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

’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

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

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

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