therefore become redundant. In doing so, the FCA is seeking to reduce frictions for further capital raisings by already listed companies.
The consultation closes on 14 March 2025 and the FCA proposes to implement these changes at the same time the new prospectus regime comes into force in summer 2025.
More Comprehensive Metadata Requirements for Submissions to the National Storage Mechanism
On 20 December 2024, the FCA confirmed more comprehensive metadata requirements for filings to the National Storage Mechanism (NSM) that will take effect on 3 November 2025:
- Persons filing regulated information will need to notify the FCA of their legal entity identifiers (LEIs) and any related issuers that are the subject of the disclosure.
- The FCA proposes updates to the headline codes and categories that listed companies will need to use to categorise regulated information submitted to the NSM.
The FCA will provide more information in 2025 on what issuers and users of the NSM can expect to change as a result of the new rules. We expect that listed companies will only need to make minor adjustments to their existing processes and procedures to ensure compliance with these new requirements.
