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Misleading Statements From Directors – Actions Available to Shareholders


When directors have made misleading statements there are a number of potential penalties and remedies available to minority shareholders. Rupert Wright, a corporate lawyer with Charles Lucas & Marshall explains.

Rupert Wright

Rupert Wright

Misleading statements by directors mainly relate to information and projections which are presented to investors which are false or misleading and which never had any hope of ever being fulfilled.

There are a number of options for redress by shareholders – whether under criminal law, common law or under the Companies Act 2006.

The first consideration in any potential criminal prosecution is the Code for Crown Prosecutors.  Any prosecution must comply with the evidential stage and the public interest stage.  A person is only charged with allegations of crime where both tests are met.  Potential criminal offences might include misleading statements in relation to investments, fraud by false representation, fraud by abuse of position and conspiracy to defraud.

Under Section 397 of the Financial Services and Markets Act 2000, there are three elements which the prosecution must prove to make out an offence: namely that a misleading statement was made, that there was a requisite state of mind and also that the defendant must have acted with the purpose of inducing any person to act or refrain from acting in a way specified or was reckless.  The maximum sentence for an offence contrary to Section 397 is seven years in prison although this would be reserved for the worst cases of its kind.

As well as a criminal claim, there are potential civil remedies for making a misleading statement.  In the case of a civil claim, the following matters need consideration: deceit, conspiracy, dishonest assistance, breach of fiduciary duties, unjust enrichment and knowing receipt.

The Companies Act lays down the various fiduciary duties for directors.  In particular, a director must act within its powers, promote the success of the company, exercise reasonable skill, care and diligence and avoid conflicts of interest.

It is also open to minority shareholders to make a derivative claim which applies where shareholders have suffered or may suffer damage to their shareholding as a result of the conduct of a director.  A derivative claim is an action commenced by a shareholder seeking relief on behalf of the company in respect of wrong done to the company.  It is also open to members to make an unfair prejudice claim under Sections 994 to 999 of the Companies Act 2006.  A claim under this section can be made where the company’s affairs are being or have been conducted in a manner that is unfairly prejudicial to the interests of members.

In summary, there are a number of avenues open to shareholders to make a claim where misleading statements have been made by directors.  Directors can potentially face a wide ambit of potential criminal and civil claims and should consult their lawyers on a regular basis before making statements which could be potentially misleading.

For further information contact Rupert Wright on 01635 521212 or rupert.wright@clmlaw.co.uk

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Rupert Wright
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Rupert Wright

August 25th, 2014 at 3:31 pm