Updating the market: Disclosure obligations

Practical Law UK Articles 6-101-7488 (Approx. 19 pages)

Updating the market: Disclosure obligations

by Charles Randell, Slaughter and May

THE UK REGIME

Historically, it was unclear to what extent UK companies were obliged to update the market on their trading performance between their regular annual or half-yearly announcements. Until 1995, the London Stock Exchange's (LSE) Listing Rules contained an obligation on listed issuers to "avoid the creation of a false market". This was sometimes interpreted as an obligation merely to avoid selective disclosure of information that would enable some market participants to trade on information that was unavailable to others.

However, while the UK rules historically were not clear as to when an update of trading performance or expectations was required, the Listing Rules and the City Code on Takeovers and Mergers (Takeover Code) have for many years required a company that chose to make a profit forecast or profit estimate to report on the forecast or estimate when undertaking certain types of transaction.

In order to avoid the additional regulatory burdens and the potential public embarrassment that could result from issuing "official" profit forecasts or profit estimates, some companies "guided" the market by briefing analysts who then published allegedly independent but well informed research containing financial forecasts based on the guidance received.

The position changed significantly in the UK in the mid-1980s, with the introduction of legislation outlawing insider dealing (the Company Securities (Insider Dealing) Act 1985; now Part V of the Criminal Justice Act 1993 (CJA)) and the creation of a new criminal offence relating to a course of conduct creating a misleading impression (section 47(2), Financial Services Act 1986 (1986 Act); now replaced by section 397(3), Financial Services and Markets Act 2000 (FSMA) ). Both companies and securities professionals, such as analysts, became increasingly concerned about the disclosure and use of unpublished price sensitive information in case it should result in a criminal prosecution for insider dealing. In one high profile case, an analyst was prosecuted but the analyst's conviction was quashed on appeal ((HM Advocate v Mackie, The Times, 30th September, 1994; PLC, 1994, V(3), 72). Section 47(2) of the 1986 Act relating to a course of conduct creating a misleading impression also led to the concern that a company's failure to correct market expectations of its performance could be argued to be a course of conduct that created a misleading impression, and hence a criminal offence.

Against this background, Chapter 9 (Continuing Obligations) of the Listing Rules relating to disclosure of information by companies was amended in 1995 and the LSE issued price sensitive information guidance focusing, in particular, on analysts' briefings. This guidance was updated by the UK Listing Authority (UKLA) in 2001 (The Price Sensitive Information Guide (PSI Guide)) (section 14, Appendix 2, UKLA Guidance Manual, PLC, 2001, XII(11), 89) (see box "The Price Sensitive Information Guide").

The regime for companies changed again significantly on 1st December, 2001 when the principal provisions of the FSMA came into force (N2) (see feature article "The Financial Services and Markets Act: An overview", PLC, 2001, XII(7), 21). In particular:

Breaches of the Listing Rules by issuers now expose them and their directors to unlimited fines by the UKLA (see box "Remedies").
Part VIII of the FSMA, which creates a new "civil offence" of market abuse, has come into force.

The regime after N2

The legal and regulatory framework to be borne in mind by companies when considering their obligations to update the market on their trading performance is as follows:

Listing Rules. The key Listing Rules affecting business updates are in the box "Key UK Listing Rule obligations". In summary, issuers must notify without delay major new developments that may affect their business if the development may lead to a substantial share price movement. Issuers must also notify without delay information concerning a change in financial condition, performance or expectation of performance if the change would be likely to lead to a substantial share price movement.

There are exclusions from these notification requirements relating to impending developments and matters in the course of negotiation, such as acquisitions or disposals. There is also a power for the UKLA to grant a dispensation from these requirements where the disclosure to the public of information might prejudice the company's legitimate interests (see "Practical examples" below).

In addition, there are specific disclosure requirements under the Listing Rules relating to events such as acquisitions and disposals, changes in capital structure and decisions to declare dividends.

The continuing obligations requirements of the LSE, set out in its Admission and Disclosure Standards, require compliance with the Listing Rules if securities are to be admitted to trading and remain on the LSE's markets.

The Listing Rules on notification of new information are supplemented by the UKLA's Guidance Manual including its PSI Guide (see box "The Price Sensitive Information Guide").

The UKLA has power to impose unlimited penalties for breaches of the Listing Rules. In addition, the FSA and the Secretary of State have extensive powers to apply for injunctions or restitution orders in cases of breach of Listing Rules (see box "Remedies").

Market abuse. Under Part VIII of the FSMA, market abuse arises where behaviour by a person or persons:

Occurs in relation to a qualifying investment traded on a prescribed market.
Satisfies one or more of the following three conditions:
- it is based on information which is not generally available to those using the market but which, if available to a regular user of the market, would or would be likely to be regarded by him as relevant when deciding the terms on which transactions in investments of the kind in question should be effected.
- it is likely to give a regular user of the market a false or misleading impression as to the supply of, or demand for, or as to the price or value of, investments of the kind in question.
- a regular user of the market would, or would be likely to, regard the behaviour as behaviour which would, or would be likely to, distort the market in investments of the kind in question.

A person who requires or encourages another person to engage in market abuse is liable to the same penalties as the person who engages in the market abuse.

Under the FSMA, the FSA has produced a Code of Market Conduct (COMC) that gives guidance on what does and does not amount to market abuse. The COMC may be relied on in so far as it indicates whether or not particular behaviour amounts to market abuse; a statement in the COMC that particular behaviour does not amount to market abuse is conclusive for the purposes of the FSMA (section 122, FSMA).

