Issuers are obliged to announce inside information relating to their securities as soon as possible. Before an announcement is made, issuers and their advisers must handle inside information properly in order to avoid committing market abuse.

New Upper Tribunal judgment on market abuse

In May 2014, the Upper Tribunal (Tribunal) upheld the Financial Conduct Authority's (FCA) (formerly the Financial Services Authority) decision against Mr. Ian Hannam for market abuse by improperly disclosing inside information. The Tribunal's judgment provides some interesting commentary on what constitutes inside information and when and how inside information should be disclosed. To read the judgment, click here, or otherwise read on for our summary of the key points for issuers and their advisers to note.


Mr. Hannam, a senior and experienced banker, was advising Heritage Oil plc (Heritage), a company with a premium-listing on the London Stock Exchange. The FCA's case was based on two e-mails from Mr. Hannam to the Oil minister of the Kurdistan Regional Government. The first e-mail disclosed information of a potential bid for Heritage, including details of a predicted bid price. The second e-mail disclosed information relating to positive exploratory drilling results by Heritage. The Tribunal upheld the FCA's decision that Mr. Hannam engaged in market abuse by improperly disclosing inside information outside the proper course of the exercise of his employment, profession or duties. In its judgment, the Tribunal noted that the FCA did not question Mr. Hannam's integrity or honesty. On 11 July 2014, the Tribunal upheld the FCA's decision to impose its penalty of £450,000 on Mr. Hannam.

Key lessons for issuers and advisers

In a lengthy and detailed judgment, the Tribunal analyses what amounts to inside information and how it should be handled prior to its announcement to the market. Below, we highlight the key lessons from the decision for issuers and their advisers.

  1. The reasonable investor would consider whether information has a 'likely effect' on price

In its judgment, the Tribunal considered whether the information disclosed in the two e-mails was inside information as defined in section 118C of the Financial Services and Markets Act 2000 (FSMA). This section, amongst other things, provides that inside information is information which would, if generally available, be likely to have a significant effect on the price of an issuer's securities. Additionally, section 118C(6) of FSMA provides that information is likely to have a significant effect on price, "if but 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" (the reasonable investor test).

The interpretation of the reasonable investor test has provoked significant debate in the UK. The FCA's interpretation (following the Tribunal decision in the FSA v David Massey ) has been that the reasonable investor test is an exhaustive test for what amounts to inside information and consequently, it supplantsthe test of whether the information is likely to have a significant effect on price, rather than supplements it.

The Tribunal, however, characterised this previous approach as ' simplistic ' and held that the reasonable investor would use information which has a ' likely effect on price ' as part of the basis of his investment decisions. Furthermore, the information must be such that it is possible to predict the direction of the price movement (that is, whether there is an upward or downward shift in price). The Tribunal further noted that the reasonable investor would not take into account information which, if generally available, would have a ' trivial ' effect on price – rather, there must be a significant movement, although the Tribunal did not attempt to quantify the meaning of ' significant ' in this case. Additionally, the Tribunal held that the prospect of information having a ' likely ' effect on price must be a real one – rather than a fanciful one. Similarly, the reasonable investor must be ' likely ' to take into account the information in making its investment decision – so, a reasonable investor would be likely to take into account information which is ' sufficiently material ', such that it has an effect on his decisions.

The effect of the Tribunal's decision is that information which is not likely to shift the price significantly is not inside information, even if it is information which a reasonable investor may take into account. Although the Tribunal declined to set a quantitative threshold as to what is ' significant ', the decision is helpful following the Massey decision.

  1. There must be a realistic prospect of the future event or fact occurring

In relation to information about future circumstances occurring, the Tribunal held that there must be a 'realistic prospect ' of those circumstances coming into existence and that a test of ' more likely than not ' was not the test to be applied. This potentially expands the scope of what constitutes inside information – which is of particular note to issuers.

  1. Inaccurate information may still be inside information

One of the key issues considered in the judgment was the accuracy of the information disclosed in the e-mails, in particular, the second e-mail which disclosed Heritage's positive exploratory drilling results. The judgment discusses the technical details behind the accuracy of the relevant statement which was alleged to have amounted to inside information and the Tribunal concluded that the statement was only partially accurate.

The Tribunal held that information that is only partially accurate may nevertheless be sufficiently precise to be inside information, where the inaccuracies do not detract significantly from the remaining genuine facts. The Tribunal rejected an approach which requires all information contained in a communication to be wholly accurate before it can be categorised as inside information, even in relation to matters which might have an impact on the share price. The Tribunal held that a statement by an insider which indicates a ' genuinely and reasonably held belief on the part of an issuer is capable of constituting inside information, even if the belief subsequently turns out to be mistaken '.

