The disclosure and management of information is at the core of Irish securities law. When securities are offered to the public or listed on a securities market, the prospectus or market admission document must contain specified information, which must be verified as true and accurate.
Once listed, certain types of information must be made public by being announced to the markets, such as annual and half-yearly financial information, and directors dealings in company securities.
The most complex area of this law is the law that requires a listed company to make known ‘inside information’ to the market in a timely manner. This requirement arises under the EU Market Abuse Regulation (MAR). The principle behind it is to ensure a fair market in the company’s securities.
If all inside information is announced to the markets by a company, then (the theory goes), it will be impossible for trades to take place in the company’s securities on the back of unpublished information – that is, insider dealing.
That is a fine principle but, as is the case with many noble principles underpinning systems of law, the devil is in the detail.
Information society
‘Inside information’ is defined by MAR as “information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments”.
The key elements are:
- The information must be precise,
- It must not yet have been made known to the public,
- It must relate directly or indirectly to a company (or companies) or securities of such company (or companies),
- The information must be likely to affect the price of the securities, and
- That effect must be significant.
The three key obligations with respect to inside information are:
- The company must announce the information to the public without delay, unless the circumstances entitle the company to delay the announcement,
- The information should not be disclosed selectively to any person prior to a general announcement to the market, and
- No-one should use (or more correctly misuse) the information by dealing in the securities of that company.
A listed company is entitled to delay announcing inside information for as long as three conditions are satisfied:
- Immediate disclosure is likely to prejudice the company’s legitimate interests (for example, for a transaction or a regulatory clearance for a transaction),
- The delay in disclosure is not likely to mislead the public (for example, what is being withheld from the market does not represent a contradiction of a company policy announced to the market, such as “we will not be making acquisitions”, and what is withheld is a proposed acquisition), and
- The company is able to ensure the confidentiality of that information (for example, by ensuring that as few people as possible have access to the information, and putting confidentiality agreements in place).
Where there is a delay in disclosure of information and the unannounced event or transaction comes to pass, the announcement of it must include a statement that it contains ‘inside information’ and the Central Bank of Ireland must be notified of the fact of its being delayed, along with evidence of compliance with these three conditions.
Precision instrument
The trickiest point to navigate under this law is whether the information is ‘precise enough’.
In the film Wall Street, Michael Douglas’s Gordon Gekko character dealt in shares of Bluestar Airlines before the announcement of a regulator’s report that exonerated the company from wrongdoing. He got this information from Charlie Sheen’s Bud Fox character, who in turn got it from his engineer father, who worked for the airline.
When would that information become ‘precise’ under the law? When the inspectors started to indicate that the airline was not at fault? Or when the inspector’s report was finally published?
An indication of the answer to this question arises from a recent UK case under MAR. (Despite all the Brexit noise, UK law was, and is, identical to ours.) In a decision by the UK’s Financial Conduct Authority (FCA) announced in August 2022, the chairman of the UK-listed ConvaTec Group PLC was fined £85,000 for selective disclosure of inside information.
That he had made selective disclosures was not at issue, but what was at issue was whether the information disclosed was sufficiently ‘precise’ to amount to ‘inside information’. That information related to deteriorating trends in the company’s trading performance and the potential retirement of the CEO, which was disclosed to some of the company’s customers.
The basic argument made to the FCA by the chairman was that the information disclosed was fundamentally unsuitable for announcement, and therefore did not constitute inside information within the meaning of article 7 of MAR.
The chairman argued that if and when inside information has arisen is often a complex judgement, particularly in the context of an evolving situation, which was the position in this case.
The company was in close consultation with its brokers and was following its policies and procedures in performing a continuous assessment of whether it possessed inside information in respect of its anticipated financial performance, and the connected issue of the CEO’s potential retirement.
The company had concluded, after obtaining advice from its brokers, who were experienced and aware of all pertinent facts and matters, that ‘inside information’ arose on a particular date and not before. He argued that the disclosures contained limited and inherently uncertain information, as the matters under discussion were “depending on the board’s analysis”, which had not yet occurred.
