Shareholder engagement or unlawful disclosure?

As former CEO of Vodafone and Chair of GSK, Sir Christopher was an experienced listed company director and ConvaTec and its brokers were alive to the question of inside information arising. However, the FCA rejected representations on behalf of Sir Christopher that the information that was disclosed was not inside information, and that the disclosure was justified. So, what went wrong, and how can directors avoid falling foul of the rules against unlawful disclosure?

The disclosures involved two items of inside information: an imminent revision of revenue growth guidance and the retirement of ConvaTec's CEO.

The facts

The inside information in question concerned: (i) a potential decrease in orders from one of ConvaTec's major customers, which potentially meant that revenue growth would be below market expectations; and (ii) conversations as to the potential retirement of the CEO.

On 3 October 2018, a major customer indicated its plans to decrease orders which would have a major impact on ConvaTec's ability to hit its revenue growth guidance. Over the following 12 days, ConvaTec had a number of discussions with the customer to ascertain the extent of the decrease and the impact on revenue growth guidance. During this period, the CEO indicated that he wished to explore retirement. On 10 October, Sir Christopher informed two of ConvaTec's shareholders that an announcement was expected on 15 October to say that it would be revising guidance and that the CEO was retiring. Announcements disclosing these matters were released to the market on 15 October.

The FCA ruled that at the time that Sir Christopher spoke to the investors, the information was sufficiently precise to constitute inside information within the meaning of the Market Abuse Regulation (MAR), and that the disclosure constituted unlawful disclosure under MAR.

The Final Notice: Points to note

Several important points were made by the FCA in response to arguments made on behalf of Sir Christopher and these should be borne in mind when considering whether information may be disclosed to shareholders prior to an announcement.

1. The risk of "surprising" major investors with an announcement does not justify giving them a "heads up" on inside information ahead of an RNS announcement.

According to the Final Notice, Sir Christopher explained that the main purpose of the conversations was to tell the investors “that the person that they had invested in, in leading the business, was most likely not going to be leading it in the future”. In addition, he did not want to “surprise shareholders of scale with announcements” given the intention of one of the investors (to build a more significant shareholding in ConvaTec) and the actual size of the investment by the other.

Although the FCA accepted that engagement and the fostering of good relations with shareholders formed part of Sir Christopher’s duties as Chairman, it held that disclosing inside information for this reason was not consistent with the objectives of MAR, which seeks to prevent "unfair advantage being obtained from inside information to the detriment of third parties who are unaware of such information” and therefore the disclosure was made otherwise than in the normal exercise of his employment, profession or duties.

In the FCA's press release, Mark Steward, Executive Director of Enforcement and Market Oversight, said: "Inside information is not a private commodity for those with privileged access to it ... We will continue to rigorously enforce against breaches when we see them to ensure this important principle remains uppermost in the minds of issuers and their senior officers".

2. The fact that the information is not yet in a form that is ready to be announced does not mean it is not inside information.

It was argued on behalf of Sir Christopher that the information was not, at the time of disclosure, inside information on the basis that it was "fundamentally unsuitable for announcement".

The FCA rejected this argument, on the basis that the fact that information is unsuitable for announcement does not prevent it from being inside information within the meaning of MAR. If this were the case, anyone with knowledge of such information could trade on the basis of it, to the detriment of any counterparty unaware of that information.

3. The FCA reiterated that there may be a short delay if it is necessary to clarify the situation before an announcement is made (Article 17(1) MAR).

The FCA noted that it must be the case that information can be inside information and still require clarification or further investigation before the issuer is in a position to make an announcement to the public.

Boards should be aware that insider lists should be maintained within this period. Also, the length of delay in this case is generally not likely to be acceptable to the FCA.

4. The fact that the information disclosed did not contain the extent or likely range of the guidance revision did not stop it being "precise" enough to constitute inside information

The information disclosed was precise because it satisfied the requirement in Article 7(2) of EU MAR that it indicated “a set of circumstances which exists or which may reasonably be expected to come into existence, or an event which has occurred, or which may reasonably be expected to occur” and was specific enough to enable conclusions to be drawn as to the possible effect of that set of circumstances and/or event on the price of ConvaTec 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, it is already understood from previous cases that there is no need to know the extent to which the price would be affected, and there is no need even to conclude that the effect on price will be in a particular direction.

5. Formal advice should be taken on disclosure

It was argued that Sir Christopher had stated his intention to make the disclosures and that neither ConvaTec's broker or an executive responsible for giving legal and compliance advice had objected. However, the FCA held that Sir Christopher should have obtained clear, formal advice regarding the specific question of what information, if any, he might properly disclose, as well as when, in what manner and to whom, before making the disclosures.

6. Despite guidance in DTR 2.5.7G(2), disclosure to major shareholders will not always be justified

The FCA acknowledged that DTR 2.5.7G(2) provides that an issuer may, depending on the circumstances, be justified in disclosing inside information to certain categories of recipient, including major shareholders. However, the Final Notice states that this does not mean that disclosing inside information to a major shareholder is always justified; the exception to the general rule against non-disclosure of inside information should be interpreted strictly and the disclosure still has to be reasonable and necessary.