The COMC states that making or failing to make statements or disseminate information which is likely to be regarded by the regular user of the market as relevant to determining the terms of transactions in listed securities is "behaviour" falling within the scope of the market abuse regime (MAR 1.3.1E(5)). As a result:

If a listed company issues this sort of information selectively, without an announcement to the market, both it and officers of the company who are involved are at risk of proceedings for market abuse unless there is a justification for their actions. The COMC makes it clear that information which is required to be disclosed under the Listing Rules falls squarely into the category of information which the regular user would reasonably expect to be disclosed to the market (MAR 1.4.14E(2)). Other information that may not be required to be disclosed under Listing Rules (such as a change to credit ratings) will also fall within the market abuse regime if it is routinely the subject of a public announcement (MAR 1.4.12E to 1.4.15E). The COMC states that early or selective disclosure of information, which a regular user would expect market users to have, will generally be presumed to constitute requiring or encouraging market abuse unless there is a legitimate purpose for making the disclosure. Any such disclosure should be accompanied by a confidentiality statement and a warning to the effect that the recipient should not deal on the basis of that information until it has been made generally available (MAR 1.8.5G).
Submitting information about a listed company's trading position to a regulatory information service can amount to market abuse if the information is likely to give the regular user of the market a false or misleading impression of the value of the listed company's listed securities and the person submitting the information has not taken reasonable care to ensure that it is not false or misleading (MAR 1.5.18E).

The penalties for market abuse can be severe (see box "Remedies").

Misleading statements and creation of false or misleading impressions. Section 397(1) and (2) of the FSMA (relating to investments) provide that, in certain circumstances, it is a criminal offence for a person to make a statement, promise or forecast which he knows to be misleading, false or deceptive or is reckless in making it, or dishonestly conceals material facts. In certain circumstances a person who does any act or engages in a course of conduct which creates a false or misleading impression as to the market in or the price or value of certain investments commits a criminal offence (section 397(3), FSMA).

Insider dealing. Part V of the CJA creates the offence of insider dealing. A person who deals (or encourages a third party to deal) in securities while the person is in possession of non-public information that would significantly affect their price or who discloses such information may commit a criminal offence.

Civil law liability. It is unlikely that a company breaching the obligations described above is at risk of a successful action for breach of statutory duty by an investor who has suffered loss. A breach of statutory duty in itself does not give rise to any private law cause of action. A private cause of action for breach of statutory duty can arise if, as a matter of the construction of the statute in question, Parliament intended to confer on a particular class of person the right of action for breach of duty. Given the specific sanctions provided by the FSMA and the CJA, Parliament does not appear to have intended to confer a private right of action.

In order to bring a successful claim in tort for negligent misstatement a potential claimant must be able to show evidence of a "special relationship" with the defendant company (Caparo Industries v Dickman 1990 2 WLR 358; PLC, 1990, I(1), 61). This is hard to demonstrate and would turn on the particular facts of each case, including the nature and purpose of the information provided by the company and the identity of the claimant. In Al Nakib Investments (Jersey) Limited v Longcroft for example, the High Court held that the duty of care imposed on directors in relation to a prospectus did not extend to those buying shares in the market because there was not sufficient proximity between the parties (1990 BCC 517; PLC, 1990, I(1), 61). A shareholder of a listed company is likely to have difficulty in establishing the existence of a special relationship.

Overseas legal requirements. Issuers with overseas listings or a significant number of overseas shareholders may also have to comply with overseas legal and regulatory regimes. Although harmonisation through European Directives should mean that EU member states impose fundamentally the same continuing obligations on listed issuers, the US legal and regulatory regime in this area is different from that in the UK (see box "US disclosure regime").

Enforcement action

The UKLA has been stepping up its monitoring and enforcement actions in this area and appears to be monitoring, in particular:

Profit warnings, to see whether the announcement was made on a sufficiently timely basis.
Announcements of transactions, to see whether the transaction appears to have been leaked to the press for publication over the weekend or on the day of announcement (the so-called "Friday night drop").

The UKLA has sent letters to a number of listed companies requesting explanations of their actions and some of these cases have turned into more major investigations. To date no major post-N2 investigation has yet resulted in the imposition of sanctions.

However, the FSA has recently concluded an investigation into profits warnings by Iceland Group plc (now known as The Big Food Group plc) (PLC, 2002, XIII(5), 84) (see also box "The Iceland case"). Although the Iceland case occurred before the FSA acquired its new powers to fine issuers and directors for breaches of the Listing Rules, it is clear that the FSA will vigorously pursue suspected breaches of a listed company's continuing obligations and it can be inferred that the FSA will not hesitate to impose fines in suitable cases.

Practical examples

The following paragraphs discuss some hypothetical examples in the light of the UK regime.

What type of information?

Example 1: A plc is an international tourism business specialising in holidays in Israel. As a result of increasing tension in the Middle East it becomes clear that there is a significant decline in international tourism and that confidence will take many months to recover. A plc's share price falls dramatically. The board of A plc is now considering whether it should inform the market that comments about expected sales growth, made in the chairman's statement at the AGM, no longer hold good.

It appears that the fact that A plc no longer expects to achieve the earlier sales growth is not information that would lead to a substantial movement in the price of its securities. Provided that A plc is happy that investors are now trading on the basis that the previous sales expectations will not be met, there may not be any requirement to issue a statement of the obvious.

