Bribery & Shareholder Loss: Can Shareholders Seek Recourse?

Nicola Sharp of Rahman Ravelli outlines the challenges facing Petrofac shareholders seeking compensation for losses.

On 11 May 2023, shareholders of Petrofac filed, through their lawyers, a securities claim against the company, seeking compensation for a fall in the price of their shares.

The claim is the result of a series of events following the discovery of corporate wrongdoing that has seen Petrofac’s share price fall since 2017.

In May 2017, the Serious Fraud Office announced that it was investigating Petrofac regarding suspicions of bribery, corruption and money laundering. In February 2019, a senior employee of a Petrofac subsidiary pleaded guilty to 11 counts of bribery. In October 2021, Petrofac pleaded guilty to paying approximately £32 million in bribes to officials in order to win contracts in the Middle East worth around £2.6 billion.

Group litigation in the UK

Collective forms of litigation, such as this claim, are rare in the UK. This is partly because claimants have to opt-in to the group litigation - which relies on prospective claimants coming forward – as they are not automatically included by virtue of being part of a class; such as a class of shareholders.

In recent years, however, there has been a growing number of group actions. The VW emissions action and the claim brought against Tesco over accounting errors are two of the more high-profile examples.

With more litigation funders being willing to take these claims, such a course of action is becoming an increasingly attractive option.

Claiming for a drop in share price: The law

In ordinary circumstances, shareholders cannot claim for a drop in their share price. It is a known risk with investments that share prices can and will fluctuate. Shareholders cannot claim for “reflective loss” where their losses merely reflect the loss suffered by the company (Prudential Assurance v Newman Industries (No. 2) [1982] 1 Ch 204)

However, there is a mechanism for these so-called “stock-drop” claims, where there has been a level of cover-up (whether intended or not) on the part of the company. The action against Petrofac will be brought as a claim under section 90 Financial Services and Markets Act 2000, which allows compensation to shareholders in relation to statements made in a company’s listing particulars or prospectus. Compensation is payable if the person who acquired securities suffered loss as a result of “any untrue or misleading statement in the particulars” or “omission from the particulars of a matter required to be included.”

But for the Petrofac shareholders’ claim to succeed, the company being guilty of wrongdoing will not be enough. The company must have made an untrue or misleading statement in its documents for the claimants to be successful. Often, the difficulty facing those bringing such claims is that the misleading statements they rely upon are broad and vague, making the link between the statements and the loss more difficult to establish.

In relation to bribery, it is usually the case that annual reports include a statement that the company “recognises the requirements of the UK Bribery Act 2010” or it “manages its risk in relation to bribery”. Whether these statements are sufficiently precise to be deemed misleading remains to be seen.

The future of securities litigation and fraud

This case has the potential to open the door for others who wish to hold listed companies to account for environmental, social and governance failures or other matters.

But it will be interesting to see what statements within the documents are deemed to be misleading or untrue - and whether the shareholders can prove reliance on such statements and any resulting loss.