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Made a bad investment… or were you misled?

All financial investments generally carry an inherent risk. When investing in shares, we all know that the value of those shares can go down as well as up, businesses can flounder and markets can fall. However, what if you’ve done your homework and been given assurances about your investment which turn out to be completely untrue? Did you rely on those assurances when making your decision to invest? Have you suffered substantial losses and feel that you have been misled before you decided to invest. What are your options in those circumstances…?

Summary

  • Legal routes to redress will depend on what type of company you have invested in and the particular circumstances of your investment
  • There is a statutory regime for compensation where losses result from investments made in public companies and where misleading statements have been included in materials published relating to securities
  • Investment in private companies is much riskier due to less stringent regulatory requirements and a lack of independent information about a private company’s finances
  • However, if you feel you have been misled then there are circumstances where you may be able to recover your loss

The likelihood is that if you have been victim of a bad investment, you will want to know whether there is any chance of getting your money back. Legal routes to redress will depend on what type of investment you have made and the particular circumstances of your investment. In this article we will look at available options for redress in respect of investments in public and private companies in the UK. Future articles will deal with other types of investment, such as property and cryptocurrency.

Purchase of company shares

There are a number of different company vehicles available in the UK, the most prevalent being the private company limited by shares and the public company limited by shares. Investing in private companies is generally considered riskier than investment in a public company as private companies are subject to far less regulation and reporting requirements than public companies.

Public companies

Under UK law, a public company must have the PLC or “public limited company” designation after the company name and maintain a minimum share capital of £50,000. Public companies also have specific reporting obligations and are required to prepare a financial report and director’s report annually to shareholders as well as being independently audited.

A key step in becoming a PLC is flotation on the stock exchange, where shares are made available for public purchase. In these circumstances, a company must publish a prospectus which allows prospective investors to understand a company’s business and determine whether to buy shares in the company. A prospectus is required to contain all information that is material to an investor for making an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the company.

The prospectus must comply with the requirements of the Financial Services and Markets Act 2000 (“FSMA”), the Financial Conduct Authority’s UK Listing Rules and UK Prospectus Regulation. The company and its directors have primary responsibility for ensuring that the prospectus is true, accurate and not misleading, and for avoiding the omission of any material information.

Under s.90 FSMA any person responsible for a prospectus is liable to pay compensation to a person who has acquired securities to which the prospectus applies and has suffered loss in respect of those securities as a result of either:

  • Any untrue or misleading statement in the prospectus
  • The omission from the prospectus of any matter required to be included by Articles 6 and 14(2) of the UK Prospectus Regulation or, in the case of a supplementary prospectus, Article 23 of the UK Prospectus Regulation

Section 90(1) does not require the person claiming compensation to prove that they relied on the relevant statement or omission when they acquired the securities. It also does not require the person claiming compensation to have acquired the securities in the offer to which the prospectus relates.

However, a person is not liable under s.90(1) FSMA if they can demonstrate that they reasonably believed (having made such enquiries) at the time the prospectus was submitted to the FCA that the statement was true and not misleading, or that the any omission causing loss was properly omitted. In addition, at least one of the following conditions must be satisfied:

  • They continued in that belief until the time when the securities in question were acquired.
  • The securities were acquired before it was reasonably practicable to bring a correction to the attention of persons likely to acquire them.
  • Before the securities were acquired, they had taken all such steps as it was reasonable for them to have taken to secure that a correction was brought to the attention of those persons.
  • They continued in their belief until after dealings in the securities began and they were acquired after such a lapse of time that they ought in the circumstances to be reasonably excused.

If the statement in question was made by an expert, the exemption applies where the person responsible for the prospectus reasonably believed both that the expert was competent to make or authorise the statement and that the expert had consented to its inclusion in the form and context in which it was included.

Misleading statements in other published documents relating to securities can lead to claims under section 90A and Schedule 10A FSMA, and more generally misleading statements can lead to claims for misrepresentation or negligent misstatement or even criminal liability under section 89 Financial Services Act 2012 or the Fraud Act 2006. A recent example of a claim under s.90A FSMA is that of 230 individuals who held interests in securities issued by Standard Chartered Plc [1] and are seeking compensation for losses they claim to have suffered as a result of investments made based on untrue, misleading or deficient statements made by Standard Chartered Plc in documents published over the course of 12 years.

