The FSA is investigating possible breaches of the Listing Rules following the announcement by The Carphone Warehouse Group PLC of a director's share pledges as security for personal loans. This is a timely reminder that those who manage and advise listed companies must always consider the requirements of the FSA's Listing Rules, and in particular its Model Code on dealings in securities, whenever persons with managerial responsibilities want to take any action regarding their shareholdings in the listed company.

CARPHONE WAREHOUSE ANNOUNCEMENT AND FSA INVESTIGATION
David Ross was the deputy chairman of Carphone Warehouse. On Monday 8 December 2008, Carphone Warehouse announced that it had received notification from Mr Ross that he had, through various agreements between 2006 and 2008 and as part of a package of security, pledged 136.4 million ordinary shares in the company against personal loans. Mr Ross had also tendered his resignation as a director of the company with immediate effect.

Subsequent news stories in the press also suggested that he had pledged shares in other listed companies of which he was a director as collateral for loans.

The FSA is investigating whether Mr Ross breached the Listing Rules by pledging the shares as collateral for loans.

The Model Code

The purpose of the Model Code is to ensure that persons discharging managerial responsibilities (PDMRs), including directors, do not abuse, and do not place themselves under suspicion of abusing, inside information that they may be thought to have. Under the Listing Rules, listed companies must require every PDMR to comply with the Model Code and must take all proper and reasonable steps to secure their compliance. Individual listed companies are free to impose more rigorous dealing obligations than those contained in the Model Code.

The cornerstone of the Model Code is that PDMRs must not deal in the securities of the listed company without obtaining advance clearance. The Model Code sets out the procedures for requesting and obtaining clearance. Before dealing, a director (other than the chairman or chief executive) or company secretary must notify the chairman, or a director designated by the board for this purpose, and receive clearance to deal from him. The chairman and chief executive must obtain clearance from each other or, if the other is not available, from the senior independent director or a board committee or other officer nominated for the purpose.

A PDMR may not be given clearance to deal:

  • in any securities of the company on considerations of a short term nature (investments with a maturity of one year or less always being considered short term);
  • during a "close period" (as defined in the Model Code); or
  • at any time when there exists any matter which constitutes inside information in relation to the listed company.

PDMRs must also take reasonable steps to prevent any dealings by or on behalf of persons connected with them on considerations of a short term nature, and must seek to prohibit any dealings by or on behalf of any connected person or by an investment manager on behalf of the PDMR or on behalf of any other person connected with the PDMR during a close period. However, the PDMR should not inform his connected persons or investment manager when they are not free to deal as a result of the company having inside information in existence.

"Dealing"

It may not be obvious at first glance that "dealing" catches the act of pledging shares as security, as it does not involve an outright disposal of the shares. However, the Model Code sets out a list of operations, as well as straightforward acquisitions and disposals, which amount to dealing. These include "using as security, or otherwise granting a charge, lien or other encumbrance over the securities of the company" (paragraph 1(c)(v) of the Model Code).

Not all dealings are caught: paragraph 2 of the Model Code sets out a list of those which may be carried out without obtaining consent. These include the take up of rights under a rights issue, undertakings to accept a takeover offer, and various transactions in connection with employee share schemes.

The upshot is that where any transaction relating to shares in the listed company is involved, the provisions of the Model Code (or, if relevant, the company's own share dealing code) should be carefully checked. In addition, bear in mind that even if a transaction is not prohibited by the Model Code, it may still contravene the market abuse or insider dealing regimes.

There is no express requirement under the Model Code for a listed company to announce that clearance to deal has been given. However, PDMRs and listed companies must consider carefully whether notification and announcement obligations arise under the provisions of the Listing Rules and the Disclosure and Transparency Rules, for example pursuant to DTR 3.1.2 (notification of transactions by PDMRs) and DTR 3.1.4 (notification of transactions by issuers to a RIS).