U.K. Regulators Send a Message on Market Abuse Regulation Failings
Recent Market Abuse Regulation (MAR) Case Decisions
While U.K. financial regulators will look to address issues in the U.K. capital markets, including cases related to contraventions of the MAR, rarely are those case decisions and contents made publicly available. Recently, both the U.K.’s Financial Conduct Authority (FCA) and Aquis Stock Exchange (AQSE) have published a series of decision notices concerning breaches of MAR and applicable stock exchange rules worth noting.
Carillion Plc – FCA Decision Notices
Carillion Plc, a company listed on the London Stock Exchange, went into liquidation in January 2018. Before this, it had been a leading international construction, project finance and support services business operating in the U.K., Canada and the Middle East. Whilst not the underlying cause, the liquidation was in effect triggered by an announcement made on 10 July 2017 (Final Announcement), stating that the company was making an expected provision of £845 million as of 30 July 2017. The nature of this provision surprised market analysts and Carillion’s share price fell by 39% on the day of the announcement and by 70% overall within three days. Subsequently, the company’s financial position deteriorated yet further which ultimately led to the onset of the liquidation.
The Decision Notice centres around announcements made by Carillion prior to the Final Announcement, which were found to be misleading and made recklessly, with the FCA determining that Carillion was in contravention of MAR and the Listing Rules in relation to various statements made in their announcements.
Announcements leading up to the Final Announcement gave no indication to the market as to true financial position of the company and were misleading, having omitted various issues that the company was dealing with. These issues effectively only came to light as a result of the Final Announcement, when the actual and materially worse financial position of the company was made available to the market.
The FCA noted that, due to the seriousness of the contravention and, if not for the fact that the company was already in dire financial circumstances, it would have imposed a fine of £37.91 million on Carillion. As a financial penalty would not have been effective, the FCA chose to take the rare step of publicly censuring Carillion and detailing the contraventions instead, as a warning to the market.
Alongside the Decision Notice against Carillion, three former directors of the company were found to have been knowingly involved in Carillion’s breaches. The directors were found to have approved or been involved in approving various announcements they knew to be inconsistent with the company’s true financial position. They were aware of various financial risks to the company that they had chosen not to make the Carillion Board or Audit Committee aware of.
Due to the serious and deliberate nature of the three former directors’ actions, they were given fines between £154,400 and £397,800.
The FCA’s Decision Notices are initial findings rather than final notices. Accordingly, the FCA findings should be considered as provisional at present.
Sir Christopher Gent – FCA Final Decision Notice
Sir Christopher Gent (SCG), was a non-executive chairman of ConvaTec Group Plc (ConvaTec), a company admitted to the premium listing segment on the Main Market of the London Stock Exchange. The Final Notice published by the FCA deals with SCG’s role as Chairman of ConvaTec. In about October 2018, in his capacity as chairman, SCG disclosed inside information regarding an expected regulatory news service (RNS) announcement relating to the revision of ConvaTec’s financial guidance as well as the retirement of ConvaTec’s CEO, which was done outside of the normal exercise of his employment, profession or duties.
SCG’s disclosure involved contacting and disclosing the inside information to two major shareholders of ConvaTec, before it had been announced. Despite it being found that there was no improper motive for the disclosure and that SCG believed that he was acting in the best interests of ConvaTec, the FCA found SCG had acted negligently in unlawfully disclosing the inside information and imposed a fine of £80,000 on SCG personally. There were various arguments put forward by SCG in his defence, including the fact that neither the ConvaTec’s brokers nor another board executive (who SCG had told of his intention to call the two major shareholders) advised him against making those calls. However, the FCA makes it clear that personal individual responsibility in relation to MAR is of tantamount importance in these decisions, and that they will also consider things like a director’s MAR training and experience. Furthermore, the FCA noted that despite there being no improper motive, SCG’s conduct was serious because the unlawful disclosure of inside information undermines investor confidence in the integrity of U.K.’s financial markets.
Love Hemp Group Plc – AQSE Disciplinary Notice
In a 25 August 2022 decision, AQSE issued a Disciplinary Decision Notice, censuring Love Hemp Group PLC (Love Hemp) and issuing a financial penalty of £100,000 (later discounted to £70,000 on settlement) for breach of MAR and the AQSE Rules.
Love Hemp was admitted to AQSE’s Growth Market in September 2019, and the disciplinary notice deals with events wherein Love Hemp released an announcement (Announcement) on 8 February 2022 regarding the completion of a fundraising for £2.06 million. However, they did not include information regarding how settlement of the fundraising was to be completed. Importantly, the full amount of the proceeds of the fundraising were not due for up to 20 days following the release of the Announcement. The directors of Love Hemp later maintained that they had no reason to believe that settlement would not be forthcoming on the due date. However, one investor did not remit the funds as required before the due date.
Compounding this issue was the fact that the directors then failed to update the market about the investor’s failure to make payment until they issued an announcement on 3 May 2022.
Notwithstanding the investor’s later failure to pay, the information Love Hemp set out in its Announcement could have been seen as false or deceptive due to it not including key information that may have misled other investors as to the company’s actual financial position.
There were two issues arising; firstly, that the Announcement gave the impression that, from early February 2022, Love Hemp had completed and received the full £2.06 million from the fundraising when, in fact, it might not receive the full amount until at least 20 days following the Announcement; secondly, as soon as the investor did not pay as it was contractually obligated to do, they failed to update the market again as required, which compounded the issue further.
AQSE noted that Love Hemp’s processes and procedures in relation to preparing and reviewing announcements were not adequate, and the risk to investors as result of failing to properly detail the fundraising and then to update the market regarding the investor’s failure to pay, had the potential to negatively impact shareholders and potential shareholders. As such, AQSE thought it appropriate to censure Love Hemp and issue a fine.
This case highlights the importance of keeping the market fully informed about a fundraising and ensuring timely updates on status are issued to the market. Any companies considering a fundraising with delayed settlement terms need to include this information in their announcements to the market.
These cases all highlight the determination of U.K. financial regulators to enforce the requirements of MAR and to uphold the highest standards required to ensure the integrity of the U.K. public markets.
The FCA will look to assess the actions taken by the directors and other relevant parties when determining whether their conduct is appropriate in the circumstances, and in light of the knowledge they have when determining whether their behaviour was reckless in imposing a penalty. Company officers should be aware that there are significant penalties enforceable by the FCA and other U.K. financial regulators for breach of MAR and other relevant stock exchange rules.
The lessons to be learned from these cases for board members and other market participants are:
- to ensure that rigorous processes and procedures are in place to monitor activity and take actions accordingly to ensure compliance with MAR and other relevant stock exchange rules relating to disclosure of inside information;
- to carefully scrutinise and assess any information the company or its directors receive, or are in possession of, with a view to identifying whether it needs to be made publicly available in a timely manner. Delaying disclosure of inside information is possible, but only in limited and specific circumstances;
- to obtain specific advice if there is any doubt as to whether information needs to be disclosed, given the penalties that can arise should a breach of MAR or other applicable regulatory rules occur; and
- to consider the FCA’s focus on personal individual responsibility of each director.
If you have any questions on the matters discussed in this advisory or if you need further guidance on the manner in which you should be disclosing information in compliance with MAR, please contact your regular AT lawyer or one of the authors below from our U.K. Capital Markets team.
Disclaimer: This publication is provided by Armstrong Teasdale Limited for informational purposes only. The information contained in this publication should not be construed as legal advice.