The increasing use of intermediation in the holding of securities creates both advantages and disadvantages for issuers and investors and has implications for the operation of the capital markets as a whole. We explored these issues in two edited volumes, the first in 2010 (Intermediated Securities: Legal problems and Practical Issues, Hart Publishing), the second in 2019 (Intermediation and Beyond, Hart Publishing). The importance of the issues raised in our second book was recognised in a Call for Evidence regarding Intermediated Securities published by the Law Commission in August 2019. The High Court also had to consider the difficulties caused by intermediation in SL Claimants v Tesco plc  EWHC 2858 (Ch). In an important decision for securities litigation in the UK, the High Court dismissed a strike out application made by Tesco plc in the group litigation brought by its shareholders under section 90A FSMA, relating to the false and misleading statements made by Tesco regarding its commercial income and trading profits in 2014.
Tesco asserted that it was not liable under section 90A and schedule 10A FSMA for any untrue or misleading statement in its secondary market disclosures to any claimants who held the shares in a custody chain with more than one intermediary. Tesco accepted that its construction would render the FSMA regime ineffective in relation to claims by holders of intermediated securities, but it contended that these consequences flowed from a failure of the law to keep pace with the development of a dematerialised market. If correct, this would expose a fundamental hole in the FSMA regime. The issue is significant, because the vast majority of transactions in publicly held shares in companies listed in an exchange in the UK are held in dematerialised form through CREST, and the position of the claimants was typical of the dematerialised securities market.
Hildyard J considered two technical questions of statutory construction in relation to section 90A and schedule 10A FSMA, namely whether claimants who held their shares through CREST (i) had an ‘interest in securities’ within the meaning of paragraph 8(3) of schedule 10A FSMA and (ii) had ‘acquired, continued to hold or disposed of’ any interest in securities (even if, contrary to Tesco’s first submission, they had one). The judge answered ‘yes’ to both these points, and dismissed Tesco’s strike out application.
Hildyard J recognised the importance of the issue in this case and the need to uphold the legislative regime within section 90A and schedule 10A FSMA which is intended to provide investors with protection. He stated that the court ‘…must proceed on the basis that the draftsman and legislature did understand the market in intermediated securities, did not intend to strip away the rights of investors who chose that mode of holding their investment, and must have been persuaded that the words they used were appropriate to preserve and enhance those rights’ [at 88].
This decision is in keeping with the arguments we advanced in Intermediation and Beyond, as noted by Hildyard J at . It is undoubtedly the correct outcome, but the fact that Tesco brought the strike out action at all illustrates the fact that, as Tesco argued in this case, and as we argue in our books, the law has failed to keep pace with the development of a dematerialised securities market. It is to be hoped that the Law Commission will address these concerns. At present the Law Commission has been asked to produce a scoping study, in order to inform public debate, and develop a broad understanding of potential options for reform but not, as yet, to produce a full report with detailed recommendations for reform. SL Claimants v Tesco provides further support for the view that these issues deserve the Law Commission’s close attention.
Jennifer Payne is the Linklaters Professor of Corporate Finance Law at the University of Oxford.
Louise Gullifer is the Rouse Ball Professor of English Law at the University of Cambridge.