FCA fines Chair of listed company for market abuse

Background

In late September 2018, the board of the Company became aware of a risk of not meeting the Company's published guidance and directed that the Company's financial forecasts should be interrogated. On 3 October, one of the Company’s significant customers indicated that they might need less supply from the Company which would have a negative impact on the Company’s results. On learning of this information, Sir Christopher suggested scheduling a meeting of the non-executive directors only. He acknowledged to the FCA that this was an indirect indication that if guidance needed to be revised and reported through an RNS announcement, then he considered that this called into question the CEO’s future with the Company.

On Friday 12 October, the Company’s CEO indicated to Sir Christopher that he wished to explore retirement. Later that day, Sir Christopher made disclosures to two shareholders that, depending on the board’s analysis, the Company expected to make an RNS announcement on Monday 15 October that it would be revising guidance and that the CEO was retiring.

On Monday 15 October at 7am, the Company released an RNS announcement which reported that the Company was revising its guidance. At 7am, the Company also released a separate RNS announcement which reported that its CEO would step down and cease to be a director with immediate effect.

Decision

The EU Market Abuse Regulation (EU MAR) was the legislation which applied to the Company at the relevant time. The FCA final notice states that, in making the disclosures to the two shareholders, Sir Christopher’s conduct amounted to unlawful disclosure of inside information under Article 10 and in breach of Article 14(c) of EU MAR.

Definition of inside information

To be “inside information”, the information in question must:

1. Relate to an issuer or its securities.
2. Not be in the public domain.
3. Be of a precise nature.
4. Be likely to have a significant effect on the price of the issuer's securities.

The two questions at issue were whether the information which Sir Christopher disclosed was “of a precise nature” and “likely to have a significant effect” on the price of the Company’s shares. 

Sufficiently precise

It was submitted in defence that the information was not sufficiently precise to be inside information on the basis that the disclosures contained limited and inherently uncertain information, as the matters under discussion were “depending on the Board’s analysis”, which had not yet occurred.

The FCA stated that the information disclosed did not have to be certain in order to be sufficiently precise to constitute inside information. The FCA said that, instead, the test, pursuant to Article 7(2) of EU MAR, was whether the events disclosed were “reasonably expected to occur”. The FCA affirmed the decision in Hannam, in which the Upper Tribunal held that this meant that there needed to be a “realistic prospect” of them occurring. In the FCA’s view, at the time of the disclosures, this test was met because there was a realistic prospect both that the financial guidance would be revised and that the CEO would retire, notwithstanding that the Company needed to clarify the financial position and that the CEO had not yet confirmed they would be retiring. The fact that there were further developments following the disclosures did not alter the fact that, at the time of the disclosures, these events were reasonably expected to occur.

Likely to have a significant effect on price

The FCA concluded that the information disclosed was also specific enough to enable a conclusion to be drawn as to its possible effect on the price of the Company’s shares. Although it was the case that the disclosures did not provide detail as to the extent or likely range of the expected guidance revision, the FCA affirmed the decision of the Upper Tribunal in Hannam that, in interpreting this test, there is no need to know the extent to which the price would be affected.  The FCA further noted that the ECJ had concluded that there is no need even to conclude that the effect on price will be in a particular direction.

Timing of disclosure of inside information

It was submitted in defence that if the Company had inside information, then pursuant to Article 17(1) of EU MAR it was obliged to inform the public as soon as possible. The information disclosed could therefore not have been inside information as it was not, at the time of the disclosures, ready to be announced. 

The FCA clarified that, while Article 17(1) of EU MAR requires an issuer to inform the public of inside information “as soon as possible” it does not require the issuer to inform the public immediately. It also requires the inside information to be made public “in a manner which enables fast access and complete, correct and timely assessment of the information by the public”. Therefore, in the FCA’s view, Article 17(1) permits a short period of time between inside information coming into existence and a public announcement having to be made, in order for preparations for the announcement to be made and to avoid disclosing information which would lead to the public making incorrect or incomplete assessments of the information disclosed. The test as to whether information is inside information is not whether it is sufficiently precise to be announced immediately.

The FCA appears to have accepted that the information, at the time of the disclosures, was not ready to be announced to the market.  However, in the FCA’s view, this did not prevent the information from being sufficiently precise so as to constitute inside information. 

Selective disclosure

It is possible to make selective disclosure of inside information (ie, not a general disclosure to the market via RNS announcement, but to a select recipient / group of recipients) if you do so within the normal course of your employment, profession or duties. However, the FCA concluded that the disclosures were made otherwise than in the normal exercise of Sir Christopher’s employment, profession or duties for the following reasons:

• Sir Christopher’s explanation that he did not want to “surprise shareholders of scale with announcements” was not a good reason for making the disclosures.
• Although Recital 19 to EU MAR provides that discussions of a general nature regarding the business and market developments are permissible between shareholders and management concerning an issuer, Sir Christopher’s disclosures of inside information were outside the scope of that type of discussion.
• Sir Christopher’s objective, or primary objective, was not to consult the two shareholders but rather to forewarn them of events that he believed would soon take place. The implication is that, if Sir Christopher had made the disclosures with a view to consulting the two shareholders on the future of the CEO, this might, in the FCA’s view, have been permissible. 
• There were more appropriate means by which Sir Christopher could have acknowledged, and ensured, the ongoing support of the shareholders in question. For example, other major shareholders were given access to the Company’s senior management team in calls held immediately after the RNS announcements.  

The FCA noted that the question of whether disclosure has been made in the normal exercise of a person’s employment, profession or duties is separate from whether suitable confidentiality and no share dealing arrangements have been entered into. The FCA concluded that the imposition of confidentiality and no-dealing requirements could not make the disclosures part of Sir Christopher’s normal exercise of his employment, profession or duties. 

Conclusion

The FCA’s decision contains important guidance on the interpretation of key elements of the UK Market Abuse Regulation, and its predecessor EU MAR:

• Information does not have to be certain in order to be sufficiently precise to constitute inside information. The test is whether the events are “reasonably expected to occur” which means that there needs to be a “realistic prospect” of them occurring.
• The FCA has helpfully clarified that the obligation to inform the public of inside information “as soon as possible” does not mean “immediately”. UK MAR permits a short period of time between inside information coming into existence and a public announcement, in order for preparations for disclosure to be made.  
• There must be a legitimate reason for sharing inside information with shareholders – it is not enough to want to give shareholders a “heads up” of something coming down the track. 

Listed companies should seek advice where they are considering disclosing confidential information which could potentially amount to inside information to shareholders or other selected recipients.