In what is now becoming a long line of successful enforcement actions by the Financial Services Authority ("FSA") there has been a clear message about getting information to the market in a timely fashion. The most recent enforcement action relating to company announcements, JJB Sports plc (25 January 2011), is a helpful reminder that content as well as timing is important.
The FSA gave JJB Sports plc ("JJB") a Decision Notice on 15 December 2010 which notified JJB that pursuant to section 91(1) of the Financial Services and Markets Act 2000, the FSA had decided to impose a financial penalty of £455,000 on it for:
- a breach of the Disclosure and Transparency Rules ("DTR") 2.2.1 and Listing Principle 4 in relation to the announcement on 18 December 2007 of the acquisition of the Original Shoe Company Ltd ("OSC") by JJB
- a breach of DTR 2.2.1 and Listing Principle 4 in relation to the announcement on 22 May 2008 of the acquisition of Qubefootwear Ltd ("Qube") by JJB.
In each case the breach was based on fairly similar facts:
- on JJB's acquisition of OSC, it announced the acquisition to the market and stated the cash value of the consideration, but failed to state that it had also agreed to pay an amount relating to the stock held by the target at a fixed date
- on JJB's acquisition of Qube, it announced that the acquisition consideration was £1 in cash, but failed to note that it had agreed to settle an overdraft of £6 million.
On the OSC acquisition, the FSA's enforcement notice paints a picture of failure of communication between company and brokers. In board discussions the deal had been noted as having two elements to the consideration: price for shares and price for stock. The brokers, however, were simply told that the price, excluding stock, was £5 million. Since they understood that no stock was being purchased, the announcement of the deal with simply the £5 million figure stated did not ring any alarm bells.
JJB did not initiate the announcement of the Qube deal. Its existence was picked up by the company's brokers from the press. On enquiry with the company, the brokers were then sent a chain of emails from which an announcement was put together and announced by JJB. On the same day that the deal was announced with consideration of £1, JJB transferred some £6 milllion to Qube's account to settle the third party overdraft. In this case, the description of the consideration was technically correct, but the true and proper cost of the acquisition, which is what the market wanted to know, was not. The chain of emails sent to the company's brokers would have revealed to them, had they reviewed the whole chain, that the overdraft payment was being made, but this communication was not sufficient to absolve the company of its responsibility to make an accurate announcement.
The JJB enforcement is a reminder that, in making announcements, it is worth:
- confirming that the key elements of the transaction in question brought out to the board in board papers have been considered for announcement to the market
- ensuring that if information is being forwarded to brokers for them to consider what is being announced to the market, it is done so in a straightforward and transparent way. Attaching lengthy legal documents or email chains is unlikely to be appropriate.
It is also worth noting that post-1 October 2010, a company publishing untrue or misleading statements to the market via a Recognised Information Service will face potential liability to buyers, holders or sellers of securities.
You can read the full enforcement notice here.