The FCA has recently published its Primary Market Bulletin 52 (15/11/2024 ("PMB 52"). Among other matters, it covers how issuers should Identify inside information.
Inside Information generally
The FCA recite Article 7.1(a) of the UK-onshored Market Abuse Regulation ("UK MAR"), which defines inside information 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";
Article 7.2 in turn defines "precise" information:
"…information shall be deemed to be of a precise nature if it indicates a set of circumstances which exists or which may reasonably be expected to come into existence, or an event which has occurred or which may reasonably be expected to occur, where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of the financial instruments or the related derivative financial instrument…"
The FCA highlight that when assessing whether information is of a "precise nature", the ECJ ruled in Markus Geltl v Daimler AG (Case C-19/11) [2012] ("Geltl") that information must have a "realistic prospect" of coming into existence or occurring in order to be considered "precise".
We would add that it is also worth recalling that the ECJ also referred to excluding "information concerning circumstances and events the occurrence of which is implausible". The ECJ also indicated "However, that notion should not be interpreted as meaning that the magnitude of the effect of that set of circumstances or that event on the prices of the financial instruments concerned must be taken into consideration".
The FCA add that in Hannam v FCA [2014] UKUT 0233 (TCC)("Hannam"), the Tribunal decision cited that same "realistic prospect" test as the law to be applied.
Again, we would add that the Upper Tribunal also went on to say that the "realistic prospect" test does not mean that there must be a more probable than not / > 50% chance of the circumstances coming into existence or the event occurring. They indicated:-
"It certainly means that the prospect must not be fanciful. But as we see it there can be a realistic prospect of circumstances coming into existence or of an event occurring without it being more likely than not that they will do so. We do not, in any case, find it of help to attempt to approach the question on the basis of assessing percentage chances."[Emphasis added]
These passages make clear that the prospect must be more than fanciful and not implausible, but what that means in practice is not particularly clear. If one were to seek to apply a percentage (although the Upper Tribunal in Hannam was reluctant to do so), we would venture that "fanciful" may be something below a 15-20% chance of occurring.
The Upper Tribunal in Hannam also sought to interpret the word "likely" in the context of whether information, if it were made public, would be "likely to have a significant effect" on the price of relevant securities (Article 7.1(a) of UK MAR). They concluded that "likely" meant there "is a real (in contrast with fanciful) prospect", again rejecting the "more probable than not" test. It seems that issuers must apply a test of what is a "realistic prospect", a "real" prospect, and not "fanciful" or "implausible". It also seems that same test may be interchangeable in the context of both the Article 7.2 ("sufficiently precise") and Article 7.1(a) ("likely") contexts.
But where does that leave us? While we can deduce is that both thresholds are not particularly high, and certainly not being more likely than not, but there is still considerable room for uncertainty, subjectivity and differences of opinion about when a prospect is realistic and what is fanciful. That seems unsatisfactory.
One other matter worth mentioning, but which did not feature in PMB 52, was that of FCA v Sir Christopher Gent ("Gent"). This FCA Final Notice (the matter did not go to the Upper Tribunal) makes clear that in determining whether inside information has come into existence, it does not matter whether information is in a fit state/ready to be publicly announced. The test for whether information is inside Information is set out in Article 7 of UK MAR, and there can be a timing gap between inside information coming into existence and its being capable of being publicly announced. Information can be inside information and yet still require clarification or further investigation before the issuer is in position to make an announcement to the public. It was emphasised in this context that while Article 17(1) of UK MAR requires an issuer to inform the public of inside information “as soon as possible”; it does not require the issuer to inform the public immediately.
Offer processes
The FCA also make observations about offers. They say listed or traded companies that have received an offer for all or part of the company need to carefully consider whether such an event is inside information. This is particularly important given this information is likely to be known to a number of parties as a result of the offer being prepared and made.
During an offer process, the FCA note that it is not uncommon for companies to receive a series of formal offers from the same party. The FCA say they have seen cases where advice has been provided by the company’s advisers that inside information crystallised only when a final offer was accepted by the company’s directors. This was because the likelihood of the transaction taking place before acceptance was not deemed certain.
The FCA's view is that whether the receipt of an offer is inside information should be assessed on a case-by-case basis, and relevant factors to take into account could include the identity of the bidder, the nature and quantum of the offer and the likelihood that the offer will be recommended by the board of the listed or traded target company. In this specific context, issuers are reminded that information is precise if it indicates a set of circumstances which exist or which may reasonably be expected to come into existence, which the Upper Tribunal in Hannam had held includes where there must be a more than fanciful chance of the future event or circumstances coming into existence or occurring, but that the threshold was lower than the event or circumstances being "more likely than not".
On this basis, the FCA say it is possible that the receipt of an offer could be inside information before it has been formally considered and recommended by the issuer's board.
Once again, this does not really take matters very much further in terms of resolving the uncertainties involved. For example, we can envisage a situation in which an initial offer is made which is lower than one which is likely to be acceptable i.e., is more likely than not to be rejected. However, it appears necessary to evaluate both the chance that it may in fact be accepted, and also the chance that an increased offer will be made which is likely to be acceptable. Is either prospect realistic and not merely fanciful?
Periodic financial information
The FCA highlight their previous guidance in Technical Note 506.2 to companies on the classification of periodic financial information. In that guidance, they had emphasised that issuers should assess whether the information they hold is inside information by beginning from the assumption that information relating to financial results could constitute inside information.
