March 2009

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Corporate Team

FSA bares its teeth regarding non-compliance with the disclosure and transparency rules

Introduction

When the UK implemented the Transparency Directive by the introduction of the Disclosure and Transparency Rules ("DTR") in 2007 the responsibility for enforcing the new regime fell firstly to the Department of Trade and Industry and then to the Financial Services Authority ("FSA").  Initially the FSA decided not to take a hard line approach to enforcement but it has signalled recently that the two year period of grace is over and it is ready to get tough on enforcement.  A few recent high profile cases have illustrated the FSA's determination in this regard and have emphasised several key points which listed companies should bear in mind.

What are the Disclosure and Transparency Rules?

The DTR are a set of rules which listed companies (generally those on the Official List of the London Stock Exchange, but DTR 5 also applies to AIM companies) must observe and are designed to ensure that there is prompt and fair disclosure of relevant information to the market to ensure an efficient, fair and orderly market.  Key rules in the DTR are:

  • DTR 2 which states that companies must notify a Regulatory Information Service as soon as possible of any inside information; and

  • DTR 5 which states that holders of significant shareholdings in a listed company must notify the company of their holding. 

Listing Principle 4 of the Listing Rules is also relevant.  It states that a listed company must communicate information to holders and potential holders of its securities in such as way as to avoid the creation or continuation of a false market.

Examples of recent fines

The FSA's tougher stance on non-compliance with the DTR has been highlighted by two high profile fines imposed by it in January 2009 alone. 

Firstly, the FSA fined Wolfson Microelectronics plc ("Wolfson") £140,000 for breach of DTR 2.2 and Listing Principle 4 of the Listing Rules in respect of a 16 day delay in announcing inside information to the market.  On 10 March 2008, Wolfson was informed by a major customer that it no longer required Wolfson to supply it with parts for its product.  Wolfson estimated that the loss of the contract would amount to a loss of $20 million (8% of its forecast revenue for 2008) but it did not announce the negative news until 27 March 2008. 

Secondly, the FSA fined Entertainment Rights plc £245,000 for breach of DTR 2.2.1 and Listing Principle 4 of the Listing Rules in respect of a 78 day delay in announcing inside information.  On 10 July 2008, one of Entertainment Rights' key contracts was varied and potentially reduced the company's profits by $13.9 million.  The board, however, felt unable to quantify the impact of the variation and delayed announcing the variation until 26 September 2008 once it had quantified a loss of £8 million.

What points should you take from this?

The FSA has highlighted some key points in these cases which should be borne in mind by boards of listed companies.  These include:

  • Companies must consider carefully whether information is 'inside information' and whether they must announce the information to the market.

  • The hope of there being future good news to offset existing bad news does not avoid the need to announce the inside information to the market without delay:  the market will determine whether the good news cancels out the bad.

  • A company cannot delay an announcement even if it cannot precisely quantify the impact of the information.

  • Companies must consult their legal advisers/sponsor/broker as soon as possible to assess whether or not information is inside information and whether it needs to be announced.

  • Companies cannot refuse to disclose negative price sensitive information because it would cause a fall in the share price or result in the share price not representing the true value of the company.

  • Information must be released immediately, i.e. the day they are advised by their legal advisers/broker if possible or the day after at the latest.

  • Confidentiality agreements do not prevent the need to make an announcement.

  • Companies must act in accordance with any disclosure policy which they have adopted.

  • Even a delay of 10 trading days (16 days in total) is seen by the FSA as 'extensive'.

What can you do to mitigate fines?

If the FSA determines that the breach of the DTR merits a financial penalty it will, nonetheless, take into account certain mitigating factors in determining the level of the fines.  Such factors may include:

  • If the company has taken steps to improve its internal processes and strengthen its board.

  • Whether the company has made a full and frank admission to the FSA of the breach and proactively sought an early resolution.

  • Whether the company has co-operated fully with the FSA.

  • Whether any previous disciplinary action has been taken against the company.

  • Whether there was a deliberate intention to mislead the market or reckless breach.

Summary

In the last few years, the FSA has taken action against only a handful of companies, but with two companies already receiving substantial fines in 2009 and volatile market conditions continuing, it is likely that the FSA will remain vigilant and be prepared to impose more fines. 

The FSA has stated a clear intent to ensure that inside information is disclosed to the market as soon as possible to ensure that the market is not distorted.  Therefore, companies must be alert to the need to disclose inside information to the market without delay even if the temptation in the current financial credit crunch may be to delay disclosure.  Legal advisers and brokers should be consulted immediately and boards should review their internal procedures for identification and disclosure of inside information.

How can McGrigors help?

We can assist you with specific queries on whether or not information constitutes 'inside information' and help you assess whether or not it must be announced to the market.  More generally, we can assist you with general queries on the application of the DTR and help you to comply with your regulatory obligations.

Contacts

Alan Diamond
Partner, Corporate Team
Tel +44 (0)131 777 7067
Email alan.diamond@mcgrigors.com

Patrick Martin
Partner, Corporate Team
Tel +44 (0)207 054 2658
Email patrick.martin@mcgrigors.com

Rosalie Chadwick
Partner, Corporate Team
Tel +44 (0)141 567 9381
Email rosalie.chadwick@mcgrigors.com
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