This conclusion is supported by paragraph 3.14 of the PSI Guide, which states that certain information that is already in the public domain does not need to be announced. It gives the example of a change in UK interest rates, which may affect the price of a company's securities, and states that "an announcement might only be required if the change had an unusual or unexpected effect on the company". However, A plc will need to investigate what analysts and other market participants are saying about the company's future performance, in order to ensure that the impact is generally understood.

Example 2: B plc holds a meeting with analysts at the commencement of a new trading period. B plc is careful to give the analysts no information about its trading forecast for the coming period, but is alarmed to see that the majority of the analysts produce reports with forecasts significantly above the company's own forecast and significantly above results for previous periods. The board of B plc is considering whether it should make an announcement correcting the expectation that has resulted.

A literal reading of paragraph 9.2 of the Listing Rules (which obliges a company to "notify ... without delay any information which is not public knowledge concerning a change in the company's ... expectation as to its performance which, if made public, would be likely to lead to a substantial movement in the price of its listed securities") seems at first sight to argue in favour of an announcement.

The PSI Guide does not provide B plc with clear guidance. It states that "in most circumstances a company is not obliged to make an announcement correcting public forecasts by analysts. However, a company should consider correcting serious and significant errors which come to its attention which in its view have led to a widespread and serious misapprehension in the market" (emphasis added).

Therefore, in these circumstances, paragraph 9.2 of the Listing Rules should only be interpreted to require a company to correct analysts' forecasts where the company has itself been the source, directly or indirectly, of the forecasts. This is consistent with the wording of paragraph 9.2 which speaks of a "change in the company's ... expectation of its performance which ... would be likely to lead to a substantial movement in the price of its listed securities", implying that the company had an earlier, different, expectation which has found its way into the market. The exhortation in the PSI Guide to "consider" correcting the errors of the analysts should not put a listed company in the position where analysts, acting independently of the company, drive its disclosure obligations.

Where the company is part of the way through a period and it is clear that its trading performance has changed such that it will not achieve prior expectations for that period, the situation is different. There is then a change in the company's performance within the meaning of paragraph 9.2 (and there may be a "new development" within the meaning of paragraph 9.1).

However, in view of the fact that B plc and its directors are now exposed to disciplinary proceedings for breach of the Listing Rules and possibly also proceedings for market abuse if the FSA takes a different view on these issues, they may wish to contact the FSA or alternatively to err on the side of caution and make an announcement.

When must the announcement be made?

Example 3: Half way through the first six months of its financial year, the management accounts of C plc show that, as a result of continuing production problems, its sales have deteriorated and that it is highly unlikely that it will be able to achieve sales for the first half in line with its earlier expectations and the consensus of analysts' forecasts. The board of C plc is considering whether it must inform the market of this. However, before doing so it wishes to finalise a re-negotiation of its banking covenants, which would otherwise be breached at the end of the first half of the financial year.

C plc will wish to consider whether it can rely on paragraphs 9.4 and 9.5 of the Listing Rules to avoid disclosure, on the grounds that the information is about "impending developments or matters in the course of negotiation". However, neither the Listing Rules nor the PSI Guide provide any comfort that C plc can delay disclosure in these circumstances. In this case, there are two items of information:

The information that C plc is highly unlikely to achieve the consensus of analysts' forecasts.
The information that C plc needs to re-negotiate its banking covenants as a result.

Only the second item of information could be argued to be an "impending development or matter in the course of negotiation".

Paragraph 9.8 of the Listing Rules also permits the UKLA to grant a dispensation from the requirement to make an announcement where disclosure of the relevant information might prejudice a company's legitimate interests. This paragraph might be of use to C plc, since the PSI Guide indicates that it may grant a dispensation "where an announcement at a particular point in time might jeopardise the issuer's ability to continue to trade". However, in order to rely on paragraph 9.8, C plc will have to obtain UKLA approval.

Example 4: D plc discovers significant accounting irregularities at one of its subsidiaries. It is clear that sales have been significantly over-reported, but that an investigation lasting two weeks will be necessary in order to assess the size of the problem. The board of D plc is considering whether it must inform the market before the investigation is complete.

This is a significant new development and D plc now has material new information within paragraphs 9.1 and 9.2 of the Listing Rules. However, section 8 of the PSI Guide states that where a company is faced by an unexpected and significant event, for example, a large foreign exchange loss, a short delay in announcement is acceptable if it is necessary to clarify the situation.

The wording in the PSI Guide should provide D plc and its directors with some comfort that the UKLA may not take action for breach of the Listing Rules in these circumstances, although they will be worried that a delay of two weeks may not be considered by the UKLA to be a "short delay". They will also have to consider whether their failure to make an announcement is a course of conduct that results in a misleading impression and a potential criminal offence under section 397(3) of the FSMA or that it amounts to market abuse. It is suggested that the only impression that the market is entitled to be under is that D plc has complied with its obligations under the Listing Rules, as elaborated by the PSI Guide, and that if D plc has complied with these obligations neither it nor its directors are at risk of committing a criminal offence or at risk of committing market abuse. However, in view of the concern over the length of the delay in clarifying the position, D plc may wish to contact the FSA in these circumstances before determining how to proceed.

Suspension is another option that the directors of D plc may consider. The UKLA makes clear that it will normally suspend listing if the issuer is unable accurately to assess its financial position and inform the market accordingly (paragraph 9.3.4, UKLA Guidance Manual).

