Insider Trading Post Fyffes
Author:
Caroline Moran
The storm surrounding the Fyffes judgment has now died down and it looks like it’s business as usual for DCC plc and Jim Flavin. But what does the Supreme Court judgment mean for practitioners asked to advise their clients in relation to insider trading compliance issues?
In the first instance, it must be noted that the Fyffes case is an analysis of the insider trading provisions contained in Part V of the Companies Act, 1990. Part V has now been repealed in so far as the securities in question relate to a regulated market. The applicable law for trading in regulated markets is now the Market Abuse Regulation 2005 which transposes the EU Market Abuse Directive 2003/6/EC into Irish law. Part V still applies to securities in non-regulated markets.
Part V of the Companies Act, 1990 makes it unlawful for a person who is connected with a company (or was connected within the preceding 6 months), to deal in any securities of that company where he is in possession of information that is (i) not generally available and (ii) if generally available would be likely to materially affect the price of the securities.
The Market Abuse Regulation contains a similar offence but refers to information which would be ‘likely to have a significant effect on the price’ of the securities.
As the definition of inside information contained in the Market Abuse Regulation is similar to the definition set out in Part V of the Companies Act, 1990, we can expect that the tests laid down by the Supreme Court in Fyffes will be relevant to future Irish judicial interpretation of the Market Abuse Regulation and therefore should be taken into account by practitioners.
In the Fyffes case, the court was required to determine whether negative financial information contained in two Fyffes internal management reports that had been circulated to Jim Flavin as a non-executive director of Fyffes, would have materially affected Fyffe’s share price had it been available to the market generally. If so, DCC plc and Flavin would be in breach of the insider trading provisions. It was accepted that a material variation in share price would be an increase or decrease of a minimum 10% in value. The information contained in the management reports was unavailable to the market in February 2000 when DCC plc sold its Fyffes shares at a profit of €85 million.
The High Court applied the test of the ‘reasonable investor’ and asked whether a reasonable investor in February 2000, having assessed the negative news in the trading reports, would have concluded that the trading reports would impact on Fyffes share price to a substantial or significant degree.
The High Court was of the view that the reasonable investor would conclude that it was too early in the financial year to make a judgement about the outcome of the business. In addition, the reasonable investor would offset the negative trading reports against other positive information available in the market at the time, such as the rumours of a Fyffes merger and the potential of the new worldoffruit.com venture, Fyffes new online sales website. Accordingly, the High Court held that the reasonable investor would not conclude that the trading reports would negatively impact on share price.
The Supreme Court overruled this decision and held that the information would affect share price. The Supreme Court stated that the test in Ireland is directed to market effect and not the conduct of a hypothetical reasonable investor.
The questions that need to be asked in respect of information held are as follows:
-Is there information?
-Is it generally available?
-If it was made generally available would it be likely to materially affect the price of the shares in the market?
In determining the likely effect of the information on the market, the Supreme Court made clear that it was not appropriate to offset the expected impact of negative information against positive information already in the market. This is because share price moves upwards in anticipation of good results and downwards in anticipation of poor results. Should the anticipation become a reality the value of this will already have been factored to a considerable extent into the share price. For example, in the case of Fyffes, the share price had already increased due to the positive effect of the worldoffruit.com venture. To state that the negative management report information would be neutralised due to this positive information was to double count the value of the worldoffruit.com venture.
For Fyffes and DCC plc, this outcome means another High Court battle to assess the level of compensation Fyffes should receive. Under the terms of the legislation DCC plc may be required to account to Fyffes for any profit made on the sale of the shares.
For practitioners, the message coming from the Supreme Court is clear – as a matter of common sense, new financial information relating to a company will concern the market and is likely to affect share price. Connected persons who hold fresh financial information, not generally available, should not deal in the company’s shares. Practitioners would be wise to take a cautious approach.