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06 November 2007
The Supreme Court has overturned the High Court's not-guilty verdict in Ireland's most significant insider-dealing case of recent years.(1) The plaintiff, Fyffes plc, issued proceedings against DCC plc, its managing director and two of its subsidiaries for the €85 million profit made on the sale of DCC's Fyffes shares in 2000. Fyffes claimed that the chief executive of DCC, Jim Flavin, availed of price-sensitive information to which he was privy as a non-executive director of Fyffes at the time the shares were sold and dealt on the basis of that information in contravention of the provisions against insider dealing in the Companies Acts. The Supreme Court agreed.
DCC had acquired a substantial stake in Fyffes in 1981, before Fyffes was listed. Following the DCC flotation in 1994, its holding in Fyffes, which was another public company, was perceived as being anomalous and it declared, albeit not publicly, that its strategy was to exit from Fyffes when a suitable opportunity arose. Following a number of intra-group transfers of the Fyffes shares, in February 2000 the defendants disposed of their shareholding in Fyffes, which amounted to almost 10% of its issued share capital, realizing a profit of approximately €85 million in the process. At the time of the disposal, the chief executive of DCC, Jim Flavin, was also a director of Fyffes.
Fyffes claimed that DCCs disposal of the shares was unlawful because it was effected at a time when Flavin had access to price-sensitive information by reason of his directorship of Fyffes. Specifically, Fyffes referred to trading reports for November and December 1999 which were confidential and circulated only to the directors of Fyffes, and which disclosed a poor trading performance forecast for the first quarter of 2000.
On March 20 2000, just over one month after the share disposal, Fyffes announced a profit warning, stating that the company would not meet its anticipated half-year performance. Following this profit warning, Fyffes' share price fell significantly.
Fyffes commenced proceedings under Part V of the Companies Act 1990, which prohibits any person from dealing in the securities of a company when in possession of information that is not externally available but, if it were, would be likely materially to affect the price of the security. The act makes dealing in securities in this way a criminal offence and also provides a civil remedy for the issuer and the purchasers of such shares.
The High Court found, as a matter of fact, that the information contained in the trading reports was bad news about Fyffes' trading and earning performance in the first quarter of 2000 and that, taken on their own, a reasonable inference could be drawn from the figures that there was a real risk that Fyffes' expectations for the first half of the year would not be met.(2) Further, it found that the trading reports were confidential and that the information contained in them was of the type and quality that was potentially price sensitive. The court also found that Flavin was in possession of the potentially price-sensitive information by reason of his connection with Fyffes when DCC sold the shares, and that Flavin both caused and procured the dealing which resulted in the share sales.
The court then considered the overriding issue in the case: whether, by reason of his connection with Fyffes in February 2000 when the shares were sold, Flavin had in his possession information that fulfilled the criteria for price sensitivity provided for in the legislation - that is, information that was not generally available but, if it had been, would have been likely materially to affect the price of Fyffes' shares.
To determine this issue the court applied a 'reasonable investor' test derived from US case law. The key question, according to the court, was whether as a matter of probability in February 2000, a reasonable investor, having assessed the news about Fyffes' performance in the first quarter, in the context of the "total mix" of information available about Fyffes' prospects for the financial year, would have concluded that the information indicated a lowering of expectations about Fyffes' earnings in the first half of the financial year 2000 of a magnitude that would probably impact Fyffes' share price to a significant degree. The court deduced that the reasonable investor would not so conclude. Rather, he or she would conclude that it was too early in the financial year to make a judgement about the outcome of Fyffes' existing business in the first half of the year.
Fyffes appealed the High Court decision solely on the question of whether the trading reports constituted price-sensitive information.
The Supreme Court unanimously overturned the High Court on this point and held that the High Court had erred in concluding that the information in Flavin's possession relating to the business of Fyffes on the date of the share sales in February 2000 was not price sensitive in relation to those shares, within the meaning of the legislation.
The Supreme Court held that the reasonable investor test was not appropriate to determine the issue of price sensitivity and that the statutory test to determine what constitutes price-sensitive information is one that should be decided by the court objectively. The court further held that even if the reasonable investor test were to be accepted for the purpose of legal argument, the High Court, in offsetting the information in the November and December trading reports against other factors known to investors (described in the High Court as the "total mix" of information), was erroneous. Rather, the Supreme Court adopted what is described as the 'commonsense' approach, holding that the test is whether the information, which is not generally available, is likely materially to affect the price of the security, and that this should be determined by the court objectively. Neither the subjective view of Flavin nor that of the company directors was relevant. The court should consider:
The court stated that in this case the answer was clear: there was information which was not generally available and which constituted bad news of a nature that would concern the market and likely affect the price of the shares.
The Supreme Court further held that the information contained in the profit warning was considerably similar to the information in the trading report and noted that after the profit warning the share price dropped significantly. The case is now due to return to the High Court in order to measure the extent of the profit for which the defendants are liable to account to Fyffes and to determine the claims made by certain purchasers of the shares.
The case was highly newsworthy, given the sums of money and profile of the companies involved, and particularly as it was the first time the Irish superior courts considered the insider-dealing rules.
While the case has made headlines, it is of limited value for the interpretation of future insider-dealing cases. The legislation considered in the Fyffes Case was Part V of the Companies Act 1990, which is no longer applicable to companies listed on the Official List of the Irish Stock Exchange. The new regime applicable to listed companies is contained in the Market Abuse Regulations 2005, which specifically introduce the concept of the 'reasonable investor' into the analysis of whether insider dealing has occurred. Although the test was considered in some detail by the High Court and rejected by the Supreme Court, it is unclear whether the High Court's elucidation of the reasonable investor test (which was imported from US case law) will be applied in any cases arising pursuant to the Market Abuse Regulations.
For further information on this topic please contact Michael Tyrrell or Daniel Scanlon at Matheson Ormsby Prentice by telephone (+353 1 232 2000) or by fax (+353 1 232 3333) or by email (firstname.lastname@example.org or email@example.com).
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