In what terms?

Example 5: The board of E plc decide that the company will make a loss in the current period and announce to the market that "the board of E plc expects profits for the current period to be significantly reduced". E plc's PR company is not involved in preparing the announcement but, at the E plc's request, releases the announcement on E plc's behalf. The name of E plc's PR company is not mentioned in the announcement.

Paragraph 9.3A of the Listing Rules requires that a company take all reasonable care to ensure that any statement or forecast or any other information it notifies to the Regulatory Information Service or makes available through the UKLA is not misleading, false or deceptive and does not omit anything likely to affect the import of such statement, forecast or other information. The issue of the announcement, with its clear implication that E plc will nevertheless make a profit for the current period, falls short of this standard and exposes E plc and its directors to a fine for breach of the Listing Rules. The directors of E plc are also at risk of prosecution under section 397 of the FSMA for making false or misleading statements and engaging in a course of conduct creating a false or misleading impression as to the value of E plc's securities and, for the same reason, they are at risk of proceedings for market abuse.

Although the FSA has asserted that the COMC has not imposed new obligations on brokers and PR companies who issue announcements as agents for listed issuers, in practice, the position has changed. Prior to N2, a PR company acting merely as "post-box" in these circumstances was not exposed to a high risk of a successful prosecution under what will now be section 397 of the FSMA because it did not conspire with E plc in producing the misleading statement and probably could not be said to be reckless as to the accuracy of a statement which it did not itself make and for which it took no responsibility.

However, the COMC now requires a person who is responsible for submitting information to the Regulatory Information Service for dissemination to take reasonable care to ensure it is not false or misleading (MAR 1.5.18E). It goes on to explain that it is appropriate that those who disseminate information through the Regulatory Information Service take reasonable care to ensure the information is not inaccurate or misleading, and gives the specific examples of the company's financial advisers or its public relations advisers (MAR 1.5.20E).

PROFIT FORECASTS AND ESTIMATES

A profit warning may itself constitute a profit forecast or estimate for the purposes of the Listing Rules and the Takeover Code. Even if it does not, a company announcing a profits warning will often wish to provide the market with further guidance as to the expected results. The company should therefore consider carefully:

Whether the guidance it is giving amounts to a profit forecast or estimate.
The consequences of making a profit forecast or estimate.

What is a profit forecast or estimate?

Profit forecasts and estimates are defined for the purposes of the Listing Rules in paragraphs 12.21 to 12.23A of the Listing Rules. Key points to note are:

A form of words which by implication states a minimum or maximum for the likely level of profit or losses for a period subsequent to the last published audited accounts is a profit forecast or estimate, even if no figure is mentioned and the word "profit" is not used.
A dividend forecast must be treated as a profit forecast where it implies a profit forecast, for example, where the issuer has a known policy of relating dividends to earnings.

Rule 28 of the Takeover Code contains similar provisions.

Consequences of a profit forecast or estimate

Once a company has made a profit forecast or estimate for a financial period, then until the results for that period have been published, it will be required to repeat or update the statement in any:

Listing particulars.

Class 1 acquisition circular.

Circular containing proposals to be put to shareholders in general meeting concerning a refinancing or reconstruction of the issuer or its group (paragraph 12.24, Listing Rules).

The profit forecast or estimate must also be reported on in those documents by the auditors or reporting accountants and the sponsor and the principal assumptions on which the forecast or estimate is based must be stated (paragraph 6.G.2, Listing Rules).

In addition, if the company becomes involved in a takeover as offeror or offeree (other than as offeror offering solely cash or, with the consent of the Takeover Panel, non-convertible loan notes), a profit forecast or estimate that has previously been made must (unless the Panel otherwise agrees) be examined, repeated and reported on in documents sent to shareholders.

CORPORATE COMMUNICATIONS

As recommended by the PSI Guide, companies should clearly define where responsibility lies for dealing with price sensitive information and what policies are to be followed. The existence of clear policies and procedures for dealing with price sensitive information may also help the company to respond to enforcement action by regulators.

A corporate communications policy should:

Record that price sensitive information should be handled on a confidential, need to know basis until it has been released to a regulatory information service.
Give examples of information that is likely to be price sensitive.
Define responsibilities and procedures within the company for managing and releasing price sensitive information.
Record procedures for dealing with the press, analysts, rating agencies and others who want price sensitive information.
Indicate where help and training can be obtained.

It is useful to inform advisers to the company about the corporate communications policy so that no misunderstandings about roles, responsibilities and policies can arise.

FUTURE DEVELOPMENTS

Developments in this area are continuing. A comprehensive review of the Listing Rules is planned by the UKLA and a discussion paper is expected in the early autumn.

The European Commission (Commission) is currently working on new directives on market abuse and transparency, both of which would, if adopted, have a significant impact on the obligations of listed companies to update the market.

Market Abuse Directive

In May 2001 the Commission presented a proposal for a directive on insider dealing and market manipulation (Market Abuse Directive) (COM (2001) 281). This would replace the Insider Dealing Directive (89/52/EEC) and would cover both insider dealing and market manipulation. The proposal has been considered by the European Parliament, the Economic and Social Committee, the Council of the European Union and the European Central Bank (PLC, 2002, XIII(4), 81). The opinions are positive in principle and suggested amendments relate to the scope of the proposals, such as the definitions of insider dealing and market manipulation.

