The FSA’s views on shareholder activism are of particular relevance to funds and others who invest in quoted companies with a view to the subsequent exercise of their rights as shareholders to influence/replace management and effect a restructuring of the target or its business. The FSA newsletter indicates that possession of non-public information about his own intentions/strategy (whichmay be inside information) does not prevent the activist from building a stake in the target. However, if othermarket participants come to trade on the basis of knowledge of the activist’s strategy the FSA would be likely to take a different view – particularly if this results in several parties acquiring shares independently and thereby avoiding the Companies Act disclosure requirements that would apply if the shares were acquired by the same entity (for example, because in aggregate the stake exceeds the 3%threshold for disclosure).
The newsletter ismost unclear as to the FSA’s reasoning, and a newsletter does not of itself constitute a binding interpretation of either themarket abuse regime or the FSA Principles. However, the following practical points would appear to flow:
- Information about an activist’s strategy in relation to the target companymay, in itself, amount to “inside information”.
- An activist is not prevented frombuilding a stake in the target simply because he has information about his own strategy (provided that strategy has been built on publicly available information) – although questions may arise if the activist seeks to obtain a profit through derivatives such as CFDs or spread bets.
- Another party who obtains information about an activitist’s strategy or intentionsmay be prevented from dealing in the securities of the target (or related derivatives) until the activist’s intentions have been made public.
- Practical issues will arise where an activist shares his ideas/strategy with other shareholders or potential shareholders in order to test support, or where two or more parties come together to pursue a joint strategy in relation to the target. It seems that the FSA considers that there is a risk not only of insider dealing but also marketmanipulation if the approach is regarded as circumventing requirements to disclose interests in shares under (for example) the Companies Act.
The FSA’s views on block trades follow a short thematic project conducted by themwith severalmarket participants. The key pointsmade by the FSA are as follows:
- The FSA confirms that it is acceptable for a bank tomake potential clients “insiders” in relation to a bought deal or an accelerated book build for which it has yet to receive a mandate. It is not clear fromMarketWatch whether the information passed to clients should be confined to trading information but itmay only be passed with the permission of the vendor.
- Any parties who have beenmade insiders in relation to a potential block trade would be at risk of insider dealing if they trade on the basis of that information before the trade becomes public.
- During themarketing process the FSA simply notes a wide range of different practices in relation to what announcement, if any, ismade before the trade is launched.
- The FSA proposes to amend the Code ofMarket Conduct specifically to allow for disclosure of inside information which is “trading information” to the extent necessary, and solely to offer the investment to, or acquire the investment from, the person receiving the information, provided the disclosure is “reasonable”. The FSA suggests that disclosure outside these parameters would be an abuse.
The FSA’s views, while helpful in certain respects, probably raisemore questions than are answered:What, for example, should a potential counterparty who has been made an insider do if the trade does not go ahead and never becomes public?What are the obligations of banks in respect of announcements? Is the FSA saying that it has no fixed view? Or is it saying that wider dissemination of information about the block trade beyond those to/from whomthe stock is to be offered/acquired is an improper disclosure?
This is the first sign of the FSA grappling with the difficult practical problems that attend the abolition of the “trading information safe-harbour” that existed prior to the implementation of theMarket Abuse Directive. It will be important to achieve greater clarity as to the FSA’s expectations, and as its underlying policy, through the forthcoming consultation process on changes to the Code.