The FCA highlight their having seen cases where finance packs have been presented to an issuer's board weeks before a scheduled earnings statement is published, but which showed revenues did not meet internal forecasts by the company and external consensus estimates by analysts. In some cases, issuers had chosen not to disclose performance that was significantly behind internal forecasts and external consensus on the basis that below-forecast performance would be compensated by significant over-performance later in the year. Where this has not happened, in some cases the subsequent publication of the financial statements caused the share price to fall between 40% and 50%. The FCA say they have seen similar effects from the loss of major contracts, an event which again may take time to become certain.
In such situations, where the information could be of a precise nature such that it constitutes inside information at an early stage of the process, the FCA say issuers will have to disclose the information "in their scheduled results announcement as soon as possible". An issuer may be able to delay disclosure of the inside information under Article 17(4) of UK MAR, but only in a limited set of circumstances where immediate disclosure of the inside information is likely to prejudice the legitimate interests of that issuer, and where delay of disclosure is not likely to mislead the public. Of particular relevance will be where the issuer has previously stated financial objectives or targets which are now unlikely to be met.
In the FCA's earlier Technical Note 506.2, the FCA indicated that for the purposes of point (a) of Article 17(4) of MAR, the FCA considers that the cases where immediate disclosure of inside information is likely to prejudice the legitimate interests of an issuer include circumstances where:
"the issuer is in the process of preparing a periodic financial report and immediate public disclosure of information to be included in the report would impact on the orderly production and release of the report and could result in the incorrect assessment of the information by the public."
They go on to say that in many cases, an issuer will be able to carefully and appropriately draft an announcement that will enable the correct assessment of the inside information by the public, adding "We accept that in some cases this will not be practicable other than through publication of the full financial report".
We would observe that the combined comments might suggest that delaying disclosure until the date when the results announcement is scheduled to take place may be acceptable. However, we would suggest that serious consideration needs to be given as to whether an earlier announcement needs to made, rather than awaiting the scheduled results announcement date, or seeking to bring forward the scheduled date of release where possible. In this context, we note that in ESMA's Questions and Answers On the Market Abuse Regulation (MAR) Guidance, Question 5.11 indicates:-
"However, a piece of inside information under Article 7 of MAR can be identified while preparing the financial guidance, the half-yearly or the yearly reports. In that case, that piece of inside information has to be immediately published unless delayed disclosure under Article 17 of MAR takes place, irrespective of the date of publication of the financial guidance, the half-yearly or the yearly report as determined by the relevant national legislation."
The FCA also warn that an issuer should also not delay disclosure of the fact that it is in financial difficulty or that its financial condition is worsening, although it may be able to delay disclosure of the fact or substance of negotiations to deal with such a situation.
The FCA's expectation is that where an issuer is not able to meet the conditions of Article 17(4), it should release an announcement that discloses the inside information as soon as possible, and in a manner that enables the public to correctly assess the inside information.
CEO resignations and appointments
The FCA say they have seen cases where press speculation arises that a CEO is standing down, a shortlist of successors identified, and a replacement will shortly be appointed. In those cases, the issuer has classified the resignation of the CEO and the appointment of their successor as inside information, but have delayed disclosure of that information.
This was a live issue in both the Geltl and Gent cases.
While conscious that issuers are likely to want to manage as smoothly and concurrently as possible the disclosure of their CEO’s resignation and their replacement, the FCA say it is important that issuers have regard to the timely identification and disclosure of inside information concerning both the resignation of an existing CEO and the appointment of their successor. This is especially so where the information leaks or there is press speculation.
The FCA add that issuers need to carefully and continually assess the point at which developments concerning the succession process constitute inside information. While the process for starting the recruitment of a successor can have a long lead time, the assessment of whether developments during this process constitute inside information should be carried out continuously.
Separate assessments should also be carried out for developments in both the resignation and appointment given that these are two separate pieces of information which may on their own constitute inside information at different points in time. The FCA also point out that it is possible that events during this process could be inside information at an early stage and before the formal resignation of the existing CEO and/or appointment of their replacement. This could include where a CEO has signalled their intention to resign and/or the board has started discussions to appoint potential successors. The test of whether the information is precise is most relevant, taking account of Articles 7(2) and 7(3) of UK MAR discussed above - an intermediate step in a protracted process shall be deemed to be inside information if, by itself, it meets the criteria of inside information.
If there is continuous press speculation on the succession, then the issuer may need to carefully consider whether this constitutes a leak. Factors to consider could include the accuracy of the speculation.
What issuers can do
The FCA suggest issuers may consider establishing a disclosure committee whose role is to determine and advise when information meets the threshold for inside information and determine the timing and content of announcements. This might include having a clear understanding of the definition of inside information, and having access to external counsel, including legal, advisory and corporate brokers at short notice.
The FCA also suggest that issuers may wish to ensure that the CFO, CEO and Company Secretary can make announcements on performance and event-based inside information outside of normal reporting timetables and absent a formal disclosure committee.
Other pointers include:-
(i) training relevant employees, including those in the finance function, to enable them to recognise when inside information meets the threshold;
(ii) documenting the reasons information was classified as inside information or, where there was consideration and conclusion that it was not, documenting those reasons.
Commentary
This is helpful guidance in particular in focussing on some specific events and circumstances where inside information may come into existence. It also should serve as a warning to issuers to be alive to the FCA's interpretation of when inside information may come into existence and become announceable.
At the same time, one can have some sympathy for issuers and their advisers in feeling that determining whether inside information has come into existence remains an imprecise science with few practical examples to be guided by. The very fact that a number of apparently interchangeable phrases are to be applied, which are susceptible to differing interpretations and subjective applications, is less than ideal.
Author
David Capps, partner
