Various Claimants v Tesco Plc

The court considered a strike-out application by Tesco under section 90A and Schedule 10A of the Financial Services and Markets Act 2000 concerning claims by investors who held Tesco shares in dematerialised form through CREST and custody chains. The central legal questions were (i) whether the phrase "any interest in securities" in paragraph 8(3) of Schedule 10A includes the proprietary (equitable) interest of an ultimate investor at the end of a custody chain and (ii) whether such an investor can be said to have "acquired, continued to hold or disposed of" an interest in securities for the purposes of Schedule 10A.

The judge held that holders of intermediated (dematerialised) securities who are ultimate beneficial owners have an equitable proprietary interest that falls within "any interest in securities" in paragraph 8(3), and that transactions which cause the ultimate beneficial ownership to vest or cease to vest in a person can qualify as acquisitions or disposals for the purposes of Schedule 10A. The court rejected Tesco's two-limb argument that (a) investors in custody chains with more than one intermediary lack any qualifying interest and (b) even if they had such an interest, they had not "acquired" or "disposed of" it when legal title moved on the CREST register. The judge distinguished authorities relied upon by Tesco (notably Akers v Samba and Vandervell) and relied on the established analysis of intermediated securities (including the Lehman authorities) to give meaning to the statutory words in light of market practice and the statutory purpose.

This is a first-instance judgment in two consolidated Financial List claims where institutional investors (the SL Claimants and the MLB Claimants) sue Tesco under s.90A and Schedule 10A FSMA for losses said to arise from reliance on published information. Tesco applied to strike out the claims on the basis that the claimants, who held shares via CREST through chains of custodians and sub-custodians (nominees), were not persons who had "acquired, continued to hold or disposed of" an interest in securities within paragraph 8(3) of Schedule 10A and therefore lacked standing.

• Background facts: all relevant Tesco shares were held in dematerialised form through CREST and registered in the names of custodian institutions; the court accepted for strike-out purposes that Tesco's published information was false, known to Tesco, relied upon reasonably by claimants and caused loss.
• Issues framed: (i) whether "any interest in securities" includes the equitable proprietary interest of an ultimate investor in a custody chain; (ii) whether the words "acquires, continues to hold or disposes of" cover the vesting or extinction of such an interest when legal title is transferred on CREST; and (iii) the effect of authorities such as Re Lehman (the "Rascals" line), Akers v Samba and Vandervell on those questions.
• Procedural posture: application by Tesco to strike out both claims at first instance; the court proceeded on common ground factual assumptions required for a strike-out.

Court's reasoning (concise): the judge analysed the operation of CREST and custody chains, recognising the "right to a right" nature of intermediated securities. He accepted that the ultimate investor does not hold the legal title and that sub-trusts exist, but concluded that the ultimate beneficial owner nonetheless holds an equitable proprietary interest adequate to fall within "any interest in securities" in Schedule 10A. The court rejected Tesco's narrower construction which would confine the statutory remedy to legal owners or direct custodial relationships only, because that reading would frustrate the statutory purpose and leave a lacuna given modern market practice. The judge also held that the words "acquires, continues to hold or disposes of" are capable of covering transactions which result in the vesting or ceasing to vest of the ultimate beneficial interest (and that paragraph 8(3)(b) is properly limited to contracts for acquisition/disposal not yet completed or rights to securities not yet issued). Authorities cited by Tesco (Akers, Vandervell) were distinguished as context-specific and not controlling of the statutory construction issue.

Result: Tesco's strike-out application was dismissed and the claims may proceed; the judge left open the question of whether declaratory relief should be granted and invited parties to propose an order.

The defendant's strike-out application is dismissed. The court held that holders of intermediated (dematerialised) securities who are the ultimate beneficial owners in custody chains possess an "interest in securities" within paragraph 8(3) of Schedule 10A FSMA and that the expressions "acquires, continues to hold or disposes of" can cover transactions by which ultimate beneficial ownership vests or ceases to vest. Accordingly the claimants have standing to pursue compensation under section 90A and Schedule 10A and the strike-out failes; the judge distinguished authorities relied on by Tesco and adopted an interpretation compatible with market practice and the statutory purpose.