On 10 March 2008, a major customer informed Wolfson that it would not be required to supply parts for future editions of two of its products (the “negative news”). Wolfson estimated that this represented a loss of $20 million or 8% of its forecast revenue for 2008. Wolfson also expected, based on other more positive information, that its 2008 forecast revenue would remain the same. The negative news was such that it constituted inside information and should have been disclosed as soon as possible.

On 12 March, Wolfson discussed the matter with its investor relations advisors who wrongly recommended that there was no need to disclose the negative news. Consequently, Wolfson delayed making an announcement. Wolfson had not contacted its corporate brokers or legal advisors at this point.

At its board meeting on 20 March, Wolfson reconsidered the earlier advice received. Following the meeting, Wolfson sought legal and corporate broking advice which recommended disclosing the negative news. On 27 March, the company announced the negative news and its share price closed at about 18% lower than the previous day.

Sally Dewar, managing director of wholesale and institutional markets at the FSA said:

“Listed companies must carefully consider what could be inside information and their obligations to disclose it. It is unacceptable for a company not to disclose negative news because it believes other matters are likely to offset it. Doing this hampers an investor’s ability to make informed investment decisions and risks distorting the market value of a company’s shares.

Companies have the primary responsibility for meeting their disclosure obligations. While they may benefit from seeking advice from those in a position to comment on their regulatory requirements, they cannot rely, without due consideration, on such advice.”

In determining the final penalty for Wolfson’s actions, the FSA took into account a number of mitigating factors, in particular that the company had sought advice. Wolfson co-operated fully with the FSA investigation, and received a 30% discount of the £200,000 fine for early settlement.

Text to this point reproduced from the FSA website with their kind permission.

Relevance to AIM

Although the strict technical wording of the disclosure obligations applicable to AIM companies is different to that applicable to Wolfson, there can be little doubt that the sequence of events would have amounted to a breach of the AIM rules too.

Had it been an AIM company, Wolfson would have retained its nominated adviser who one might expect to have been the first source of advice on such matters on the loss of a major contract. In this sense, perhaps, AIM can lay claim to being more tightly regulated than the Official List.

Lessons for AIM issuers

It seems that Wolfson’s only real mistake was to rely on bad advice. At least it recognised the need to take advice, and subsequently, realising that advice was wrong, took further opinions. Those actions undoubtedly reduced the fine handed down. That being said, while there is no real surprise at the outcome, it does nonetheless act as a very timely reminder, in uncertain economic times, of the need for management of AIM companies to pay particular attention to issues of announceability. It is also worth noting the FSA’s comment that good news must not be used to shelter bad news. If the issuer/nomad relationship is a healthy one then management may well want to consult their nomad straight away on any issues of announceability; it is quite possible that they are contractually obliged to do so under terms of their nomad agreement. As in the Wolfson case, experienced legal advice is also likely to be invaluable.

The FSA make it clear, however, that the ultimate responsibility for the decision not to announce lies with the issuer and, fundamentally, its directors. It remains of great importance, therefore, that directors and senior management are aware of the disclosure obligations in theory and how to apply them in practice. Company secretaries may wish to consider arranging a briefing session with their directors and senior management to reinforce this message.

Lessons for nomads?

Nomads are of course already conscious of the need to stay close to their issuer clients and in particular to ensure that channels of communication are open. It is hard to see how any nomad, asked for advice in the Wolfson circumstances, would not decide that an announcement is required. The challenge for nomads, at a time when there is so little business or economic stability, is to ensure that their clients do actually seek their advice. That may in time suggest a reminder to clients of the disclosure obligations in the AIM Rules and a reinforcement of the importance of continued dialogue between client and nomad.