Private companies

As stated above, investment in a private company is much riskier as there are far less stringent regulatory requirements, and there is no equivalent statutory regime for compensation. All private companies are required to file accounts at Companies House annually, however, some small companies, micro-entities and dormant companies may be able to file abridged or simpler versions. Private companies will only be required to compile audited accounts if they meet certain thresholds as follows:

  • Turnover threshold £10.2m
  • Gross Asset threshold £5.1m
  • Number of employees 50 or more

This means that getting hold of the full financial picture of a private company can be difficult, and you are reliant on the information being provided to you by those individuals seeking your investment and who inevitably have a vested interest.

Where statements about the company’s financial position, performance or value have been made which turn out to be untrue, you may be able to bring a claim against the company itself or its agent(s) (i.e. those individuals making the statements) for misrepresentation. In order to succeed in such a claim, you will need to prove that:

  • a misrepresentation was made (i.e. an untrue statement)
  • which you relied upon when entering the contract to purchase shares; and
  • you suffered loss as a result

A claim for fraudulent misrepresentation (which carries with it wider scope for damages) also requires the false representation to have been made by the defendant knowingly, without belief in its truth, or recklessly as to its truth. If this deceit element is not present, then a claim for negligent or innocent misrepresentation will be more appropriate.

A recent example of such a claim is the case of Groen v Heath [2024] EWHC 1654 (Ch) in which investors complained about false statements made by Martin Heath (shareholder and director of start-up tech business, Seed Media Limited (“SML”)). Mr Heath made statements about the capabilities of software developed by SML, the identity of SML’s customers and the state of its finances. The court held that Heath knew that the company was not cash flow positive, and it did not have a complete, tested and validated product that worked. The investors successfully claimed that they had suffered substantial financial loss as a result of investments made in SML in reliance on the statements made by Mr Heath.

For some tips about investing in private companies see our previous article The Perfect Fraud? Investing in private companies (Part 2) The unravelling… This article was based on a claim for fraudulent misrepresentation which we successfully brought against the founder and investor relations director of a global coaching business on behalf of a small group of private investors.

If you are a minority shareholder and find that the company is being mismanaged or managed in a way that is prejudicial to your interests there may be a route to legal redress through either a derivative action (meaning an action brought by you on behalf of the company) against the company’s directors for breach of directors’ duties, or via an unfair prejudice petition. Look out for future articles on these types of claim.

EMIs

The new reimbursement rules will have a profound impact on the banking industry, but some PSPs may feel the consequences of the changes more than others. There has been a concern that the reimbursement requirement could send some smaller PSPs into insolvency threatening competition in the marketplace. Additionally, if you are an EMI with a business model based on using an agent bank, agents and distributors, there is an added layer of complexity to implementing the new rules.

Assessing who is liable to fund the reimbursement is not straightforward, however given the time constraints (5-days in a simple claim), it is likely that EMI principals will be left to reimburse the customer, and then seek payment from its agent or distributor. It is important that distribution agreements contain the appropriate warranties and indemnities and make clear the agent/distributor’s obligations under the new rules.

Conclusion

The majority of investors appreciate the inherent risk that comes with investing in companies. However, there are circumstances where potential investors may have been misled about the financial status of a company, the value of its shares or assets, and its capabilities or future performance. Where that information was relied upon when deciding to invest and it turns out to be untrue there may be a legal route to recovery. At Tenet we have experience of successfully recovering losses in these circumstances and can provide expert advice on your legal options.

For more information about this article please contact the author: Esther Phillips

Should you suspect that you are a victim of fraud or other wrongdoing and need advice, please do not hesitate to get in touch at hello@tenetlaw.co.uk  we will be happy to help.

[1] Persons Identified in Schedule 1 to the Re-Amended Particulars of Claim v Standard Chartered Plc [2024] EWCA Civ 674

Published on January 31, 2025