Every little doesn’t always help

18 December 2019

Tesco has recently failed in its attempt to strike out claims by investors seeking to recover losses in respect of their investment decisions to buy and sell shares in Tesco, which the Claimants claimed were made in reliance on untrue or misleading information published by the supermarket chain.

FSMA – the Relevant Law

Under section 90A and Schedule 10A of the Financial Services and Markets Act 2000 (FSMA), an issuer of securities is liable to pay compensation to a person who (i) acquires, (ii) continues to hold or (iii) disposes of securities in reliance on published information, and who has suffered loss as a result of any untrue or misleading statement in it (or omission of any matter required to be included in it).   The “acquisition or disposal of securities” includes the “acquisition or disposal of any interest in securities… or contracting to acquire or dispose of securities or of any interest in securities”.

Tesco’s submissions

The shares in Tesco were all held in a “dematerialised form”, i.e. through a computer-based system, which in this case was CREST (“Certificateless Registry for Electronic Share Transfer”).  In CREST, custodians are used to acquire, hold or dispose of securities, which are referred to as “intermediated securities”. The key feature of intermediated securities held in a custody chain is that the ultimate investor is given the benefit of a right, without holding the right itself.

Tesco applied to strike out the claims on the following grounds:

  1. The Claimants did not have an “interest in securitiesbecause they could only assert their legal rights against the person immediately preceding them in the custody chain, and not against the holder of the legal title.
  2. Even if the Claimants were found to have an “interest in securities”, they could not have “acquired” or “disposed” of that interest: At most an underlying investor could hold a beneficial interest, which would only be created or extinguished on the acquisition or disposal of the securities by the legal owner.  This did not equate to “acquiring or disposing of” the shares.

Tesco accepted that its construction would mean that Schedule 10A was unfit for purpose but contended that this consequence flowed from a failure of the law to keep pace with developments in the market.

The court rejected both arguments and dismissed Tesco’s strike out application.


Hildyard J determined that the right which an investor has via a custody chain “is, or can be equated to, an equitable property right in respect of the securities”, which is sufficient to establish the “interest in securities” required by FSMA.

The Court also found that the purpose of Schedule 10A is to confer a statutory cause of action in respect of an untrue or misleading statement or omission in relation to securities.  The terms “acquireand “dispose should therefore be given a broad meaning to encompass the creation and termination of an interest in the security.

This decision should be welcomed as the vast majority of shares in publicly listed companies are held and transferred through CREST.  Had Tesco been successful in its arguments, the Court would have accepted that there is a “fundamental hole in FSMA”, leaving a large number of investors with no recourse under FSMA to defend their rights.


Harry Stewart Author
Harry Stewart
Senior Associate
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Yasmin Daswani Author
Yasmin Daswani
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