If adopted, the Market Abuse Directive would extend the restriction on insider dealing to cover dealing by persons who have inside information relating to an issuer of financial instruments, by bringing within the definition of "inside information" non-public information that would be likely to have an effect on the price of financial instruments even if the information is not derived from a source inside the issuer. The directive would also require member states to prohibit any person from engaging in market manipulation. "Market manipulation" was defined in the proposal to include:

Transactions which are likely to give misleading signals as to the supply, demand or price of financial instruments, transactions which secure the price of financial instruments at an abnormal or artificial level and transactions which employ fictitious devices or deception.
Dissemination of information through any media (including the internet) or by any other means which is likely to give false or misleading signals as to the supply, demand or price of financial instruments, including the dissemination of rumours and false or misleading news.

The Market Abuse Directive would also require member states to ensure that issuers of financial instruments inform the public as soon as possible of inside information. A regime similar to the SEC's (US Securities and Exchange Commission) Regulation on Fair Disclosure (Regulation FD) (see box "US disclosure regime") is proposed, where an issuer that discloses inside information to a third party must make simultaneous disclosure of that information to the public. The exceptions from this proposed rule are similar to the exceptions in Regulation FD.

Finally, the Market Abuse Directive would require each member state to designate a single administrative authority with the function of ensuring that the Directive is applied.

If adopted in its proposed form, the Market Abuse Directive would represent a significant change in the regulation of use and disclosure of information about listed companies. In particular:

Forward looking information may be caught: the obligation to announce information as soon as possible if it would be likely to have an effect on the price of financial instruments goes much further than existing provisions which generally relate to changes in the company's financial or trading position. In particular, forward looking information, such as internal budgets, may trigger an announcement obligation under the wording of the proposed Market Abuse Directive.
No "reasonableness" limitation: despite the very wide definition of inside information, there is no concept similar to that found in the Listing Particulars and Prospectus Directives limiting the information to be disclosed to that which investors would reasonably expect.
Information does not have to derive from the company as long as it "relates to" the company: since the definition of inside information in the proposed Market Abuse Directive does not require that the information has come from inside the company, it could be argued that the Directive would require companies to disclose information about the actions of others. For example, a company might be required to make an announcement if it discovered that a well known analyst was about to change his rating of the company from "buy" to "sell". Similarly, if a company discovers that a major shareholder is preparing to sell shares in the company the company may be required to make an announcement.

Transparency Directive

The Commission is preparing to bring forward a new directive on transparency obligations of issuers whose securities are admitted to trading on a regulated market (Transparency Directive). The Commission issued a consultation document on 17th July, 2001 proposing:

Consolidation of all disclosure requirements in Community law into one directive.
Broadening the scope to cover all securities of issuers admitted to trading on a regulated market, so that, for example, AIM companies and companies traded on the German Neuer Markt would be caught.
Upgrading the regular reporting requirements, to include: quarterly financial reporting; disclosure of consolidated financial statements complying with International Accounting Standards; limited auditors' review of the quarterly report; and new time limits for the publications of quarterly and annual financial reports.
Allowing publication of information on the internet as well as in newspapers.
Upgrading ad hoc disclosure requirements. The current EU requirement is that an issuer informs the public as soon as possible of any major new developments in its sphere of activity which are not public knowledge and which may, by virtue of their effect on its assets and liabilities, financial position, or on the general course of its business, lead to substantial movements in the prices of its shares. The Commission proposed a requirement that the issuer informs the public without delay of all new information which is not public knowledge and necessary to enable investors to make an informed assessment of its assets and liabilities, financial position, profits and losses, prospects and rights attaching to its securities, which may lead to substantial movements in the prices of its securities.
The concentration of responsibilities in the home administrative competent authority.

The results of the consultation process were issued on 19th December, 2001 and the proposal for a Transparency Directive is likely to be submitted to the European Parliament and the Council this summer. It remains to be seen in what form the Transparency Directive will be brought forward and whether, in particular, the overlap with the Market Abuse Directive will be eliminated.

The Price Sensitive Information Guide

Key points in the UK Listing Authority's (UKLA) guidance on the dissemination of price sensitive information include:

Identifying unpublished price sensitive information

Companies should remember that, in general, the more the specific the information, the greater the risk of it being price sensitive. Companies should not disclose specific data, least of all financial information such as sales and profit figures, to selected groups rather than to the market as a whole.

The fact that a company has nothing to announce can be price sensitive. The UKLA will not require a company to make an announcement denying wholly unfounded rumours, but if the company does decide to respond, the UKLA prefers that it does so by issuing a formal announcement via a regulatory information service rather than by a comment to a journalist.

Certain potentially price sensitive information will already be in the public domain and so does not need to be announced. For example, a change in UK interest rates is information that can have an effect on the price of a company's listed securities; however, companies are not required to announce this because it is already public knowledge. An announcement might only be required if the change had an unusual or unexpected effect on the company.

When assessing whether a matter requires announcement or whether it has already been made, the simple fact that it is possible for the information to be obtained by the public is not necessarily enough. If the information is not readily available because a fee is required to obtain it or it is not a matter of general knowledge that it can be obtained, then an announcement will be required.

A framework for the handling of price sensitive information

Companies should have a consistent procedure for determining what information is sufficiently significant for it to be price sensitive and for releasing that information to the market.

Responsibility for communication with analysts, investors and the press should be clearly defined. Staff should be prohibited from communicating information to anyone outside the company if they have not been given this responsibility.

