In its concerns over the rising number of profit warnings, the Financial
Services Authority is probing large companies over possible failure to disclose
key trading data to the markets. But lawyers say the watchdog’s focus on
disclosure could lead to disputes with companies over what information should
have been revealed and when, especially given the wider circumstances
surrounding many decisions during the credit crisis. The FSA’s probes could lead
to fines for companies that break the listing rules and criminal prosecution of
executives for “market abuse”.
The FSA has always scrutinised sharp share price movements after profits
warnings the regulator carries out more than 200 “enquiries” a year (although
many are routine checks). But the credit crunch is seeing a higher volume of
cases than normal and a larger number involving multinationals that would not
normally expect trading difficulties.
For example, Rentokil’s share price fell more than 30% last summer following
a profits warning. On 12 January this year Land of Leather saw its share price
plummet to three pence ahead of a suspension in trading and the company’s entry
Last year saw the highest number of UK company profit warnings since 2001,
according to research by Ernst & Young, totalling 449 a rise of 17% on the
previous year. Of these, more than 40 FTSE-250 companies experienced share price
falls of more than 10% on profit warnings.
It is in this context that the FSA has warned companies of its intention to
strictly police the rules on disclosure to the market and making profit
warnings. The regulator appears acutely aware of the temptation for companies to
hold back bad news from the market, particularly when their survival is at
The FSA’s disclosure regime does recognise that some information can be kept
confidential until developments are at a stage when an announcement can be made
without prejudicing the legitimate interests of the issuer. However, it adds
that the ability to delay disclosure of inside information is “conditional, not
absolute” and such a delay should not “mislead” investors.
David Southern, senior corporate partner at law firm Marsden Rawsthorn, says the
FSA’s concern is the creation of false markets that such dramatic fluctuations
in share price can cause. “It is likely that further adverse news is on the
horizon for many listed companies and the FSA has stated it intends to
investigate all instances where a share price fluctuation of more than 10%
occurs following a profits warning,” says Southern.
“Whether the FSA has the resources to implement such a policy will depend on
the severity of the recession and the number of companies that struggle as a
However, company directors should be in no doubt as to the serious
implications of withholding share-price sensitive information and must inform
the market as soon and as comprehensively as is practicable,” he says.
The penalties for companies failing to comply with these obligations are
severe. The FSA has the power to impose unlimited fines, order a company to pay
compensation to victims and publicise its infringement. These warnings are more
than empty rhetoric. In July last year the FSA fined Woolworths £350,000 for
failing to disclose promptly a likely drop in earnings following renegotiation
of a key contract.
Paul Henty, senior associate at solicitors firm Shadbolt, says the Financial
Services and Markets Act 2000 and Market Abuse Directive impose a basic
obligation on LSE-listed companies to ensure all information which is likely to
have a significant effect on the price of shares is made known to the market as
soon as possible. But complying with the obligation often involves fine
For example, a company only needs to divulge information which is
sufficiently precise, such as probable events and circumstances, and to judge
whether this information would have a significant effect on the share price.
“These are not easy decisions at the best of times, but even less so in today’s
rapidly moving market,” he says.
“Directors owe a duty of skill and care to the company and this could expose
them to civil actions where an unnecessary disclosure was made which had an
adverse effect on shares,” says Henty. “Shareholders could attempt to sue
directors for a loss in value in the shares if they unnecessarily harmed share
value through needless or inaccurate statements. As a result, companies will
feel they could do without the extra challenge presented by this increase in
Richard Weaver, partner in the capital markets group at PricewaterhouseCoopers,
says the FSA’s position is not new: what is unprecedented is the backdrop
against which directors have to make judgements as to what information to
disclose and when.
“The FSA’s definition requires that the information to be disclosed should be
of ‘a precise nature’. What is different now is the range of potential outcomes
that the directors face in making a forecast,” says Weaver.
“Directors need to consider if the information would be likely to have a
significant effect on the share price. Normally, news of poor trading would
depress the share price, but this is 2009. Some companies’ share prices are so
depressed that even worse-than-expected trading news may have little effect,”
“The news in the next few months will be full of profit warnings. Directors
will be hoping that these difficult decisions are not judged by the market (or
the regulator) with the wisdom of hindsight,” he adds.
Read a recent FSA speech at