Breach of disclosure obligations
Disclosure and Transparency Rules
On July 1, 2005, the FSA handbook was restructured to include a
new “block”, the Listing, Prospectus and Disclosure Rules. On
January 20, 2007, the Disclosure Rules were renamed the Disclosure
and Transparency Rules (DTR), bringing into UK law provisions from
the EU’s Transparency Directive and designed to ensure greater
transparency as to the ownership and control of corporate
entities.
They include obligations for companies with a full listing on
the London Stock Exchange to disclose to the market information
that may affect the price of their shares. Principle 4 of the
Listing Principles, designed to ensure adherence to the spirit as
well as the letter of the DTR, makes the policy clear: a
listed company must communicate information to holders and
potential holders of its listed equity securities in such a way as
to avoid the creation or continuation of a false
market.
A core obligation is set out in DTR 2.2.1: a company must notify
the market, through a Regulatory Information Service (RIS), as soon
as possible, of any inside information concerning the company. (The
FSA maintains a list of approved RIS providers, which disseminate
information from listed and AIM companies for onward transmission
to the market.) AIM rule 11 is in similar terms.
Inside information
“Inside information” is information of a precise nature
that:
- is not generally available;
- relates (whether directly or indirectly) to investments traded
on a UK regulated market (such as listed shares on the London Stock
Exchange);
- would be likely to have a significant effect on the price of
the shares if it were generally available (FSMA, s.118C).
The price sensitivity of information is crucial. A company must
ask: would a hypothetical “reasonable investor”, out to maximise
their own economic self-interest, be likely to use the information
and so have a significant impact on the share price? Information
that will usually be considered relevant to a reasonable investor’s
decisions includes that affecting:
- the company’s assets and liabilities;
- the performance of the company’s business, or expectations as
to that performance;
- the company’s financial condition;
- the course of the company’s business;
- major new developments in the company’s business;
- information that has previously been disclosed to the
market.
In addition, a company must take all reasonable care to ensure
that any information it releases to the market is not misleading,
false or deceptive, and that it does not omit anything that is
“likely to affect the import” of the information (DTR 1.3.4).
Although the rules on the disclosure of inside information have
changed, cases decided under the old regime will continue to give
valuable guidance as to how these obligations will be enforced.
The FSA – as our case studies show –
has been rigorous in its pursuit of errant companies and has used
its powers against directors who were “knowingly concerned” in a
breach (FSMA, s.91(2)).
Personal liability for directors
The definition of “knowingly concerned” is not, on the evidence
of existing FSA case material, clear cut. The Sportsworld and Universal Salvage cases suggest that
the “guilty” director does not need to have any intention to
mislead the market: knowledge of the facts and some involvement in
the breach were enough to result in fines for each chief executive.
In the later case of Pace, however,
the directors escaped penalties and censure – the FSA seems now to
have accepted the idea that to “be knowingly concerned” a director
must have some awareness that the company is breaking the
rules.
The safest course will always be to make sure you know the rules
and assume that absence of bad faith will not be enough to get you
off the hook. In this context, Listing Principles 1 and 2 are very
relevant:
- a listed company must take reasonable steps to enable its
directors to understand their responsibilities and obligations as
directors;
- a listed company must take reasonable steps to establish and
maintain adequate procedures, systems and controls to enable it to
comply with its obligations.
If the FSA cannot pin a breach of a specific listing rule on to
a company or its directors, it now has the ability to pursue them
for a breach of these listing principles. It could be all too easy,
after the event, for the regulator to allege that directors did not
understand their responsibilities and obligations, and that
adequate systems were not in place for compliance.
Is it just the chief executive who is at risk of a fine? The
short answer is “no”. All directors of a listed company should
accept full responsibility, collectively and individually, for the
company’s compliance with the rules. Although the FSA decided, in
both the Sportsworld and
Universal Salvage cases, that
the CEOs had a particular responsibility, all directors, executive
and non-executive, are under a duty to ensure the company complies
with its obligations and to bring any price-sensitive information
to the attention of the full board as soon as possible. And, as the
Universal Salvage and Pace cases
have shown, the FSA will be critical if the board does not seek
prompt advice from the company’s brokers.
The rest of the board should not simply point to the CEO and
expect him or her to take the rap in every case.
