No Leniency Shown to First AIM Issuer Fined by the FCA under the Market Abuse Regulation
The Financial Conduct Authority (FCA) has brought its first enforcement action under the EU Market Abuse Regulation (MAR), which has had direct effect in the UK since 3 July 2016. This case involved a small AIM traded investment company that misconstrued the legal effect of the commercial arrangements it had entered into, which led it to fail to understand both that it was in possession of inside information, and the need to disclose that information as soon as possible.
While this was a very clear example of a breach of Article 17(1) of MAR, it is noteworthy because it is the first enforcement action taken by the FCA under MAR and against an issuer with shares admitted to trading on AIM. Before 3 July 2016 shares admitted to trading on AIM were not subject to the UK rules regarding the disclosure of inside information under the Disclosure and Transparency Rules, although Rule 11 of the London Stock Exchange's AIM Rules for Companies contains similar requirements.
This action also demonstrates that, in order to ensure that the fine is a credible deterrence, the FCA is willing to significantly increase its level where the company has failed to disclose inside information on time, even where its management have fundamentally misunderstood the effect of the transaction it had entered into.
It is not clear from the Final Notice (available here and published on 13 December 2017) whether the London Stock Exchange (LSE) is also considering taking enforcement action against the company under Rule 11 of the LSE's AIM Rules for Companies, though the LSE issued this statement about the case, welcoming the FCA's enforcement action and emphasising the need to "minimise duplication". Notably, it was the LSE that referred the case to the FCA, and the LSE (not the FCA) which first contacted the company's Nominated Adviser (Nomad) about the unexplained rise in the company's share price, which ultimately led to the company making an RNS announcement about the commercial arrangements it had entered into.
Tejoori Limited (Tejoori) was fined GBP 70,000 for breaching Article 17(1) of MAR which requires an issuer to inform the public as soon as possible of inside information which directly concerns it. The penalty would have been GBP 100,000, but for an early settlement discount.
Tejoori was an investment company. Its strategy was to achieve long-term capital growth through socially responsible investments in accordance with Sharia principles. One of two material investments was a shareholding in Bekon Holding AG valued in its financial statements at USD 3.35 million. On 12 July 2016, only days after MAR took affect, it was notified by Bekon that its shareholding would be compulsorily acquired by Eggersmann Gruppe GmbH & Co. KG. This was due to a "drag-along provision" whereby majority shareholders could require other shareholders to sell in the event of a takeover. The acquisition by Eggersmann would be for no initial consideration with only the possibility of deferred consideration, which in the best case scenario would amount to EUR 1.15 million over 5 years. This was materially less than the value of Tejoori’s investment.
The share transfer agreement was entered into on 10 August 2016. Bekon and Eggersmann issued press releases announcing the latter's acquisition the following day. Nothing was stated in relation to Tejoori leaving the market ignorant about the consideration paid to Tejoori by Eggersmann. In this vacuum, there developed positive market speculation (for example, on online bulletin boards) over the level of consideration which Tejoori had supposedly received. This gave rise to a sharp increase in its share price on 22 and 23 August 2016, a total of 38% in two days. The volume of shares traded also significantly increased.
The true position only came to light after the LSE queried the sudden rise in share price with Tejoori's Nomad. Due to a fundamental misunderstanding over the nature of its agreement, Tejoori initially told its Nomad that it had not sold its shares, and consequently, the value of its investment remained unchanged. Only after consulting with Tejoori's German legal advisers was the correct position established. This led to a market announcement on 24 August 2016 and at market close the share price was down 13%.
FCA Findings - Inside Information
After investigation, the FCA found that Tejoori had contravened Article 17(1) of MAR over its failure to inform the public as soon as possible of inside information which directly concerned it. Specifically, it should have announced as soon as possible, when notified on 12 July 2016, that there was a reasonable expectation that it would have to sell its stake in Bekon for little, if no consideration.
The Final Notice also provides a useful reminder of the FCA's analysis of when inside information arises under MAR. Bekon's notification of 12 July 2016 gave rise to a reasonable expectation that Tejoori would have to sell its stake for less than its value. Tracking some of the language of Article 7(2) of MAR, the Final Notice with reference to the process around the compulsory acquisition of Tejoori's stake, states that "in the case of a protracted process that is intended to bring about, or that results in, particular circumstances or a particular event, those future circumstances or that future event, and also the intermediate steps of that process which are connected with bringing about or resulting in those future circumstances or that future event, may be deemed to be precise information." That is to say, sufficiently specific to conclude that a possible effect of the transaction would be a fall in Tejoori’s share price. Of course, this information was not public, and if it had been made public, it would likely have had a significant effect on the share price as was, of course, later borne out when an announcement was eventually made on 24 August 2016. Moreover, the FCA considered there were no grounds to justify delaying disclosure.
Although the FCA judged this breach to be at the lower end of the scale of seriousness (level 2 of 5), companies and their boards should note that the regulator made no allowance for the fact that Tejoori had fundamentally misunderstood the effect of the agreement to transfer its stake, and raised the level of the fine from GBP 8,617 to GBP 100,000 to ensure that it met the objective of being a credible deterrence. This is a reminder that issuers and their boards will be held responsible for creating false markets whatever their understanding. Moreover, the fact that the Board had received a briefing from its Nomad on 5 June 2016 on its disclosure obligations and then failed to apply that knowledge was an aggravating factor. Mark Steward, FCA Executive Director of Enforcement and Market Oversight in the accompanying press release said: "Issuers must have regard to their disclosure obligations at all times and misunderstanding the commercial reality of a transaction is no excuse."
Implications for issuers and their advisers
What should issuers take away from this enforcement action?
- the FCA has given no grace period for companies to comply with MAR.
- the importance of an issuer fully understanding the commercial decisions it enters into and when inside information could arise. This underlines the need to put in place proper processes to identify inside information and allow decisions to be taken promptly, and within appropriate timescales.
- companies and their boards are expected to understand their regulatory obligations and to take into account in practice any training that they have received; information and training are essential, but if not acted upon may aggravate market misconduct.
- while companies with securities traded on AIM generally benefit from lighter touch regulation than those with securities traded on the LSE's Main Market, MAR applies to AIM companies as it does to Main Market companies.
- the importance of AIM issuers consulting with Nomads and other advisers promptly regarding the likely price impact of significant transactions and changes in financial performance.