The FCA has recently published Primary Market Bulletin No. 52, which discusses the identification of inside information under the UK Market Abuse Regulation (MAR), as well as associated obligations concerning the dissemination of inside information.

This will be of relevance to Irish companies where shares are admitted to the main market of the London Stock Exchange or AIM.

In this article, we focus on the identification of inside information. Three common scenarios are highlighted in which issuers have taken varying approaches to assessing when information constitutes inside information. The bulletin also suggests steps which issuers should take so that they are prepared to adequately identify such information.

Identifying Inside Information in Certain Situations

The FCA highlights the importance of robust identification, classification, management, control, and dissemination of inside information. According to the FCA, this is crucial for ensuring overall market confidence and that all investors operate on a level playing field, and for minimising the risk of market abuse. As mentioned above, the FCA points to three common scenarios in which differing approaches have been observed:

1. Offer Process

Where a listed company has received an offer for a part / all of the company, management needs to consider if such an event constitutes inside information. The FCA explains that in a takeover situation, it is common for a company to receive a number of offers from the same bidder with each offer surpassing the previous in terms of monetary value. Assessing whether or not an offer is considered inside information should be dealt with on a case-by-case basis. Factors to be considered include the bidder’s identity, the offer’s nature and amount, and the likelihood of the board recommending the offer.

The FCA explains that information is considered to be ‘precise’ where it indicates a set of circumstances which exist or which may reasonably be expected to come into existence. The FCA re-confirms that this is a higher threshold than a fanciful chance but a lower threshold than ‘more likely than not’. With this in mind, the FCA states that the receipt of an offer could be deemed inside information before it has been considered or recommended formally by the board.

2. Preparation of Periodic Financial Information

The FCA emphasises that issuers should assess on an ongoing and case-by-case basis whether periodic financial information is inside information on the assumption that information relating to financial results could constitute inside information.

The FCA notes previous cases where finance packs, which were presented to a board weeks before the publication of scheduled earnings statements, showed that revenues did not reach internal forecasts by the company and external consensus estimates by analysts. In other cases, issuers have opted not to disclose performance that is significantly behind internal forecasts and external consensus on the basis that below-forecast performance will be compensated by significant over-performance later in the year. Where this has not happened, in certain cases, the subsequent publication of the financial statements has caused the share price to fall considerably. The FCA has observed similar consequences from the loss of contracts; an event which may also take time to become certain.

The FCA states that where the information could be of a precise nature such that it is considered inside information at an early stage, an issuer must disclose the information in its scheduled results announcement as soon as possible. Delayed disclosure of the inside information is permitted under Article 17(4) of MAR, however this only applies in limited circumstances. Technical Note 506.2 illustrates the conditions where delayed disclosure may be satisfied in the context of the preparation of financial information. Of particular relevance is where the issuer has previously projected financial targets which are now unlikely to be met.

Further, the FCA provides that where an issuer is in financial difficulty, it should not delay disclosure of the fact. However, it may be able to legitimately delay disclosure of the fact or substance of negotiations to deal with such a scenario.

The FCA confirms its expectation that, where an issuer is not able to meet the conditions of Article 17(4) of MAR, it should prepare and release an announcement that discloses the inside information as soon as possible and in a manner that enables the public to correctly assess the inside information. In addition to this, justifying non-disclosure of information by offsetting negative and positive news is not permitted.

3. CEO Resignation and Appointment

Issuers should carefully manage the disclosure of a CEO’s resignation and the appointment of a successor, as both can be considered inside information. This requires continuous assessment to determine when these developments become inside information. Separate assessments should be carried out for the resignation and the appointment, as they may individually constitute inside information at different stages.

For example, if there is press speculation about a CEO’s resignation or the appointment of a successor, issuers must disclose this information to the public promptly. Factors to consider when assessing the price sensitivity of these events include the CEO’s length of service, market expectations, and the reasons behind the resignation.

Steps Issuers Can Take

To ensure that issuers are well-prepared to identify inside information, a number of pre-emptive actions can be taken, such as:

• establishing a disclosure committee in order to determine when information meets the threshold for inside information and advise on the timing and content of announcements. This committee should have access to counsel, including legal, advisory, and corporate brokers;
• ensuring that the company’s executives can make announcements on performance and event-based inside information outside of normal reporting timetables;
• training employees, particularly those in finance roles, to recognize when information meets the threshold for inside information;
• ensuring that information classified as inside information is managed appropriately, including the timely creation and updating of insider lists; and
• documenting the reasoning behind the classification of specific information as inside information.

Contributed by Oisin Callaghan.