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New legislation implementing the EU Market Abuse Directive (Directive 2003/6/EC) came into effect in Ireland and a number of other EU Member States last July. The legislation has brought about important changes for all companies (Irish or foreign) whose shares are traded on the Official List of the Irish Stock Exchange (ISE), as well as their directors, senior management and advisers. Although the new regime has been the subject of very little media commentary since it came into effect, it significantly strengthens and extends the law relating to insider dealing. It creates an entirely new offence of “market manipulation”, imposes very significant sanctions for breaches of the new law, and gives the Irish Financial Services Regulatory Authority (IFSRA), rather than the ISE, sweeping new powers of enforcement. For these reasons, it will directly impact on the existing practices of all Irish listed companies (and their advisers), particularly in relation to the control and release by them of inside information to the public. The aim of the Market Abuse Directive (known as MAD) is to increase standards for market integrity and ensure equal treatment in the EU securities industry. One of the key factors that led to MAD was the view that a combination in the growth of the Internet and the explosion of dealings in sophisticated (and poorly understood) financial instruments other than shares and bonds, such as derivative products, swaps and options, offered new opportunities to the unscrupulous for the carrying out of “market abuse” (essentially, the twin offences of insider dealing and market manipulation). The new market abuse rules have extra-territorial effect, in that they apply to actions concerning listed “financial instruments” (widely defined to include shares, debentures, units in collective investment undertakings, swaps, derivatives and options) whether carried out in Ireland or abroad. Of particular relevance for listed companies, their directors and senior executives will be the provisions of the new regime which will take effect on and from 1 October 2005. These relate first to the obligation to draw up and maintain “insider lists” and secondly, the requirements for “persons discharging managerial responsibilities” of Irish-registered listed companies, and “persons closely associated” with them, to notify IFSRA (as well as their company) of certain securities transactions conducted on their own account. Insider dealing and “market manipulation” Using inside information to buy or sell financial instruments to which the information relates is an offence. It is also an offence to disclose inside information to any other person, unless this is done in the normal course of the exercise of the person’s employment, profession or duties. The new offence of “market manipulation” is exceptionally broad, with the key elements being the carrying out of abnormal transactions that give false or misleading signals to the market (unless this conforms to market practices accepted by IFSRA), or artificially fixing prices. Other elements of the offence include transactions or orders to trade using fictitious devices for example, and spreading information (including rumours) that gives false or misleading signals. A key point to note is that the approach taken in the legislation is to avoid an exhaustive definition, and instead to provide a long list of “non-exhaustive signals” which may or may not amount to “market manipulation” but which will be taken into account by the regulator, thus facilitating a “benefit of hindsight” approach in relation to investigation and enforcement. In this regard, IFSRA will doubtless have noted the recent convictions of two directors of AIT Group plc, a UK public company, for making misleading statements in breach of the UK Financial Services and Markets Act, as well as a number of other cases of alleged market abuse which have been investigated by the UK’s Financial Services Authority (FSA) under the similar market abuse regime in the UK. Defences Helpfully, a number of defences are provided to the new market abuse offences. Having inside information relating to a target company and using it in a public takeover of that target in conformity with the Irish Takeover Rules, for example, would not of itself be market abuse. Neither will engaging in buy-back programmes, own share purchases, or post-public offering stabilisation measures, provided detailed conditions are complied with. However, the broad offence of disclosing inside information, except in the course of a person’s profession or employment, may oblige CEOs and other executives to be more cautious in their dealings with the media and analysts. New disclosure obligations Since 6 July of this year, listed public companies have been under an obligation to publicly disclose inside information which directly or indirectly concerns the company. While such companies have always been obliged under Stock Exchange rules to disclose to the public, for example information such as major new developments that could be price-sensitive, the new rules are expressed differently, and could well be interpreted and applied differently by IFSRA. There is a right to delay public disclosure to avoid prejudicing the company’s “legitimate interests”, provided this would not be likely to mislead the public and the company can ensure the confidentiality of the information. “Legitimate interests” could include negotiations where the outcome is likely to be affected by public disclosure, or the financial viability of the company is in grave and imminent danger, but IFSRA has warned in its interim market abuse rules that the “legitimate interests” exemption is likely to be narrowly interpreted by it (which is consistent with the approach taken by the FSA in the UK). Controlling access to inside information The new disclosure obligations require listed companies to control access to inside information and to take effective measures to deny access to that information other than to those who need it. Companies must also have in place measures which allow immediate public disclosure of the inside information, if it cannot be kept confidential. The rules go on to provide that the information must be disclosed without delay and in a manner that allows fast access and complete, correct and timely assessment of