“It used not to be considered any sort of sin to profit financially from the use of secret, private or privileged information. That was how fortunes were made. Now things are different. To trade on the use of inside information is recognised for what it is. It is a fraud on the market. The insider who exploits his access to the special knowledge he enjoys for the purposes of the company in his capacity as executive or director of a company commits a crime. He will be made, additionally, to answer for the profits he has made.”
So said Mr Justice Fennelly in his judgment on Fyffes plc v DCC plc, S&L Investments Ltd, Mr James Flavin and Lotus Green Ltd, in the Irish Supreme Court on 27 July 2007.
On three dates – 3, 8 and 14 February 2000 – the defendants disposed of more than 31 million ordinary shares in Fyffes plc (almost 10 per cent of its issued shares). This disposal realised revenue of more than e106m (£73.89m), representing a profit of e85m (£59.25m) on the cost of acquisition.
At the time, the third named defendant, Mr Jim Flavin, was a director and chief executive of DCC plc and a director of S&L Investments. He was also a director of Fyffes and chairman of Fyffes’ audit committee.
When the dealing took place, Mr Flavin was in possession of Fyffes’ trading reports for November and December 1999, which included a forecast for January 2000, the three months comprising the first quarter of Fyffes’ financial year. These trading reports, which were confidential and were circulated only to the directors of Fyffes, disclosed a very poor trading performance at Fyffes for the first quarter of financial year 2000. At the same time Fyffes was pursuing an internet initiative, worldoffruit.com, which had led to an increase in its share price in early 2000.
On 20 March 2000, at its AGM, Fyffes issued an adverse trading statement advising that it would not meet its anticipated half-year performance and that it was not known whether this shortfall could be made up in the full year.
Immediately following this announcement, Fyffes’ share price dropped significantly, losing more than 25 per cent of its value over two days.
In January 2002, Fyffes issued proceedings against the defendants under Part V of the Companies Act 1990, the first-ever such case. This prohibits any person from ‘dealing’ in the securities of a company when in possession of information that is not generally available but, if it were, would be likely to materially affect the price of those securities. The act makes any such dealing a criminal offence and provides a civil remedy to both the issuer and the purchasers of such shares. It was this latter, rather novel, remedy that was at the core of the Fyffes case.
In its judgment, delivered on 21 December 2005, the High Court concluded that the defendants dealt in the shares and that Mr Flavin controlled the entire sale process on behalf of the DCC Group.
In relation to the second issue of price-sensitivity, the High Court, on a review of the Fyffes trading reports, accepted that the information contained in them was confidential, authoritative, detailed and precise and held that the information was unquestionably bad news about Fyffes’ trading and earnings in the first quarter. Accordingly, the High Court found that a reasonable inference could be drawn from the figures that there was a real risk that Fyffes’ own expectation and analysts’ expectations for the first half and for the full year would not be met. On the legal issues the High Court concluded that the test as to whether information is price sensitive is an objective one and adopted a ‘reasonable investor’ test to determine the issue.
Despite the High Court’s findings as to the import of the trading reports, using the reasonable investor test, it found that he would have concluded that it was too early in the financial year to make a judgment about the outcome for Fyffes’ existing business and that other issues, such as the prospects for a merger or major acquisition and the potential of Fyffes’ internet venture would offset the impact of the current trading problems. As a result, the High Court found that the information was not price sensitive.
It further held that the effect on Fyffes’ share price of the 20 March 2000 adverse trading statement was of no evidential value.
Fyffes appealed the High Court’s findings on price sensitivity to the Supreme Court and the appeal was heard over five days in June 2007.
On 27 July 2007 the Irish Supreme Court delivered its unanimous judgment. It concluded that the High Court was correct in its findings of fact regarding the significance of the November and December trading reports. However, the High Court had erred in the identification and application of the correct legal principles to these findings.
The Supreme Court held that the reasonable investor approach was not appropriate and that the statutory test to determine the price-sensitivity of information is one that should be decided by the court. Furthermore it held that even if the reasonable investor test was appropriate (which it was not), it was not applied correctly as the High Court had erred in applying offsetting factors against the recognised price-sensitivity of the information. Such factors would have already been included in the share price.
The Supreme Court also found that the High Court had erred in attaching no evidential weight to the drop in Fyffes’ share price following the profit warning it issued on 20 March 2000 in assessing the likely impact the alleged price-sensitive information would have had on the share price on the dealing dates. It held that it was not necessary for both the information and market conditions to be identical before a Court could accord evidential weight to the proxy events of 20 March 2000.
The five judges of the Supreme Court unanimously concluded in four written judgments that the information contained in the November and December trading reports was price-sensitive. The case is now due to return to the High Court to measure the extent of the profit for which the defendants are liable to account to Fyffes and also to determine the claims made by certain purchasers of the shares.
The Supreme Court decision brings almost to a close what has been one of Ireland’s longest-running and most celebrated commercial actions. The judgments of the High Court and the Supreme Court provide useful guidance in an important area of law, which has not been the subject of judicial consideration before. They also reinforce the prohibition on insider dealing as fundamental to market regulation and confidence.
Conor McDonnell is a partner and Keith Smith is an associate at Arthur Cox