HP has succeeded in its long-running and hard-fought fraud claim against Dr Mike Lynch and Mr Sushovan Hussain in relation to HP’s acquisition of the Autonomy group at the start of 2012. On 28 January the judge gave only a brief summary of his decision, with his judgment of over 1,500 pages yet to be handed down. The judge’s assessment will no doubt present an interesting case study in failures of corporate governance. But it will presumably also be a salutary reminder to investors and those involved in M&A of the limited extent to which audited information can be relied upon and the importance of carrying out thorough due diligence.
The causes of action relied upon by HP included claims in deceit and under the Misrepresentation Act 1967, as would be expected in a fraud such as this. These were brought by a successor to the special purpose vehicle that HP had used to acquire Autonomy and were made directly against the defendants. However, HP also pursued the defendants indirectly through a ‘dog-leg claim’ brought on behalf of Autonomy itself, again via a successor company. The reason for this alternative route was that schedule 10A to the Financial Services and Markets Act 2000 (liability of issuers trading on a securities market in connection with published information, referred to by section 90A of FSMA) only permits compensation for losses caused by the publication of false information, in cases such as this, to be sought from the issuing company. There is no such restriction on claims brought by the company itself, so Autonomy was free to sue the defendants. Autonomy therefore (under HP’s ownership) took this step and sought damages from the defendants for the breaches of the duties they owed it and which had caused it to be exposed to HP’s schedule 10A claim. Autonomy had admitted that it was liable to HP for $4.55bn and it sought this sum from the defendants.
Unsurprisingly, Autonomy could not simply rely upon its own admission of liability and it had to show that HP’s claim against it under schedule 10A was justified. This included showing that there had been publication of misleading or untrue statements, that the defendants as persons discharging managerial responsibilities knew the statements were untrue, and that these had been relied upon when the shares had been purchased. Fraud practitioners will be interested to see how the direct deceit and Misrepresentation Act claims are assessed in this case. But it is likely there will be particular interest in how the judge addresses the different elements of the schedule 10A claim.
It will also be helpful to see if the judgment addresses whether HP could have relied more fully on certain exceptions in schedule 10A that might have permitted it to avoid depending so heavily on the dog-leg claim. As noted above, the general rule is that parties other than the relevant company cannot be sued. However, there are a number of exceptions in paragraph 7(3) of schedule 10A which include claims under the Misrepresentation Act 1967 and where there has been an assumption of responsibility for the information provided. These exceptions were potentially open to HP. However, HP looked to recover the bulk of its losses under the dog-leg claim via schedule 10A and only sought $420m of its loss under its direct deceit and Misrepresentation Act claims, this being the value of shares and options acquired from the defendants themselves.
The judge observed in his summary that one advantage to claims under schedule 10A is that there is no defence of contributory negligence. This might go some way to explaining why HP focused on the dog-leg claim. A contributory negligence defence would also not have been available to answer HP’s deceit claim, but such claims require proof that the defendant intended the claimant to rely upon a false statement, whereas schedule 10A only requires proof that the defendant knew or was reckless as to the truth of the published information. The schedule 10A claim is therefore easier to bring. The absence of the contributory negligence defence means a schedule 10A defendant will not be able to escape liability by pointing to a purchaser’s rushed and deficient due diligence process. However, this does not give carte blanche to a purchaser to mindlessly acquire shares, because there remains a requirement in schedule 10A that a claimant has reasonably relied on the relevant information. It seems though that the court has not approached this requirement as imposing too onerous an obligation and it will be interesting to see what further consideration is given to this issue.
As ever, the devil is in the detail and we will have to wait until the full judgment before knowing what lessons this case has to teach us and whether it develops the law at all.
It may of course be that the most important part of the case has yet to be decided because, as he explains in the summary, the judge has not yet determined what damages the defendants will be required to pay. One thing the judge makes clear is that he expects the award to be for substantially less than the amount claimed by HP. He indicates that this is because HP would have gone ahead with the acquisition in any event in order to effect the ‘transformational change’ its then CEO thought that Autonomy would bring, with HP looking to move its business from low-margin hardware to high-margin software. It therefore looks likely that HP will receive far less than the multi-billion-dollar sums that it has claimed. Practitioners keen to see the judge’s eventual assessment of this issue will however be perturbed to note not only that they will have to wait for this analysis but also that the judge makes reference in his summary to the ‘dense and voluminous’ evidence relating to the issue. If his judgment on liability extends to more than 1,500 pages, what behemoth will we have to overcome to understand his conclusions on quantum? One thing is certain, there is much reading ahead.
Tom Beasley is a barrister at Radcliffe Chambers, London
No comments yet