the information by the public. The information must also be put on the company’s website for not less than six months. Significant changes concerning already publicly disclosed inside information must also be disclosed to the market without delay. Insider lists Under the new “insider list” requirements, operative from 1 October 2005, listed companies must draw up a list of employees having access to inside information, regularly update it, keep it for at least five years, and give it to IFSRA on request. The rules require companies to maintain not just a list of its own employees who have access to inside information, but also a list of its principal contacts at any other company (for example financial or legal advisers) who also have access to the information concerned. Advisers are also required to draw up their own “insider lists” and public companies are required to make “effective arrangements” (for example via engagement letters or agreements) for them to do so and give copies to the company or IFSRA on request. Reporting of “managers’ transactions” to IFSRA The new rules on “managers’ transactions”, also operative from 1 October 2005, impact on “persons discharging managerial responsibilities” (PMDRs) of Irish-registered listed companies. PDMRs include non-executive as well as executive directors, and also senior executives below board level who have both regular access to inside information and the power to make managerial decisions affecting the future developments and business prospects of the company. The new rules require disclosure by PDMRs to the company, of transactions conducted by them in shares, derivatives or other linked financial instruments within three business days of the transaction. PDMRs must also make disclosure directly to IFSRA within five business days of the transaction. The company is separately obliged to disclose to the market via a regulatory information service at the latest by the end of the business day after it receives the information. These disclosure obligations extend to persons “closely associated” with the PDMR. This is also a very broad definition, and includes not only spouses and dependent children, but also other relatives which have shared the same household for at least one year on the date of the transaction. The rules also oblige a company which is managed or controlled by a person who is also a PDMR of a listed company to disclose details of transactions by that company in the listed company’s financial instruments. This could be onerous for directors on boards of listed companies who also happen to be responsible for managing the business of other, unconnected companies. All of these obligations are in addition to the existing disclosure obligations for directors and other persons under the Companies Act, 1990 and clearly, because of their very broad scope and effect, need to be explained to directors and senior executives of listed companies in detail. Enforcement and penalties IFSRA has been given wide powers under the Market Abuse regime, including a power to prosecute offences and issue directions on a wide range of matters (including the power to direct the trading of any financial instrument be suspended and a direction not to dispose of or otherwise dissipate assets). Other powers granted to IFSRA include the power to carry out assessments as to whether contraventions of the rules have occurred and to impose sanctions on foot of those assessments which range from a private or public caution or reprimand up to a monetary penalty of up to €2.5 million. IFSRA’s powers also include the power to conduct “dawn raids” of premises, search and inspect them for relevant records, and seize any records inspected or produced. Homes can also be raided by warrant, if the investigators have reasonable grounds for believing that there are relevant records located there. A person who commits the offence of “market abuse” is also potentially liable to criminal sanction – if convicted on indictment, he or she can be fined up to €10 million or imprisoned for 10 years or both. Such persons could also be civilly liable to compensate other parties for any loss incurred by those parties and to account for any profits made. The civil liability provisions are similar to those contained in the Companies Act, 1990 which were the subject of recent well-publicised litigation between Fyffes plc and DCC plc, in respect of which the judgment of the High Court is awaited with interest by the investment and advisory community. Some key implications The new role and significant enforcement powers of IFSRA mean that listed companies and their advisers may need to adopt a more transparent approach to the release of inside information to the market. This could bring about more, and earlier, public announcements of inside information; The new regime will require companies to have effective systems and procedures to control inside information, and decide whether and when public announcements are needed; There is an immediate requirement from 1 October for listed companies to identify PDMRs and “persons closely associated” with them, and educate them as to their legal obligations; Guidelines for dealing in securities by directors and employees should be reviewed, especially if the company has multiple listings on different stock exchanges and its guidelines have not been reviewed for some time; Lists of employee insiders who regularly or occasionally have access to inside information now need to be drawn up and updated, and advisers to listed companies should also be required to keep their own lists; Disclosure procedures for listed companies are likely to come under scrutiny by IFSRA in the event of allegations of market abuse, and need to be documented appropriately. Such procedures should ensure at a minimum that:- only those who need to know inside information have access to it; “insider list” obligations can be satisfied, and those who do need to know inside information are aware of their legal obligations; decisions regarding the release of potentially price-sensitive information can be taken quickly, without delay, and are properly documented; share price movements and market rumours can be monitored appropriately; advisers are consulted early to assist the company in assessing the market-sensitivity of company information.

 

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