Companies may find it helpful to identify to analysts and the press, those employees responsible for communications. Companies might also consider making their internal policies on communication known outside the company.

Where companies issue lengthy releases either to shareholders or to the market as a whole which include comments on current or future trading prospects, this information should be given due prominence and not hidden in the body of the announcement.

Companies might consider producing a "sensitivity list" setting out the types of information that are likely to be price sensitive for that particular company and incorporating this into their communications policy.

Companies should ensure that individuals responsible for handling communications are well trained in identifying and handling unpublished price sensitive information.

Regular statements on a company's position

Some problems with price sensitive information could be overcome if more companies had a structured communications plan with regular updates on their trading position and immediate prospects.

Handling of unexpected developments and inadvertent disclosure

If a company is faced by an unexpected and significant event, for example, a large foreign exchange loss, where an announcement would normally be required, a short delay is acceptable if it is necessary to clarify the situation.

If price sensitive information is inadvertently disclosed on a selective basis, the company should take immediate steps to ensure that a full announcement is made so that all users of the market have access to the same information.

Profit forecasts

If a company has made a public forecast but it subsequently becomes aware that the outcome will be materially above or below the forecast figure, a further announcement should be made correcting the forecast as soon as possible.

Guidance to analysts

Analysts should refrain from putting a company in the position where it is likely to commit a breach of the Listing Rules, in particular, by selectively disseminating price sensitive information. For instance, analysts should not demand that a company correct its reports or persist in asking questions in briefings where this information would involve the company using unpublished price sensitive information.

Questions from analysts and correction of analysts' forecasts

Companies should decline to answer analysts' questions where individually or cumulatively the answers would provide price sensitive information.

In most circumstances a company is not obliged to make an announcement correcting public forecasts by analysts. However, a company should consider correcting serious and significant errors that come to its attention, which in its view have led to a widespread and serious misapprehension in the market.

Draft reports from analysts

To limit the likelihood of inadvertently releasing price sensitive information, if a company believes that it is necessary to comment on a draft report it should avoid correcting the analysts' conclusions and should restrict itself to correcting the underlying data on which the analyst has based his conclusion. Companies should only correct the underlying data with information that is in the public domain or unpublished information that is clearly not price sensitive.

Draft reports from analysts

Conduct of meetings with analysts

Some companies have opened their analysts' briefings to include the press, and sometimes the public, as a non-participating audience. This practice will help to limit the scope for uninformed criticism of analysts' briefings, it will help educate the press and public and it will help raise the company's profile.

Press speculation

The UKLA does not require companies to make negative statements denying wholly unfounded rumours or speculation. However, if there are details contained in the rumour that suggest a breach of confidence has occurred and the matter is price sensitive, the company must make an announcement.

In order to be effective, a "no comment" policy must be used consistently. Any inconsistency may allow the company's audience to infer an answer and would be tantamount to selective disclosure.

Whilst the UKLA does not require a company make a negative statement denying a wholly unfounded rumour, if the company does decide to make such a denial the company should consider doing so via formal announcement rather than dialogue in a single publication.

Health warnings

Certain companies, especially those operating in volatile sectors, should consider including a statement of risks or contingencies in all announcements as a matter of best practice.

Remedies

Breach of Listing Rules or market abuse

The UK Listing Authority (UKLA) has power to impose unlimited penalties on an issuer that has contravened the Listing Rules, and on any director of the issuer knowingly concerned in the contravention (section 91, Financial Services and Markets Act 2000)(FSMA). The FSA has a similar power with respect to persons who have engaged in market abuse or encouraged another person to engage in market abuse (section 123, FSMA).

The FSA may instead publish a statement censuring a person who has contravened or been knowingly concerned in a contravention of the Listing Rules (section 91(3), FSMA) or, in the case of market abuse, a statement that the person has engaged in market abuse (section 123(3), FSMA).

The FSA or the Secretary of State may apply to the court for injunctions (sections 380 and 381, FSMA) or restitution orders in cases of breach of the Listing Rules or market abuse. A restitution order is a particularly powerful remedy:

It can be made against anyone who has contravened a Listing Rule or been "knowingly concerned" in the contravention or against anyone who has engaged in or encouraged market abuse (sections 382 and 383, FSMA).
It is not necessary that the person has profited from the contravention; it is sufficient if any person has suffered loss or been otherwise adversely affected.

Any amounts paid to the FSA in pursuance of a restitution order must be paid by it to the persons affected.

FSA policy on penalties

As required by the FSMA (sections 93 and 124) the FSA has produced two statements of policy, one in its capacity as the UKLA, relating to the imposition and amount of penalties for contraventions of the Listing Rules and market abuse, respectively.

Misleading statements and creation of false or misleading impressions

The maximum penalties on conviction of a criminal offence under section 397 of the FSMA are seven years' imprisonment and/or an unlimited fine.

Insider dealing

The maximum penalties on conviction of the offence of insider dealing under Part V of the Criminal Justice Act 1993 are seven years' imprisonment and/or an unlimited fine.

Key UK Listing Rules obligations

General obligation of disclosure for companies

9.1 A company must notify a Regulatory Information Service without delay of any major new developments in its sphere of activity which are not public knowledge which may:

(a) by virtue of the effect of those developments on its assets and liabilities or financial position or on the general course of its business, lead to substantial movement in the price of its listed securities; or

(b) in the case of a company with debt securities listed, by virtue of the effect of those developments on its assets and liabilities or financial position or on the general course of its business, lead to substantial movement in the price of its listed securities, or significantly affect its ability to meet its commitments.

