Out-Law Guide 5 min. read
18 Jul 2007, 9:03 am
This guide is based on UK law as at 1st February 2010, unless otherwise stated.
The following case studies relate to OUT-LAW's guide on the Disclosure of price-sensitive information – FSA rules.
Universal Salvage had a rolling contract with Direct Line Insurance for vehicle salvage that could be terminated on three months’ notice. The contract was responsible for approximately 40 per cent of the vehicles handled by the company and for a significant proportion of its turnover.
Direct Line put the contract up for tender and, at a meeting on March 18, 2002, informed Martin Hynes, chief executive of Universal Salvage, that he had lost the business. The Universal Salvage board was told of this on March 20, 2002, and written confirmation of termination was received by the company on March 25, 2002. The termination was to take effect on June 30, 2002. Universal Salvage thought this was a negotiating ploy and wrote to Direct Line raising a number of arguments as to why the contract should continue. Direct Line undertook to investigate the issues raised. Nevertheless, on April 16, 2002, Universal Salvage again received a letter that confirmed the loss.
In the meantime, Universal Salvage had been analysing the financial impact of the termination, all for a presentation to the board on Thursday, April 18, 2002. At that board meeting, it was decided that Hynes should seek advice from the company’s financial adviser, WestLB, about the loss of the contract and the poor trading performance the company was experiencing in the final quarter.
The board meeting ended at 1.00pm. Hynes telephoned WestLB at 4.30pm and again at 5.00pm but his usual contact was unavailable. Hynes got hold of him the next morning, Friday, and it was agreed that they would meet on Monday, April 22, 2002. At that meeting, WestLB advised that an announcement should be made to the market about the lost contract and the poor trading figures. The announcement duly followed at 3.45pm on Tuesday, April 23, 2002; the company’s share price fell by 55 per cent.
The delay of only five working days in announcing the termination of the contract – from April 16 to April 23, 2002 – was determined by the FSA to be a breach of the obligation to disclose, as soon as possible, a major new development in the company’s business. As from April 16, the company needed to win significant amounts of new business to sustain previous levels of turnover and profit, and this, held the FSA, was a material fact, likely to lead to a substantial movement in the company’s share price. The authority pointed to the 55 per cent drop in the share price to support its argument.
In addition, the FSA decided that Hynes was “knowingly concerned” in the breach as he was the director best placed to take appropriate steps to ensure that the company notified the market without delay and he had failed to do so.
The company was fined £90,000; Hynes, £10,000.
On January 8, 2002, Pace announced its interim results but failed to reveal that its trade credit insurance for future deliveries to one of its largest customers had been withdrawn. The FSA judged this to be a breach of the obligation to ensure that information released to the market is not misleading and does not omit anything “likely to affect the import” of information already released.
The regulator held that because two annual reports had previously stated that a credit insurance programme existed for large customers, the loss of cover was material and did affect “the import” of the interim results announcement. It criticised Pace for not seeking sufficient advice on the matter. (The company had talked to its financial adviser but not its brokers.)
The FSA also found Pace to be in breach of the obligation to announce a change to the company’s expectations for its revenue performance without delay.
The interim results showed that revenue for the year to June 1, 2002 would be broadly similar to the 2001 figure of £524m. On February 4, 2002, Pace revised its forecast to £455m but failed to inform the market of the change. The company argued that its earnings expectations had not changed (because the lost sales would have produced little or no profit) – and it is earnings, rather than revenue, that would usually be pricesensitive.
It was not until March 5 that a trading statement was made – by which time things had deteriorated further and expectations had fallen to £350m. The news led to a share price fall of 67 per cent and wiped £462m from the company’s market capitalisation.
The case underlines the need to include all material information when making announcements. The loss of the insurance cover was not deemed to be price-sensitive – just material to the matter being announced.
The FSA accepted that Pace had not acted recklessly or deliberately but had simply come to the wrong conclusion about what was material. The company was nonetheless fined a hefty £450,000 for breaching the two rules.
Wolfson Microelectronics supplies the semiconductors that are found in many digital consumer goods such as mobile phones and portable media players. Its largest customer generated 18 per cent of its 2007 revenue, but on 10 March 2008 Wolfson was told that it would not be supplying parts for future editions of two of the customer’s products: $20m, or eight per cent of Wolfson’s forecast revenue for the year, had disappeared.
But at the same meeting, Wolfson learned that there would be increased demand for parts going into a third product.
Two days later, Wolfson consulted its investor-relations advisers and the view was taken that no announcement was needed. Taking the good and bad news together, there would be no net change in revenues. There was also a concern that the market would overreact and, in any event, a non-disclosure agreement with the customer prohibited it from releasing the related positive news.
On 20 March, the Wolfson board met and, when one director took a contrary view, decided it needed legal advice. The lawyers agreed with the lone board member that the bad news was inside information and needed to be announced as soon as possible.
On the lawyers’ advice, the brokers were also consulted on the likely impact on the share price. They confirmed that investors placed importance on the relationship with the major customer and that the shares were likely to suffer. Accordingly, the bad news was announced on 27 March; and the share price dropped 18 per cent.
The FSA held that, given the significance of the customer’s business and the impact of the loss of supplies for the first two products, the bad news was inside information. A reasonable investor would have been likely to use it as part of his investment decision. There could be no offset of the negative against the positive news – each had to be looked at independently and announced where necessary. And if the bad news were likely to depress the share price, the company could not withhold the information because it thought the market would over-react or fail to understand the true value of the company.
The FSA was also clear that a confidentiality agreement was no excuse for not announcing price-sensitive information. (A welldrafted contract should in any event allow for announcements required by law or by a regulator; names can always be anonymised and the text agreed with the other party.)
The lawyers and the brokers should have been consulted earlier. The obligation to announce arose on 10 March and the 16- day delay was a breach of DTR 2.2.1. That meant there was a false market in Wolfson’s shares in the intervening period, and so a breach also of Listing Principle 4.
Wolfson was fined £200,000, reduced to £140,000 for an early settlement.