This article considers the decision of the Financial Conduct Authority (FCA) to fine Sir Christopher Gent the sum of £80,000 for the unlawful disclosure of inside information. The article discusses certain points arising from the decision and suggests some practical steps for boards and issuers to take.
For a full understanding of the decision and the circumstances surrounding Sir Christopher’s disclosures, it is worth reading the Final Notice published by the FCA, which can be found here. Of particular interest are the FCA’s responses to representations made by Sir Christopher, which are appended to the Final Notice. The essential elements of the case are summarised below.
The FCA’s comments offer significant clarification in a number of important areas in interpreting the concept of market abuse. It is noteworthy that these are made public for the first time in a schedule to a disciplinary decision without any prior consultation or appropriate notice. It is hoped that further FCA policy announcements in this area will duly announced and not be smuggled out in this way.
Overview of the facts and the FCA’s decision
Sir Christopher was the non-executive Chairman of listed company, ConvaTec Group Plc. In this role, Sir Christopher was responsible for governance over, and closely involved in the preparation of, the Company’s issuance of RNS announcements to the LSE.
On 10 October 2018, Sir Christopher, in his capacity as Chairman, disclosed to individuals at each of two major shareholders information concerning an expected RNS announcement relating to the revision of ConvaTec’s financial guidance and the retirement of ConvaTec’s CEO. The FCA decided that Sir Christopher’s actions amounted to unlawful disclosure of inside information and that he therefore committed market abuse.
The FCA concluded that Sir Christopher acted negligently in disclosing the information. Having received relevant training on market abuse, and based on his own considerable experience and position, Sir Christopher should have realised that the information he disclosed constituted, or may have constituted, inside information and that it was not in the normal exercise of his employment, profession or duties selectively to disclose it. Sir Christopher failed properly to apply his mind to the specific question of what information, if any, he might properly disclose, as well as when, in what manner and to whom, and he failed to obtain clear, formal advice regarding this question, before making the disclosures.
The FCA considered that Sir Christopher acted negligently notwithstanding the following matters.
- At the time of the disclosures, ConvaTec had not yet formally classified the information regarding the expected revision to the financial guidance and the expected retirement of the CEO as inside information.
- Sir Christopher had been informed that the view of ConvaTec’s brokers was that ConvaTec needed to obtain more information in relation to the guidance revision and should not make an announcement until it had sufficiently precise information.
- In addition, a board-level ConvaTec executive and one of ConvaTec’s brokers were informed by Sir Christopher that he was intending to call, and/or had called, the major shareholders.
- Further, ConvaTec had a relationship agreement with one of the major shareholders which imposed confidentiality and no-dealing obligations on the major shareholder, and Sir Christopher imposed such obligations himself on the senior individuals to whom he made the disclosures.
Whether inside information had arisen
The FCA focused on whether the disclosures related to information that was precise and would be likely to have a significant effect on the price of ConvaTec’s shares.
(i) Precise nature
Sir Christopher argued (among other things) that the information disclosed was not sufficiently precise to constitute inside information because he had stated that the revision to the financial guidance and the retirement of the CEO were “depending on the Board's analysis” and this made it clear that these events were not certain to take place. However, the FCA confirmed guidance and precedent in stating that the events did not have to be certain in order for the information disclosed to be sufficiently precise. Instead, they needed to be “reasonably expected” to occur or, in other words that there needed to be a realistic prospect of them occurring.
As boardroom discussions about whether inside information has arisen often focus on whether the information in question is sufficiently precise to amount to inside information, directors should ensure they are applying the correct test of events “reasonably expected” to occur.
Sir Christopher, ConvaTec and ConvaTec’s brokers had also proceeded on the basis that, since ConvaTec was not in a position to make an announcement regarding the revision to the financial guidance and the retirement of the CEO, this showed that the information was insufficiently precise to amount to inside information. The FCA’s view, however, was that the information was inside information, but that ConvaTec needed to clarify the position before making an announcement to the market. This highlights the importance of distinguishing the following concepts:
- information that is insufficiently precise to amount to inside information; and
- information that is sufficiently precise to amount to inside information but reflects an evolving situation and may therefore not yet be suitable for announcement.
In the former case, no inside information exists and, self-evidently, the MAR obligations with respect to insider lists, announcement and disclosure do not apply. In the latter case, inside information does exist and those obligations do apply. Under MAR, the issuer is therefore obliged to make an announcement as soon as possible (save in certain circumstances not applicable to this case). The FCA’s view is that the use of the words “as soon as possible” expressly allows for a short period of time between information being inside information and an announcement having to be made. This is supported by DTR 2.2.9G(2) which states that the issuer may, in certain circumstances, take a short time to clarify the situation before an announcement is made. Boards should be alert to this important, but subtle, distinction.
(ii) Likely to have a significant effect on price
The FCA concluded the information disclosed would be likely to have a significant effect on the price of ConvaTec’s shares and was information that a reasonable investor would have been likely to use as part of the basis for their investment decisions.
