"I cannot tell a lie": court delivers its verdict on liability for untrue or misleading statements published by a listed company

Following the publication of an initial Summary in January 2022, the Honourable Mr Justice Hildyard handed down his full judgment in the largest ever civil fraud trial on 17 May 2022, after years of litigation and 93 days in court. In his judgment, which runs to nearly 2000 pages, Hildyard J held that Autonomy's founder and chief executive Dr Mike Lynch - and its chief financial officer, Sushovan Hussain (together, the "Defendants") - were liable to Hewlett Packard ("HP") for misleading statements and misrepresentations contained in Autonomy's annual and quarterly reports published prior to HP's ill-fated acquisition.

Background

In August 2011, HP made a recommended $11.1 billion cash offer for the entire issued share capital of Autonomy, which was at the time the UK's largest software business and a very profitable FTSE 100 company. The acquisition completed in January 2012, but in November that same year, HP announced write-downs in the value of Autonomy by some $8.8 billion, of which $5 billion was alleged to be attributable to fraud. In HP's own words, the decrease in value was "linked to serious accounting improprieties, misrepresentation and disclosure failures".

Proceedings were brought in 2015 by Autonomy's successor company and other HP companies (the "Claimants") on the basis that Dr Lynch and Mr Hussain dishonestly and deliberately misrepresented Autonomy's financial performance between Q1 2009 and Q2 2011. HP claimed that the acquisition was made based on information that the Defendants knew to be false. HP alleged that the Defendants:

• inflated Autonomy's revenues by describing it as a pure software company when, in reality, it made substantial hardware sales; and
• dishonestly misrepresented Autonomy's financial information, disguising the improper practices used to inflate revenue and growth.

In total, six claims were brought by HP. The most pertinent claim from a capital markets perspective was for civil fraud under Section 90A and Schedule 10A of the Financial Services and Markets Act 2000 ("FSMA") ("FSMA Claim"), which provide redress for untrue or misleading statements in listing particulars and prospectuses, and in "published information". HP brought the FSMA Claim, valued at $5 billion, on the basis that the information relied upon by HP when making the investment decision to acquire Autonomy was untrue or misleading. HP also brought claims under the common law for breaches of fiduciary duties and the Misrepresentation Act 1967.

Permission to "dog-leg"?

Allowing the FSMA Claim, the court held that the case at hand indeed constituted fraud on a grand scale. A particular problem that HP faced was that it was the owner of Autonomy at the time of bringing the claims, it would effectively be suing itself (given that liability only attracts to the issuer of the fraudulent information). In addressing this, the court allowed a so-called "dog-leg" claim structure: HP notified Autonomy of the FSMA claim and, controlled by HP, Autonomy admitted its liability, the judge then permitting the Claimants to sue two former directors, Dr Lynch and Mr Hussain, as persons discharging managerial responsibilities in order to recover the losses suffered.

Significance of the judgment

In examining whether HP relied on the relevant published information when making an investment decision, Hildyard J concluded that five of the six heads of claim were duly established.

This decision is of particular importance as it marks the first time that Section 90A and Schedule 10A FSMA were considered during a full trial. Hildyard J's comments bring welcome clarity, confirming that the issuer will be liable not for all losses caused by alleged misrepresentations, but only for those that the PMDRs of the issuer knew to be untrue. Moreover, one claim brought under Section 90A FSMA was unsuccessful. The judge held that the Claimants failed to show that certain accounting statements were "wrong rather than a matter of accountancy judgement on which views might properly differ”. As a result, there is now more guidance on how "untrue" any statement should be, and a claim may thus be slightly more challenging to bring.

Another key clarification was made around reliance. In line with other deceit-based claims, the judge held that there is now a factual but not a legal presumption that an objectively material representation did induce a claimant to enter into the transaction in question. However, in contrast with most deceit-based claims, such presumption will not obviate the need to show that the misrepresentation in question was "reasonably relied upon". As Hildyard J noted, there must be both a specific misrepresentation that the claimant relied upon, and the claimant must have understood it in the sense now alleged.

The introduction and the success of the dog leg structure will also open the door for future claims. Purchasers may now consider relying on Schedule 10A FSMA to seek compensation as an alternative head of claim.

It remains to be seen what the quantum of damages will be, although Hildyard J has indicated that whilst still significant, they are likely to be less than the sums sought by HP. Any punitive damages were dismissed in the judgment.

Would-be sellers and buyers, beware

This story may not have quite run its course and further twists and turns may be around the corner, as the Defendants have at least indicated they intend to seek permission to appeal the decision. For now, though, the decision serves as a cautionary tale for directors of public companies, both sell-side and buy-side. The judgment serves as a timely reminder that targeted management and accounting strategies and ambitious statements used to optimise pitches to investors and would-be purchasers are subject to the strict legal framework for investor communications and must be appropriately verified and justifiable. There are also lessons here for buyers, particularly as to how public statements made by senior directors in the aftermath of a transaction could adversely impact later claims. In his judgment, Hildyard J remains convinced that HP would have acquired Autonomy regardless of fraud, due to statements made by a then HP employee - who later became CEO - describing the acquisition as "almost magical" due to its signature and ground-breaking product, IDOL.