• On 2 February 2011, the Upper Tribunal (Tax and Chancery Chamber) Financial Services (the Tribunal) published its decision in David Massey v The Financial Services Authority [2011].
  • The Tribunal found that the applicant had engaged in the market abuse offence of insider dealing under section 118 of FSMA.
  • The effect of this is that the requirement to announce inside information may now arise in more situations than previously anticipated.

Click here for the Tribunal’s decision.

The transaction in question was Mr Massey’s short sale of 2.5m shares in a company called Eicom plc. The price was eight pence per share (i.e., for £200,000), followed by his purchase of 2.6m new shares from Eicom at the discounted price of 3.5 pence per share (i.e., for a consideration of £91,000) which he used to fulfil the short sale. The key issue was whether he had made the short sale based on inside information concerning the availability of discounted shares.

The most interesting aspect of the decision is the approach taken by the Tribunal to the definition of “inside information” in FSMA. Based on section 118C(6) of FSMA (see box) the Tribunal interpreted the definition in a very literal way. It concluded that information would be treated as “likely to have a significant effect on the price” if, and only if, it was information of a kind which a reasonable investor would be likely to use as part of his investment decision. On that basis, the issue of whether information is actually price sensitive becomes irrelevant; the only test that matters is whether a reasonable investor would be likely to use the information in making his investment decision.

For corporates, the key point to note is that the obligation under DTR 2 to make a RIS announcement regarding inside information affecting the company may now arise in more situations than was previously thought. This is because, on the Tribunal’s interpretation, inside information must be announced if a reasonable investor would be likely to use it as part of the basis of his investment decisions, irrespective of the likely impact on the company’s share price.

This is borne out by the FSA’s final notice imposing a fine on JJB Sports plc earlier this year, in which the FSA did not specifically address the issue of price sensitivity of the inside information.

Inside information

Section 118C(2) of FSMA

“Information of a precise nature which –

  • Is not generally available;
  • Relates, directly or indirectly, to one or more issuers or the qualifying investments, or to one or more of the qualifying investments; and
  • Would, if generally available, be likely to have a significant effect on the price of the qualifying investments or on the price of related investments.”

Section 118C(6) of FSMA

“Information would be likely to have a significant effect on price if and only if it is information of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions.”