In an interesting securities litigation case, Tesco Plc, a British multinational company, had allegedly published false information that wooed several investors to make investment decisions concerning its shares.
Upon discovery, the investors sued Tesco Plc to claim and recover losses suffered as a result of the false information. That begs the question, to what extend is a Public listed company liable in an intermediated market for any misleading information that it publishes to investors?
The investors in Tesco Plc held shares in a dematerialized form using chains of custodians to acquire, hold or dispose of shares as the case may be.
What makes this an interesting case is the fact that it sheds more light into who has an interest in securities held in an intermediated market, especially where the ultimate investor is at the tail end of the custody chain.
The financial market is becoming more dematerialised and equally more intermediated, with long custody chains. In the Tesco Plc case, none of the investors had a direct legal interest in the securities in Tesco, as majority held securities through custody chains i.e. Investment Banks, and other financial institutions.
These securities were held and registered in the name of a bank or institutions providing custodian services. As such, the argument in Tesco Plc was that the legal owner of the securities was the person whose name appeared on the electronic register.
The question before the UK court was whether the investors had a direct legal interest to which they could lay a claim or they were mere beneficiaries of sub-trusts created under the long chain of custody.
Amidst the court proceedings, Tesco made an application to strike out all the claims made by the investors against it, on the grounds that none of the investors had a direct interest in the securities but rather only enjoyed an economic interest.
This contention thus brought me home, as to the nature of the interests held in a dematerialsed and intermediated market and the extent of liability owed to any person who does not directly hold or acquire shares in a listed company.
Back home, the Capital Markets Act, in a similar fashion like the UK’s Financial Services and Markets Act (FSMA) provides that any person who makes deceptive and misleading information in listing particulars or the company prospectus is liable to pay compensation to an investor who has suffered loss as a result of the untrue or misleading statement.
Fortunately, in Kenya, the Central Depositories Act, recognises that a central depository or its nominee shall not be deemed to have an interest in securities which are registered in its name but will only be a bare trustee.
The Capital Markets Act as well anticipates that any person can have an interest in securities, especially those held in an intermediated market as long as such a person has reasonable grounds to believe that they have an interest in those securities.
In a dematerialised financial market that is equally intermediated, I wouldn’t agree with Tesco’s argument suggesting that the ultimate investor in such a market only enjoys an economic interest in place of a legal interest.