A couple of months ago, TMZ reported that Jessica Alba’s Honest Company (“Honest”) is being sued by its shareholders for allegedly failing to disclose key information about the company’s financial performance.
The shareholders claim they bought Honest shares after the company went public in May 2021 but, shortly after they purchased their shares, Honest reported significant losses and the share price plummeted nearly 43% from the public offering price. The shareholders allege that consumers stockpiled diapers, wipes and other wellness products during 2020 because of the pandemic, and by the time the company went public, Honest knew that the stockpiling behaviour had ended and that sales were falling fast. The shareholders allege that they have suffered loss and that Honest should have been open about the falling sales figures when they made a public offer of their shares.
Although the Honest claim is being made in the USA, companies should be aware that there is a risk of similar “class action” claims being launched in the UK.
The legal framework in the UK
Whilst not as well-established as US class actions, collective securities actions seem to be gathering momentum in this jurisdiction. Businesses should be aware of risks of such actions under Section 90 and Section 90A of the Financial Services and Markets Act 2000 (“FSMA”).
Very briefly, Section 90 and Section 90A FSMA offer a remedy for shareholders who have acquired or held securities in listed companies and suffered loss as a result of:
- untrue or misleading statements/omissions within listing particulars or prospectuses (Section 90); or
- untrue or misleading statements/omissions within other information published by the company, or as a result of a dishonest delay by the company in publishing such information (Section 90A).
If all elements of the cause of action are established, then the company is required to pay compensation to the shareholders.
Key points to note
The case law in this area is still developing, but here are some points worth noting:
- claimants will need to establish a causal link between the loss suffered and the misleading statements or omissions by the listed company. This will often require detailed expert evidence.
- under Section 90A FSMA, claimants are required to establish reliance, i.e. the claimants must show that it was reasonable for them to place reliance on the relevant misstatement. On the other hand, there is no requirement to prove such reliance in claims under Section 90 FSMA - proof that the prospectus or listing particulars contained material untrue or misleading statements is sufficient.
- the quantification of damages is a key, yet untested, aspect of both Section 90 and 90A FSMA. The wording refers to “compensation” but how the investors’ losses will be calculated is still to be determined. The choice of method can have a large effect on the quantum of damages and will most likely represent the key battleground between the parties.
As these types of collective action increase in this jurisdiction, shareholders and businesses are encouraged to keep an eye on legal developments in this area of law. In particular, businesses should consider taking steps to ensure effective procedures are in place to minimise the risk of collective securities actions.