9.2 A company must notify a Regulatory Information Service without delay of all relevant information which is not public knowledge concerning a change:

(a) in the company's financial condition;

(b) in the performance of its business; or

which, if made public, would be likely to lead to substantial movement in the price of its listed securities.

9.3 The requirements of paragraphs 9.1 and 9.2 are in addition to any specific requirements regarding notification contained in the Listing Rules.

9.3A A company must take all reasonable care to ensure that any statement or forecast or any other information it notifies to a Regulatory Information Service or makes available through the UK Listing Authority is not misleading, false or deceptive and does not omit anything likely to affect the import of such statement, forecast or other information.

9.4 A company need not notify to a Regulatory Information Service information about impending developments or matters in the course of negotiation, and may give such information in confidence to recipients within the categories described in paragraph 9.5. If the company has reason to believe that a breach of such confidence has occurred or is likely to occur, and, in either case, the development or matter in question is such that knowledge of it would be likely to lead to substantial movement in the price of its listed securities, the company must without delay notify to a Regulatory Information Service at least a warning announcement to the effect that the company expects shortly to release information which may lead to such a movement.

9.5 The categories of recipient referred to in paragraph 9.4 are:

(a) the company's advisers and advisers of any other persons involved or who may be involved in the development or matter in question;

(b) persons with whom the company is negotiating, or intends to negotiate, any commercial, financial or investment transaction (including prospective underwriters or placees of securities of the company);

(d) any government department, the Bank of England, the Competition Commission or any other statutory or regulatory body or authority.

The company must be satisfied that such recipients of information are aware that they must not deal in the company's securities before the relevant information has been made available to the public.

9.6 Information that is required to be notified to a Regulatory Information Service must not be given to anyone else before it has been so notified, except as permitted by paragraphs 9.4 and 9.15.

9.7 Where it is proposed to announce at any meeting of holders of a company's listed securities information which might lead to substantial movement in their price, arrangements must be made for notification of that information to the Regulatory Information Service so that the announcement at the meeting is made no earlier than the time at which the information is published to the market.

Exception

9.8 If a company considers that disclosure to the public of information required by paragraph 9.1 or 9.2 to be notified to a Regulatory Information Service might prejudice the company's legitimate interests, the UK Listing Authority may grant a dispensation from the relevant requirement.

Equivalent information

9.9 A company whose securities are also listed on any overseas stock exchange must ensure that equivalent information is made available at the same time to the public (by way of notification to a Regulatory Information Service) and to the market at each of such other exchanges.

Notification when a Regulatory Information Service is not open for business

9.15 When an issuer is required by the Listing Rules to notify information to a Regulatory Information Service at a time when a Regulatory Information Service is not open for business, it must ensure that there is adequate coverage of the information by distributing it to not less than two national newspapers in the United Kingdom and to two newswire services operating in the United Kingdom. In addition, the issuer must ensure that the information is notified to a Regulatory Information Service, for release as soon as it reopens.

Board decisions

9.35 Decisions by the board of directors of a company on dividends, profits and other matters requiring announcement must be notified to a Regulatory Information Service without delay and not later than 7.30 a.m. on the next following business day.

US disclosure regime

Companies listed in both London and New York will have to comply with both UK and US securities laws. There are a number of significant differences of approach between the two jurisdictions.

Periodic disclosure

Disclosure requirements under US securities laws arise principally from periodic reporting and filing requirements. Companies registered with the SEC (US Securities and Exchange Commission) have to provide reports annually and quarterly in prescribed forms. These forms require a discussion of the company's financial position under "Management's Discussion and Analysis of Financial Condition and Results of Operations" (MD&A). The MD&A must supplement the financial information for the period in question by providing other information that the registrant believes to be necessary to an understanding of its financial condition, changes in financial condition and results of operations. It must also describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favourable or unfavourable impact on net sales or revenues or income from continuing operations.

Duty to update the market

While there are a number of further rules requiring specific disclosures, for example, relating to changes in control, acquisitions or disposals of assets or bankruptcy, there is no SEC rule that specifies that US reporting issuers must update the market on material changes in their trading performance arising in the period between periodic filings and the decisions of the courts do not clearly establish whether such a duty exists (see, for example, Stransky v Cummins Engine Co., Inc., 51 F.3d 1329 and In re Time Warner Inc. Securities Litigation, 9 F.3d 259). However, where the market is relying on other statements that originate from or have been endorsed by the issuer, including statements in research reports on which the issuer has commented, the issuer may become "enmeshed" in the reports and run the risk of liability under Rule 10b-5 of the Securities Exchange Act of 1934, as amended, in respect of fraudulent misstatements or omissions in those statements.

Guidance issued by the principal US stock exchanges suggests that issuers should update the market about material new information. For example, the New York Stock Exchange's Listed Company Manual states that a listed company is expected to release quickly to the public any news or information which might reasonably be expected to materially affect the market for its securities (section 202.05). However, this guidance does not appear to be rigorously enforced.

