European Union: ‘Sir, You Have Committed Market Abuse'

The Financial Conduct Authority (the "FCA") has fined Sir Christopher Gent £80,000 for unlawfully disclosing inside information. In his capacity as chair of ConvaTec Group Plc ("ConvaTec"), Sir Christopher disclosed inside information to senior individuals at two of the company's major shareholders. The information related to a revision of ConvaTec's financial guidance and the retirement of its CEO, and had not yet been announced to the market. The FCA considered that Sir Christopher's conduct amounted to a breach of the EU Market Abuse Regulation ("MAR")¹ and that he had therefore committed market abuse.

The FCA's Final Notice, issued on 5 August 2022, provides useful insight as to the regulator's interpretation of market abuse rules. In particular, it deals with when information becomes inside information; with whom inside information can be shared; and when an announcement needs to be made to the market, all of which are issues that arise frequently for listed companies, their employees, and investors.

Summary of facts

Chronology of events²

ConvaTec's MAR policies and provision of training

Prior to its listing on the London Stock Exchange, ConvaTec's external legal advisers had provided training that covered the responsibilities of directors of a listed company and their obligations under MAR. This training was delivered to Sir Christopher and other non-executive members of the Board and specifically included how to recognise inside information.

ConvaTec also had a detailed market disclosure policy that set out the elements for identifying inside information under MAR.

The FCA's findings

The FCA accepted that Sir Christopher had not traded on the inside information, and that he had not received any financial benefit directly or indirectly from his actions. However, it considered that he had unlawfully disclosed inside information in contravention of MAR, as the disclosures were made otherwise than in the normal exercise of his employment, profession, or duties. They were not reasonable, nor were they necessary to enable him to perform his function. The FCA found that the breach was negligent and contrary to the training Sir Christopher had received as part of his role.

Was the information inside information?

Sir Christopher argued that the information he disclosed was not inside information. He considered that ConvaTec had performed a continuous assessment as to whether it possessed inside information relating to the company's financial performance and the CEO's potential retirement. ConvaTec had concluded that inside information did not arise until 12 October 2018, two days after Sir Christopher made the disclosures, at which time one of the company's brokers was still of the view that the information was not precise enough for a market announcement. Sir Christopher believed that the disclosures he made contained limited and uncertain information which was "depending on the Board's analysis."

Sir Christopher further argued that, as of 10 October 2018, the position in respect of both a potential revision to the financial guidance and the CEO's retirement was unclear, and that there were significant developments to both matters between him making the disclosures and ConvaTec concluding that inside information had arisen.

The FCA found that Sir Christopher did hold inside information when he contacted the shareholders on 10 October 2018, and that he unlawfully disclosed it. It stated that the assessment as to whether Sir Christopher disclosed inside information required an objective analysis of the test in Article 7 of MAR. It considered that, in this instance: the information was of a precise nature and was specific enough to enable a conclusion to be drawn as to the effect it would have on ConvaTec's share price; it had not been made public; and if it was publicly available, it would be likely to have a significant effect on the share price. The FCA also considered that a reasonable investor would have been likely to use the information as part of the basis for its investment decisions.

The FCA emphasised that the test is not whether the information is suitable for announcement. It did not find that a lack of detail as to the range or the extent of the revision to the financial guidance affected its status as inside information and noted that the events (the guidance revision and the CEO's retirement) did not need to be certain for the information to be sufficiently precise to constitute inside information. It also did not accept that Sir Christopher could rely on the company's assessment that inside information had not arisen. It was Sir Christopher's belief or expectation that the events would occur and that announcements would be made that gave rise to a set of circumstances which satisfied the test for inside information.

The FCA further commented that, in its view, the requirement under Article 17(1) MAR to inform the public of inside information "as soon as possible" does not require an announcement to be made immediately. It considered that there can be a short period of time between inside information coming into existence and an announcement being made. Information can therefore be inside information and still require clarification prior to being announced to the public.

Were the disclosures made in the normal exercise of Sir Christopher's employment, profession, or duties?

Sir Christopher argued that the disclosures were reasonable and necessary for him to perform his duties as chair because it was important for ConvaTec to obtain the views of its long-term strategic shareholders. He also said he did not want the shareholders to be surprised by the announcements and that the disclosures were in line with the expectations of shareholders like Shareholder 1. He noted that ConvaTec's market disclosure policy listed major shareholders as potential recipients of certain permitted disclosures.

Sir Christopher further argued that he had indicated his intention to inform the shareholders to a ConvaTec executive, who had not raised any concerns, and had sought advice from a broker who had encouraged him to make the disclosures. He also stated that the shareholders were subject to confidentiality and no dealing obligations, and that he had therefore reasonably understood that there was no risk the recipients of the information would use it to deal or act improperly.

Sir Christopher believed he was not negligent and was acting in ConvaTec's best interests in his role as chair. He maintained that he would not have made the disclosures had he been advised that the information was inside information and should not be disclosed.

The FCA did not find that the disclosures were within the normal exercise of Sir Christopher's employment, profession, or duties. It considered that his position, experience, and the training he had received should have alerted him to the nature of the information. It also found that he had failed properly to apply his mind to the question of what he could disclose, as well as when, how, and to whom, and he had therefore acted negligently.

The FCA did not accept that either the support he believed he had from the ConvaTec executive and the broker, or the confidentiality and no-dealing obligations that were imposed upon the shareholders, meant that it was objectively reasonable and necessary for him to make the disclosures, and he should have obtained clear and formal advice before doing so. The FCA also found that there were more appropriate steps Sir Christopher could have taken to secure shareholder support, such as arranging calls between them and ConvaTec's senior management immediately following the RNS announcements.

Comment

This Final Notice provides a number of useful points for listed firms and their employees.

Whether information is inside information requires an objective assessment of the circumstances. The FCA may find that information is inside information even if the company does not consider it so. Those privy to information that satisfies the criteria to be inside information should not handle it differently simply because it might not have been classified as such internally. The fact that information might not be ready to be announced or be in the desired form does not prevent it from being inside information.

Any request for advice from a broker or lawyer needs to deal with specific issues. It is also important that appropriate records are kept by senior management whilst handling inside information, including details of any formal advice received. This is particularly important in circumstances where the status of the information changes rapidly and advice should be updated as events unfold.

Appropriate channels should be used to maintain relationships with shareholders, for example, providing access to senior management following any announcements containing inside information. Whilst it might seem to make commercial sense to reach out to particular contacts with whom the company wishes to maintain a good relationship, the regulatory implications can be severe.

In this case, the FCA did not take any action against the company. The Final Notice suggests that this is because the company had implemented appropriate policies and training relating to MAR. It is therefore essential that listed firms carefully consider their own policies. To the extent that they are not sufficient, building in the key learnings from this Final Notice may be a good place to start.

Footnotes

1. Regulation (EU) No 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse

2. For ease of reading, only a selected chronology has been included in this note. A full chronology, which provides further context for the FCA's action, can be found in the Final Notice, available at: https://www.fca.org.uk/publication/final-notices/sir-christopher-gent-2022.pdf

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.