As the City braces itself for a rocky start to 2009 no director wants his company to be the subject of the next bad news story, but it is crucial that listed companies in financial difficulties do not add an FSA investigation to their list of woes.  

Following the recent publicity concerning FSA probes into the circumstances surrounding profit warnings by listed companies such as Rentokil and Rok, and the FSA’s fining of Woolworths last year for late disclosure of information resulting in a fall in profits, directors and company advisers need to be especially aware of their disclosure obligations and steps which should be taken when they become aware that bad news may need to be disclosed.  

The FSA is currently reviewing companies where a profit warning has been made to assess whether companies have properly disclosed information leading up to the profit warning. Therefore, where inside information arises as to a company’s financial position, in addition to the usual considerations, directors should ask themselves whether the information in question might be considered in hindsight to have signalled to the directors that a profit warning was imminent.  

Although directors are generally aware of their obligations under the FSA’s Disclosure and Transparency Rules and the market abuse regime it is essential now, more than ever, that companies have in place a bullet-proof policy for dealing with inside information. Sponsors will need to ensure that all their listed clients have such policies in place, as there is a very small window after unexpected financial or other information is discovered to analyse whether disclosure must be made.  

Best practice for consideration of inside information

Following and documenting the steps below will enable directors of quoted companies to approach the disclosure process with confidence and will be invaluable in the event of questions by the FSA:  

  • all listed companies should have in place a publicity committee with authority to sign off all public announcements, comprising the CEO or another executive officer, and representatives from their legal advisers, sponsor/nomad and financial PR consultants;
  • companies should have policies in place to ensure that information concerning the company’s financial and trading position, for example: unexpected figures in management accounts, disputes in connection with material contracts and events contrary to predictions in the public domain, are brought to the board’s attention immediately;
  • a company’s legal and financial advisers should be informed immediately of any such information in order for the legal advisers to assess the relevant disclosure obligations in light of Listing Rules and market abuse regime and the financial advisers to advise as to the likely impact of the information on the market;
  • immediately upon notification to the board of potential inside information a board meeting should be convened in order for the board, with the help of its advisers, to determine whether an announcement is necessary. Bear in mind, however, that the FSA has advised that inability to convene a full board meeting is not a sufficient excuse for delaying disclosure as ability to deal with announcements may be delegated to a small number of directors, or a holding announcement may be made;
  • full minutes of all matters discussed at the board meeting should be taken; and
  • in the event that the matter is deemed disclosable, an announcement should be drafted and signed off by the publicity committee immediately.

As regards the analysis of whether the matter is disclosable, and the timing of disclosure, see below.

Whether to disclose: Lessons from the Woolworths case

In considering whether new information before the board constitutes “inside information” which must be disclosed to the market, directors should consider various points made by the FSA in its Final Notice relating to Woolworths last year. Woolworths was fined £350,000 after it failed to disclose in a timely manner a variation to a contract between a subsidiary and Tesco under which it agreed to increase a discount to Tesco to £8 million, which had the effect of reducing its profits by over 10%. The FSA’s Final Notice contained the following observations:  

  • no assessment of the need for disclosure was made at the time of signing the variation and the company’s advisers were not informed;
  • it did not accept Woolworths’ argument that a likely share price drop of 10% attributable to the particular information in question was necessary before a disclosure obligation arose (Woolworths claimed that the 12% drop was partly due to other factors), and reiterated the guidance in the Disclosure and Transparency Rules that there is no particular percentage which will determine what is a “significant effect” on price;
  • the fact that the risks and uncertainty surrounding the contract had previously been disclosed to analysts did not prevent a disclosure obligation arising upon the variation being signed; and
  • the delay of one month in disclosing the inside information led to the development of a false market in the shares under the Listing Principles.  

Following the FSA’s decision in the Woolworths matter, the following lessons should be observed by boards of quoted companies and their advisers:  

  • all quoted companies should have in place compliance procedures which will catch disclosure obligations in respect of commercial matters (see above);
  • where amendments are made to significant commercial agreements, a formal assessment of their significance to the market should be undertaken, and advisers must be consulted;
  • a disclosure obligation may arise in spite of the fact that a commercial decision is taken to avoid a greater risk and despite the fact that general risks in respect of a commercial relationship have been disclosed;
  • there is no rule which prescribes that an anticipated 10% share price movement must be attributable to a piece of information in order for it to constitute “inside information”; and
  • when performing the analysis as to whether disclosure is necessary by a listed company, the Listing Principles should be considered.  

Timing of disclosure

Inside information must be disclosed to the market “as soon as possible” in accordance with the FSA’s Disclosure and Transparency Rules and disclosure may only be delayed in certain circumstances where the company has legitimate reasons (e.g. its negotiating position may be harmed by disclosure), confidentiality can be maintained and the public will not be misled by the delay. 

FSA statements in its newsletter List! and in its Final Notices concerning companies including Marconi (2003) and Woolworths (2008) make the following clarifications:  

  • inability to convene a full board meeting will not excuse delayed disclosure where disclosure could have been delegated to a small number of directors;
  • although an announcement must not be misleading to the market, a company should put out a holding announcement where final details are not available;
  • undue delay should not occur due to the need to refine wording or prepare for analysts’ questions;
  • where a decision has been made, it is not acceptable to delay disclosure of inside information pending formal board approval of the matter in question; and
  • it is not acceptable to delay disclosure of inside information because such information is due to be disclosed in an upcoming trading statement.