Selective disclosure

In August 2000, the SEC adopted a new Regulation on Fair Disclosure (Regulation FD) (see News brief "Who's afraid of Regulation FD? Selective disclosure one year on", PLC, 2001, XII(10), 9). Under Regulation FD, a reporting issuer must, as a general rule, make public disclosure of material non-public information regarding the issuer or its securities that the issuer, or any person acting on its behalf, discloses to a broker or dealer, investment adviser, institutional investment manager or investment company (or person associated with any of the foregoing) or to a holder of the issuer's securities (under circumstances in which it is reasonably foreseeable that the person will purchase or sell the issuer's securities on the basis of the information).

Regulation FD provides exceptions for disclosures made to persons owing duties of confidentiality to the issuer or who agree to keep it confidential; to rating agencies; or in connection with registered offerings. Regulation FD does not apply to foreign private issuers as defined in Rule 405 under the US Securities Act of 1933, as amended.

Insider dealing

The US insider dealing regime is different from the UK regime in several significant respects. The US regime is based on fiduciary duty. Persons who are not in a fiduciary relationship to an issuer, and do not derive their information from a person who, to their knowledge, is breaching a fiduciary duty, may not be liable for insider trading. Against this background, the position of analysts is not always clear under US securities laws.

Future developments

In the wake of the Enron affair, a number of changes have been proposed by the SEC (see News brief "Enron: Beyond the headlines"PLC, 2002, XIII(4), 6). The most significant of these is a significant expansion of the categories of event that will give rise to a current filing requirement on Form 8-K, so that specific events such as the loss of a material customer or contract or a material write-off will have to be reported immediately. In the longer term, the new SEC Chairman, Harvey L. Pitt, has stated that the SEC is rethinking its overall approach to disclosure by issuers and has suggested that the "static periodic disclosure model" of regular reporting should be supplemented by a general requirement for current disclosure of material new information. How the SEC will achieve this change without further exacerbating the problem of shareholder class actions remains to be seen, although it appears that the SEC intends the obligation to apply only to information that is "unquestionably material".

It can therefore be seen that the UK currently has a legal and regulatory regime in relation to dissemination of price sensitive information that is, in some respects, more prescriptive and potentially interventionist than the US.

The Iceland case

On 26th April, 2002 the Financial Services Authority (FSA) FSA released a public statement censuring Iceland Group Plc (now known as The Big Food Group Plc) (PLC, 2002, XIII(5), 84). The FSA decided that, on two occasions in the period December 2000 to 2nd January, 2001 Iceland contravened the requirements of paragraphs 9.2 and 9.3A of the Listing Rules by failing to keep the market informed of price sensitive information without delay and also by failing to take all reasonable care to ensure that an announcement that was issued on 13th December, 2000 was not misleading.

The FSA concluded that Iceland contravened paragraph 9.2 of the Listing Rules in failing, in two respects, to notify the market without delay of changes in the performance of its business which, if made public, would have been likely to lead to substantial movement in its share price:

In relation to Iceland's financial trading performance in the period September 2000 to December 2000 which deteriorated significantly, the FSA concluded that, by 13th December, 2000 at the latest, an obligation had arisen under the Listing Rules to make an announcement informing the market as to a change in the performance of Iceland's business. This failure was not rectified until Iceland released its announcements on 22nd and 31st January, 2001.
As at 2nd January, 2001, a further obligation to make an announcement had arisen, due to a further deterioration in Iceland's financial trading performance over the Christmas period. Iceland's failure to make an announcement without delay was in breach of the Listing Rules. This failure was not rectified until Iceland released its announcement on 22nd January, 2001.

In addition, the FSA concluded that Iceland contravened paragraph 9.3A of the Listing Rules in failing to take all reasonable care to ensure that an announcement issued on 13th December, 2000 relating to trading performance and merger benefits following the acquisition of Booker plc was not misleading.

Related information

Links from www.practicallaw.com and the web

These links can be found from this article which is at www.practicallaw.com/A24417

Know-how topics

Market abuse, insider dealing, market manipulation www.practicallaw.com/T794

UKLA Listing Rules www.practicallaw.com/T1162

Financial Services and Markets Act 2000 www.practicallaw.com/T2030

Securities and Exchange Commission www.practicallaw.com/T1184

Practice notes

FSMA overview www.practicallaw.com/A20660

Relationship between UKLA and the London Stock Exchange www.practicallaw.com/A20663

Continuing obligations www.practicallaw.com/A20664

PLC Corporate Law guide on release of information by listed companies www.practicallaw.com/A24376

From PLC, Global Counsel and other publications from the Practical Law Company

Dissemination of information:

Opening up the market (2002) www.practicallaw.com/A22744

Edgar for UK companies:

The new filing requirements (2002) www.practicallaw.com/A21475

Financial Services and Markets Act:

The eagle has landed (2001) www.practicallaw.com/A20756

Who's afraid of Regulation FD?

Selective disclosure one year on (2001) www.practicallaw.com/A20427

Marconi: Suspension of shares (2001) www.practicallaw.com/A19228

Financial Services and Markets Act:

Investigations and enforcement (2001) www.practicallaw.com/A19628

Financial Services and Markets Act:

An overview (2001) www.practicallaw.com/A19243

Continuing obligations for companies:

Posting results on the internet (2001) www.practicallaw.com/A17427

Web links

European Commission http://europa.eu.int

Financial Services Authority www.fsa.gov.uk

London Stock Exchange www.londonstockexchange.com

New York Stock Exchange www.nyse.com

Securities and Exchange Commission www.sec.gov

End of Document

Also Found In

Resource ID 6-101-7488

Law stated as at 12-Jun-2002

Resource Type Articles

Jurisdictions

United Kingdom
United States