Profit warning proposals spark fears of litigation

UK companies could face legal action if they issue profit warnings or other statements which are false and misleading, under new plans being brought in by the government.

The proposals give investors a right to sue if they feel they have been misled when buying or selling shares, and could lead to a slew of litigation over the timing or nature of company reports.

The proposals, largely in line with a review of the regime by Professor Paul Davies QC of the London School of Economics, will give investors a specific right to damages if companies issue these statements ­ made in addition to periodic statements - on any recognised information service.

The new rules will permit sellers as well as buyers of securities to recover losses.

At HM Treasury’s first outing of the draft proposals this week, companies were told that the new proposals will also bring 3,500 more companies within the regime ­ which previously only applied to main market companies ­ meaning AIM and Plus market companies face an increased reporting liability risk.

And although auditors and directors have immunity from direct litigation, companies may still seek to recover money from them if they face payouts.

Herbert Smith litigation partner Hardeep Nahal said the proposals are indicative of a new direction for UK corporate reporting.

‘Corporate reports were not designed as a means of protection for investors but rather as a way for existing shareholders to monitor management and performance.

This is a shift because it says that investors can sue on periodic and other reports, on the basis that reports informed their decision to buy shares,’ said Nahal.

The Treasury’s consultation on the new regime closes on 9 October .