The role of economic analysis in UK shareholder actions

By Ronnie Barnes, Kristin M. Feitzinger and Amir Rozen

15 March 2017 at 09:34 BST

While private securities litigation remains largely untested in the English courts, a number of recent cases indicate that high-stakes shareholder actions might be on the rise in the United Kingdom, according to a report from Cornerstone Research.


These actions relate to issues of statutory liability under the Financial Services and Markets Act 2000 (FSMA)—which governs most aspects of securities markets operations—and may provide some insight into how such litigation will develop. In the interim, the experience gained from shareholder class actions in the United States can provide valuable insights into the importance of economic analysis in these disputes.  

Recent UK cases

The emergence of these UK cases is in large part due to a change in the legal landscape in the United States and the possibility of exernal investment in litigation. The US Supreme Court’s decision in Morrison v. National Australia Bank[1] effectively bars purchasers of securities traded on foreign exchanges from filing lawsuits in the United States. In the United Kingdom, litigation funding is on the rise, reducing the possible losses that claimants might face in a shareholder action.

Royal Bank of Scotland (RBS):

This action relates to a £12 billion rights issue in 2008. The claimants allege that RBS’s directors issued misleading statements in the period leading up to the offering, causing RBS’s shares to trade at inflated prices. Investors claim that these alleged misleading statements constitute a violation of Section 90 of the FSMA, and five separate shareholder groups are seeking a total of up to £4 billion in compensation.[2]


The Tesco case involves an overstatement of profits that the firm reported for the first half of 2014. The claimants are seeking compensation based on declines in the Tesco share price that were allegedly caused by the result of announcements related to improper accounting practices in violation of Section 90A of the FSMA.[3] A shareholder action group is likely to seek £4 billion to £6 billion in damages but is waiting for the conclusion of an investigation launched by the Serious Fraud Office in September 2016. Separately, in October 2016, a group of 124 institutional funds brought a claim for more than £100 million against Tesco. 

Lloyds Banking Group (Lloyds):

This action relates to Lloyds’ acquisition of HBOS in January 2009 and an alleged failure to disclose to shareholders relevant information about HBOS. The claimants are seeking losses suffered through the dilution of their shareholdings as a result of the issuing of shares to HBOS investors and HM Treasury.

The importance of economic analysis in US securities litigation

Experience from thousands of securities class actions in the United States points to several areas where tools from financial economics may be particularly helpful in assessing issues in UK shareholder actions, including liability, reliance, and damages. For damages in particular, issues may include:

•         How much did investors overpay when they purchased the security at issue?

•         How much did investors lose when corrective information was revealed to the market?

Event studies in damages assessments in US securities cases

An event study is a widely used and generally accepted analytical framework for investigating the effects of information on security prices. It attempts to isolate company-specific security price changes and indicate whether they can be reliably attributed to company-specific information.

Damages in the United States are driven by the difference between the price actually paid for a security and its “real” value absent the alleged misrepresentations (inflation). The US Supreme Court’s decision in Dura[4] states that plaintiffs must also show that they suffered losses that were actually caused by the alleged misrepresentations.

For damages in particular, event studies are a frequently used tool. Because they can analyse company-specific security price changes following alleged misstatements or corrective disclosures, they can provide insight into the level of inflation and the magnitude of fraud-related losses (if any).

Potential supplemental analyses are often required

The standard event study analysis employed in US securities class actions cannot isolate the impact of different pieces of company-specific news disclosed within the study’s analysis window. Thus, complications requiring analysis in addition to an event study are frequent—for example, when one or more of these circumstances are present:

  • Disclosure with information unrelated to the plaintiffs’ allegations
  • Disclosure related to multiple alleged misrepresentations
  • Disclosure related to misrepresentations that change in nature or severity during the class period
  •  Over- or under-disclosure of an alleged misrepresentation

When an event study itself is insufficient to estimate price impact and hence alleged damages, a financial economist has supplemental economic tools to draw upon. For example:

  • Review of prior public press can be useful in isolating what information disclosed on a particular day was new. In an efficient market, only new (unexpected) information will affect a share price.
  • Review of investment analyst reports may provide insight into what importance (if any) financial professionals assigned to the alleged misrepresentation or correction at the time it was made.
  • Fundamental financial analysis can be useful to assess what impact (if any) the alleged misrepresentation would be expected to have on future cash flows or discount rate, and hence share price.
  • Intraday share price analysis may help disaggregate the effects of multiple announcements which occur within the event study’s analysis window but which are not simultaneous.
  • Additional regression analysis—for example, analysing past share price reaction to similar events over time or across multiple companies—may also help estimate the price impact of alleged misrepresentations or corrective information.

The content of this article is adapted from “The Role of Economic Analysis in U.K. Shareholder Actions,” published by Cornerstone Research. The views expressed herein are solely those of the authors, who are responsible for the content, and do not necessarily represent the views of Cornerstone Research.

[1]   Morrison et al. v. National Australia Bank Ltd. et al., 561 U.S. 247 (2010).

[2]   In December 2016, two of the five groups rejected RBS’s settlement offer of £800 million to cover all five groups.

[3]   “Interim Results 2014/15,” Tesco PLC, 23 October 2014; “Tesco to Face European Claim over Accounting Blunder,” Law360, 24 March 2015.

[4]   Dura Pharmaceuticals Inc. v. Broudo, 544 U.S. 336 (2005).


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