In reaching this conclusion, the FCA determined that the information disclosed was specific enough to enable a conclusion to be drawn as to its possible effect on the price of ConvaTec’s shares, even though the disclosures did not provide detail as to the extent or likely range of the expected guidance revision. To help support this conclusion, the FCA noted the Hannam case, where the Tribunal determined that there is no need to know the extent to which the price would be affected.
Responsibility for identifying inside information and taking advice
Sir Christopher discussed with a board-level ConvaTec executive and one of ConvaTec’s brokers that he was intending to call, and/or had called, the major shareholders. Both of those individuals had responsibilities for and, one might assume, expertise in, compliance with the market abuse regime but neither individual advised Sir Christopher that his proposed actions would constitute the unlawful disclosure of inside information. In rejecting Sir Christopher’s representations that this made his non-compliance with the market abuse regime inadvertent rather than negligent, the FCA said:
- taking into account all the circumstances, it was not sufficient for Sir Christopher to rely on the fact that neither individual advised him against making the calls; and
- that Sir Christopher’s training on MAR and his considerable experience as a director of listed companies meant that he should have independently realised that the information being disclosed was inside information, even though ConvaTec had not formally classified it as such.
The FCA considered that Sir Christopher “failed properly to apply his mind to the specific question of what information, if any, he might properly disclose, as well as when, in what manner and to whom, and failed to obtain clear, formal advice regarding this question, before making the disclosures.”
The FCA’s decision makes it very clear that responsibility for compliance with the obligation not to disclose inside information rests firmly with the person deciding whether or not to make the disclosures. It was irrelevant that ConvaTec had not formally classified the information as inside information. Similarly, while seeking advice may be a mitigating circumstance, it will not necessarily be completely exculpatory, particularly where advice is being sought “on the hoof”. Anyone considering selective disclosure of sensitive information should therefore ensure they obtain clear and formal advice before doing so. While the FCA does not go so far as to say that advice should be in writing, written advice has the twin advantages of providing reliable evidence, should it subsequently be needed, and of ensuring that the person giving the advice has themself given the matter appropriate consideration.
Decision-making in suboptimal circumstances
The risk of regulatory and governance failures is heightened in urgent and evolving situations. Decisions are taken over the phone, often with information being relayed to other parties through a “daisy chain” process and/or read on smart phones. There is also pressure to make decisions quickly and people are typically digesting a great deal of information and progressing a number of different workstreams at once. However, none of these factors will excuse regulatory failures and issuers must ensure that they have clear, well-understood compliance procedures with respect to MAR. Procedures should be well embedded so that they work seamlessly at times of crisis. For example, a board meeting should, as a matter of course, include an assessment of whether any inside information arose at that meeting and any uncertainty should be referred to the issuer’s brokers or lawyers. Where information is regarded as having the capacity to become inside information in the near future, the company secretary should keep a watching brief to ensure MAR compliance at the appropriate time.
Adding to the risks posed by the evolving situation was the fact that Sir Christopher was on holiday at the time he made the unlawful disclosures and sought advice on MAR. In the representations he made to the FCA, it was argued that being on holiday meant that arranging a phone call with one of the brokers was a sufficiently formal and appropriate means of taking advice in the circumstances. The FCA did not comment on this representation, but nor did it acknowledge that Sir Christopher being on holiday would justify any difference in the approach to be taken to seeking advice and considering the question of inside information. Generally, regulators and courts are unwilling to accept “holidays” as an excuse for procedural or governance failings. This can make things hard where the director only has a short window for making calls and receiving emails because of a time difference, poor internet connection or simply pressure from family or friends not to spend the holiday working.
There are steps that can be taken to support governance in such circumstances and boards may wish to review their contingency planning arrangements. For example, it would generally be open to the Chair to delegate specific responsibilities (such as talking to shareholders or approving requests to deal in shares) to the Deputy Chair or Senior Independent Director during the Chair’s absence. If a full delegation is not thought desirable, the Chair could ensure that at least one other director is involved in email and telephone correspondence to mitigate against the risk of, for example, something being missed when an email is read on a mobile phone. If a director cannot attend a board meeting, they should try to ensure they have read the relevant papers and fed their views back to the rest of the board before the meeting takes place. The minutes should record any director’s inability to participate fully in the business of the meeting.
What should boards and issuers do?
It can be hard to consider MAR obligations in the abstract and this decision makes a useful case study. Directors should ask themselves what they might have done in Sir Christopher’s position and what they might do differently in light of the FCA’s decision. Issuers should review their policies and procedures carefully, with a focus on what to do in an evolving situation, how to decide whether inside information has arisen and, if so, what obligations this triggers if the issuer is not yet in a position to make a meaningful announcement. The board should also consider carefully whether it is appropriate to share inside information with shareholders, bearing in mind that the disclosure must be reasonable and necessary.