Price watch
These arguments were rejected, with the FCA concluding that the chairman should have realised that the information he disclosed amounted, or may have amounted, to inside information.
The key point emerging from the case is not that the information is, of itself, precise, but rather that it is sufficiently precise to have an effect on price. The bar is therefore set fairly low for information to have the necessary degree of precision. It is the effect, rather than the quality of the information, that is key.
This opens another issue. Viewed from the present, certain things are likely to occur, and there is an infinity of things that may occur. On the face of it, the law requires a likelihood of an effect on price.
However, in the implementation of the law, it would appear that courts and regulators will judge a likelihood of a price effect to exist by reason of the movement in share price, even where (to the detached observer, as a matter of objective fact), the particular information raised only a possibility rather than a likelihood. It is treated as a sort of res ipsa loquitur.
In Lafonta v Autorité des Marchés Financiers, the ECJ considered the mixed issues of precision of information and likelihood of price effect. This was in the context of a debt-equity swap in the Saint-Gobain group of companies.
It was argued by the offending party in that case (a creditor that converted its debt to equity) that, in order for there to be inside information, there had to be a likelihood of the effect of the information being to send the share price in a particular direction.
The court did not accept this. It held that “in order for information to be regarded as being of a precise nature … it need not be possible to infer from that information, with a sufficient degree of probability, that, once it is made public, its potential effect on the prices of the financial instruments concerned will be in a particular direction”.
The court accepted that particular information could lead to widely differing assessments, depending on the investor. However, they concluded that, if it were accepted that information is to be regarded as precise only if it were possible to anticipate the direction of a change in prices, it would mean that the holder of that information could profit from that information to the detriment of others in the market.
In order for the information to be considered ‘inside information’, the effect on price must be ‘significant’. When insider-dealing law was first enacted in Ireland in 1990, a securities industry working group concluded that a 5% movement in price relative to the market generally would be significant (or ‘material’, which was the word used in the then law). It is safer to interpret the word ‘significant’ as ‘noticeable’.
Super asymmetry
There are several asymmetries under the law relating to the three key obligations:
- A company failing to announce inside information may be subject to administrative penalties under the European Union (Market Abuse) Regulations 2016, but will not be subject to criminal liability. On the other hand, a person using information in order to deal, or disclosing the information selectively, will be exposed to criminal liability.
- As we saw in the ConvaTec case, where a person makes a selective disclosure, rather than a general disclosure to the market, the fact that the company has not considered the information to be precise enough to make a general announcement will be no defence.
- If a company has inside information that (without justification) it fails to announce, and a person uses that information to deal in the company’s shares, the company nonetheless has a civil right to claim damages from that person under part 23 of the Companies Act 2014.
Under prior law, in Fyffes v DCC, information by both Fyffes and its shareholder, DCC, was subsequently judged to be just that. There was no legal sanction at that time for failure to announce, but DCC was held liable in a statutory claim by Fyffes – see Egan (2021).
Sense and sensitivity
Listed companies need to be alert to the need to ensure that a false market in their shares does not arise. This means being sensitive to trends that may later be judged by the courts to have created a likelihood of a share price change when that share price change ultimately takes place.
If the information is of itself imprecise, but nonetheless capable of moving the share price, an announcement will be called for.
Those in companies with access to confidential information should never selectively disclose any unpublished information unless it is demonstrably consistent with information already in the market.
And finally, when dealing in shares, the dealer needs to reflect carefully on the information available to it and discuss it with the broker handling the purchase or sale. Courts and regulators work from the premise that, if something happens, then the likelihood of it happening must have arisen at a particular time.
If that particular time predates the dealing in shares and the dealer has been exposed to unannounced information, it exposes the dealer to being accused of insider dealing.
Look it up
CASES:
LEGISLATION:
LITERATURE:
- Egan, Paul (2021), ‘A fundamental incongruity revisited: an exploration of current insider dealing law, applied to the facts in Fyffes plc v DCC plc’, Irish Jurist, vol 66, 134
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