Easing up the disclosure burden

The Department of Trade and Industry has published a consultative document containing proposals to change the law on disclosure of directors' shareholdings.

The DTI had received representations from both the London Stock Exchange and from company directors that the current disclosure provisions were too onerous.

The proposals in the document aim to lessen the burden on directors and companies by reducing the number of insignificant disclosures, while maintaining overall transparency in relation to directors' interests in their companies.

The DTI document states that “small changes in a director's interests are often of little or no significance to the company or the public”.

Directors' disclosure obligations have a direct effect on the company because it must record any such disclosures and notify the stock exchange on which its securities are listed. Carrying out these requirements can cost a considerable amount of money.

Around 40 per cent of the notifications received by the London Stock Exchange are for transactions of less than £10,000. The DTI proposes the postponement of disclosure for directors of companies whose shares are publicly traded until a certain threshold is met.

For shares the threshold is either a fixed value of £10,000 or 1 per cent of the share capital, whichever is the lesser; for debentures the proposed threshold is £10,000 with no percentage alternative.

Disclosure requirements will be postponed for scrip dividend entitlements and discretionary PEPs over which directors have no control (as opposed to self-selected or single company personal equity plans), with disclosure to be made at the end of the company's financial year.

Directors will also have to disclose any transactions not previously notified at the end of the company's financial year.

For all companies whose directors are subject to the disclosure provisions of the act, netting off will be permitted within a business day to reduce the number of separate disclosures by a director. For example, a director who disposed of £50,000 of shares and purchased another £30,000 worth on the same day, need only make a disclosure of a net disposal of £20,000 of shares.

There will also be an exemption from disclosure for directors' strict non-beneficial holdings provided that the director or his family do not stand to benefit, such as where the director acts as a trustee of a trust fund conferring no such benefit to him or his family.

Information about directors' holdings is important as an indication of the economic incentive to them for ensuring good management of a company and that its performance is improved. However, deregulation is needed; in a sample 12-day period, 1,005 disclosures of directors' dealings were made to the Stock Exchange.

Records will still have to be kept of directors', their spouse's and their dependant children's interests and transactions to enable the necessary disclosures to be made when the thresholds are met and at the end of the company's financial year.

The offence of failing to make disclosure at the appropriate time remains.