  1. There may be certain specific circumstances where it is legitimate to delay disclosure

Mr. Hannam's counsel argued that, as the FCA failed to take action against Heritage for not immediately announcing the positive drilling results disclosed in the second e-mail, this indicated that the FCA did not view the information to be inside information. Furthermore, if the FCA did consider that this was inside information, Mr. Hannam's counsel argued that Heritage was obliged to announce the inside information and had no legitimate interest to delay an announcement. Heritage announced the drilling results almost two weeks after the second e-mail was sent.

The Tribunal's view was that, whilst some form of announcement could have been made at the time of the relevant drilling results, Heritage was entitled to delay an announcement of the drilling results until some ' really significant results were obtained '. If, in these circumstances, an immediate announcement was required at the time of the relevant drilling results, a burden would be placed on Heritage to conduct daily monitoring of the most recent results in order to update the market on whether anything significant was found. This approach was likely to create volatility and uncertainty in the market until significant results were obtained. The Tribunal's reasoning indicates that the FCA might be open to consider a rational explanation for delay, where an immediate announcement might cause damage to the company and the market. In our view, until the FCA formalises any revised approach in its guidance, issuers should tread carefully and always take a cautious approach when considering whether they have a legitimate interest to delay disclosure. In the past, we have also seen the FCA (or then, the FSA) take a tough approach to delays in disclosure to the market, so, inevitably, the FCA's position will turn on the facts in question.

  1. If disclosing inside information in the course of one's employment, confidentiality requirements must be imposed

Having considered that the information disclosed in the two e-mails amounted to inside information, the Tribunal considered whether Mr. Hannam disclosed the information in the proper course of his employment. In its judgment, the Tribunal acknowledged that the emails were sent by Mr. Hannam in his capacity as a corporate financier acting for Heritage, but the question turned on whether he was disclosing the information in the 'proper' course of his employment. In doing so, the Tribunal turned to the guidance set out in the Code of Market Conduct in the FCA's handbook (MAR 1). In particular, MAR identifies non-exhaustive factors which would indicate that a disclosure was within the proper course of employment, including the ' imposition of confidentiality requirements ' upon the recipient. The Tribunal attached importance to placing recipients under confidentiality requirements and was sceptical that it was sufficient for the recipient to be subject to an implied duty of confidentiality once he had been brought over the wall. In particular, the Tribunal suggested that the FCA should consider making it a requirement to keep records of when, and how, a person had been made subject to confidentiality obligations and what he had been told.

As the Tribunal considered that no confidentiality requirements were imposed on the recipient of the emails containing inside information, it held that Mr. Hannam was not acting in the ' proper course of the exercise of his employment, profession or duties '. Additionally, the Tribunal agreed with the FCA's position that it would only be reasonable in the ' most unusual of circumstances ' to disclose information regarding a prospective takeover bid in breach of Rule 2 of the Takeover Code. 

Some welcome clarity

The Tribunal's judgment provides helpful clarity around certain points of interpretation of the FSMA provisions concerning inside information. Most notably, issuers should welcome the Tribunal's interpretation of the reasonable investor test, which places importance on the price sensitivity of information which the reasonable investor will take it into account when making his investment decisions. Additionally, it is helpful that the Tribunal has provided that information, which has no, or a trivial, effect on price would not be inside information – this narrows further the scope of what amount to inside information. The new EU Market Abuse Regulation (which must be implemented in member states by July 2016) follows the same definition of inside information as set out in FSMA. It is hoped that the reasonable investor test in the Regulation will be interpreted in the same way.

Another valuable message from the judgment relates to the importance of having in place effective systems and controls to ensure that the issuer and its advisers can handle inside information appropriately. Effective internal protocols on the selective disclosure of inside information, which include the imposition of confidentiality requirements on recipients and the maintaining of insider lists, should be firmly implemented by issuers and their advisers. Additionally, those persons involved in deal execution or transaction management who may have access to inside information should conduct regular assessments of whether inside information exists and contemporaneous records should be kept which note their assessment and conclusions. In Hannam's case, there were no written records of his assessment of whether information disclosed constituted inside information. Such records may have helped him establish the defence available under section 123(2) of FSMA, that is, that he had reasonable grounds that the behaviour did not amount to market abuse.

On 15 July 2014, the European and Securities Markets Authority published two consultation papers in relation to its proposed implementing measures of the new Market Abuse Regulation.   The outcome of those consultations is likely to require, amongst other things, amendments to the Disclosure and Transparency Rules (DTRs) regarding inside information. We may also see the FCA reconsidering and amending its guidance in the DTRs in light of some of the points discussed in the Hannam case.

Following this, we would expect that both issuers and advisers will assess their processes in terms of the disclosure of inside information. The use by issuers of letters requiring their advisers to maintain insider lists will be helpful in this respect as it should be simple to include specific reference to confidentiality obligations in such a letter, but we expect to see more formal procedures being put in place by financial (and other) advisers.