About 10,000 personal and professional investors in the supermarket group Tesco have had a pleasant surprise.
They have been told they are probably eligible to share in an £85m compensation pot, plus interest.
They are being offered the money because in August 2014 Tesco issued what turned out to be a misleading trading statement, which overstated the company’s expected half-yearly profits by more than £300m.
The Financial Conduct Authority (FCA) has decided that this led investors to buy the firm’s shares and bonds (or IOUs), at artificially inflated prices.
Now, those investors must be compensated for their losses because, as the FCA put it, they “paid a higher price than they would have paid had the false impression not been created”.
‘Genuine economic loss’
The scheme affects investors who bought Tesco shares and bonds between the dates of Friday 29 August 2014 (when the trading statement was put out) and Friday 19 September 2014.
That was the last trading day before Tesco issued a correction on Monday 22 September, after which the value of the firm’s shares and bonds fell.
To qualify for any compensation, you must be what is called a “net investor”: that is someone who bought more shares than they sold during the relevant period.
And the investor must have suffered a “genuine economic loss”, so if the loss was offset by some sort of hedging strategy no compensation will be paid.
If you are indeed eligible, you will be offered 24.5p per share.
That is the difference in the Tesco share value between the close of trading on Friday 19 September 2014 and the close of trading the following Monday after the correction had been published.
Tesco says that drop in the value of the shares has been adjusted to weed out “other industry-wide effects on the market”.
Laith Khalaf of investment firm Hargreaves Lansdown explained that a straightforward comparison of the share price on the two days should have given a compensation payment of 27p per share.
“However, the FTSE 100 also fell on the 22nd September, from 6,838 to 6,774,” he said.
“After adjusting the Tesco share price to factor out this 1% fall, so as to give a more accurate reading of the effect of the accounting correction rather than wider market noise, the 24.5p compensation therefore looks about right,” he added.
Bond holders will be offered different sums depending on the bonds in question.
A list is here and covers 35 different bonds though the compensation values have not yet been published.
Interest on the compensation sum will also be paid to eligible investors.
Individual investors will be paid interest at 4% per annum, running from 19 September 2014 until 120 says after the compensation scheme opens, which is due to happen before the end of August this year.
Professional or “institutional” investors will be paid interest on their compensation at an annual rate of 1.25%.
Getting in touch
The bulk of the eligible claimants are thought to be private individuals, though most of the compensation will go to professional investors because they usually buy shares in much larger quantities.
They also dominate the market for corporate bonds, which are a very niche investment category for individuals in the UK.
The whole scheme will be run by the accountancy firm KPMG, which will try to contact all the eligible investors.
You will be able to make a claim directly even if you are not contacted by them.
But note that in any case you will need to provide evidence of your share and bond purchases and evidence of any sales during the relevant period.
Once the scheme opens, investors will have six months in which to lodge a claim.
Doing so will not affect your legal right to take some sort of other legal action against Tesco, should you be so inclined.
But once an offer of compensation is made, you will have to sign a “release” document in order to accept it.
Doing that will mean you do give up your right to take further legal action against the supermarket over this problem.