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Inside Information and Market Abuse – Upper Tribunal delivers important judgment

28 July 2014

In May 2014, the Upper Tribunal (Tax and Chancery Chamber) delivered judgment on a high profile market abuse case. Issuers, whether listed on the Main Market or AIM, should take note of this judgment to make sure they do not fall foul of the market abuse rules and restrictions on dealing within a close period.

The judgment provides two useful clarifications for listed issuers and their advisers:

  • the “reasonable investor” test is not an exhaustive test of price sensitivity; rather the likely effect on price must also be taken into account in applying such test, and
  • the test to be applied to whether something is “likely” (whether the effect on price or a future event occurring) is a “realistic prospect” test.

In addition, the judgment opens the way for a more pragmatic approach to the disclosure timetable. In this note, however, we focus on the impact of the above two bullet points.

What is inside information?

“Inside information” is precise information, not generally available, relating (directly or indirectly) to an issuer, which, if generally available, would be likely to have a significant effect on the price of its shares.

As defined in section 118(6), information would be likely to have a significant effect on price if and only if it is information of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions.

“Inside information” is a term which is more or less interchangeable with the term “unpublished price sensitive information” used in the AIM Rules.

The judgment by the Upper Tribunal clarified that when applying the “reasonable investor” test to information which is not generally available (such as a potential acquisition):

  • the issuer (with assistance from its advisers) should assess whether the information is of a type which a reasonable investor would “likely” take into account, and
  • in making that assessment, the “likely” impact on the price of the issuer’s listed securities should be considered.

If the information is not of a relevant type or if it is not “likely” to have an appreciable effect on price, then the information would not be “inside information”. No quantitative guidance was provided by the Upper Tribunal on the meaning of appreciable (other than that it would need to be more than “trivial”).

What is “likely”?

The judgment went into great detail as to how the term “likely” is to be interpreted. In particular, it considered whether this was equivalent to “more probable than not” and “may well”, and rejected the proposition in both cases. When considering whether something is “likely”, an issuer must consider whether there is a “real (and not fanciful) prospect” of it occurring.

Interestingly (and potentially significantly), the Upper Tribunal agreed with a proposition put forward by Mr Richard Boulton QC (acting for the FCA) that “likely” means “something between 5% probable and 95% probable”. It will be interesting to see whether the FCA reflects this in its guidance. 

Prospective events

“Inside information” includes prospective events, where such events are “reasonably expected to occur”. When assessing whether an event is “reasonably expected to occur”, the test to be applied is the same “realistic prospect” test.

It would seem, therefore, that a prospective event, such as a possible acquisition, which has a probability value of “something between 5% probable and 95% probable”, has a “realistic prospect” of occurring and would be inside information if it would be likely to have an appreciable effect on price, if generally known.

What does this mean in practice?

Going forward, issuers will need to adopt a more cautious approach as to when a proposed event or transaction becomes “reasonably likely to occur”, as it appears from the judgment that even a transaction which has a 5+% probability of actually occurring would fit the bill.

Many companies have disclosure practices that adopt the “more likely than not” test as the rule of thumb, and this test should now be regarded as unsafe.

The AIM Rules require that an AIM company must ensure that its directors and applicable employees do not deal in any of its AIM securities during a close period (in accordance with the company’s share dealing code). Equivalent rules also apply to Main Market listed companies.

Applying the “real prospect” test means that listed issuers may well enter a close period when previously they would not have expected to, or alternatively at an earlier stage than they would otherwise have expected to.

This article was written by Mark Howard.

For more information please contact Mark on +44 (0)20 7203 8902 or mark.howard@crsblaw.com