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Dutch administrative penalties for failing to disclose price-sensitive information

 

27 May 2011

The Netherlands Authority for the Financial Markets, the AFM, has recently been actively enforcing the disclosure obligations of listed companies. These statutory disclosure obligations arise from the European Market Abuse Directive.  

The most recent example is the Wavin N.V. (Wavin) decision discussed below.

The AFM imposed an administrative penalty of EUR96,000 on Wavin on 9 March 2011. The AFM found that Wavin failed to immediately disclose price-sensitive information (PSI). The primary facts leading to the AFM’s decision and the AFM’s findings are discussed below. The conclusion discusses the consequences of this decision in practice.

Case

Towards the end of 2008, Wavin, a manufacturer of plastic piping systems, was caught up in a storm of financial difficulties, as a result of which it threatened to default on its agreements with the banks. In December 2008, Wavin finalised an internal plan for improving its financial situation. Within that context, four potential “anchor” investors were approached, one of which was CVC Capital Partners (CVC).

The Supervisory Board was engaged regarding the proposed approach in February and March 2009. The Supervisory Board approved attracting an anchor investor. Wavin issued a press release on this subject on 7 April 2009 in which it explained that an extensive package of measures was being considered for the purpose of fortifying its capital structure.

Two weeks after the press release was issued, on 22 April 2009, CVC made Wavin an offer. The offer comprised the private issue of convertible Wavin preference shares. CVC and Wavin negotiated during the subsequent week. As a result, CVC’s final offer of 29 April 2009 was ultimately approved by Wavin’s Supervisory Board on 1 May 2009. Two days later, on 3 May 2009, an agreement in principle was then concluded between CVC and Wavin. A number of individuals (Wavin employees, a few majority shareholders and a number of banks) were informed the next day of the agreement in principle with CVC.

Between 4 May and 1:06 pm on 5 May 2009 (the point in time at which Wavin issued a press release), the price of the Wavin share increased by 35%. In light of this share price development, Wavin and an external analyst had telephone contact at 10:44 am on 5 May 2009 regarding rumours that were being heard.

The AFM’s findings

In its penalty decision, the AFM indicated that it believed that Wavin acted in violation of the obligation to immediately disclose PSI. The AFM held (i) that Wavin had PSI and (ii) that Wavin was not justified in postponing its public disclosure obligation. The AFM relied on the European Market Abuse Directive, the Implementation Guidelines based on that directive, and the relevant guidance issued by the College of European Securities Regulators.

Wavin had PSI

The AFM believed that the information regarding the agreement in principle of 3 May 2009 qualified as PSI. Specifically, the AFM held that this information was sufficiently specific in order for a conclusion to be drawn regarding the possible impact the information would have on the Wavin share.

Wavin’s position that the information regarding the agreement in principle had very little added value as compared to the information already disclosed was held to be incorrect. On the contrary, the investors were waiting to hear how the measures referred to in the press release of 7 April 2009 would be fleshed out. The fact that it was still unclear on 5 May 2009 whether the measures being considered might be feasible was irrelevant to the question of whether specific information existed.

Wavin’s argument that the agreement in principle was conditional by nature (ie the majority shareholders and banks had not yet given their approval) did not automatically mean that the agreement could not generate specific information. The fact that the approval referred to had not yet been given at the time of the agreement was inherent to the process and unavoidable, but this did not make the information less specific. The conditional nature of the information also did not diminish its price sensitivity, as this did not require that the deal had actually been made.

Wavin’s position that the increase in the share price on 4 and 5 May 2009 was primarily caused by false expectations regarding the Q1 figures was rejected. The AFM found that it was implausible that the increase in the share price was attributable to expectations regarding the Q1 figures in light of the rumours that were circulating regarding the agreement in principle with CVC of 3 May 2009.

Postponement unjustified

The AFM believed that Wavin was not entitled to postpone disclosing the PSI.
Wavin’s position that the agreement in principle was still subject to the approval of the majority shareholders and agreement by the banks did not hold. A listed company may have a justified interest in postponing the disclosure of PSI if the adopted proposal have yet to be approved by the Supervisory Board or an equivalent body. This did not apply in a situation in which majority shareholders and/or banks had yet to give their consent.

Moreover, postponing disclosure of the PSI was likely to mislead the public. The fact that the increase in the Wavin share price could be attributed, in part or in whole, to the PSI was plausible in light of the content of the press release of 7 April 2009 and the rumour that Wavin would be placing convertible bonds with CVC. It was specifically because this information could have either a positive or a negative impact on the price that Wavin should have disclosed the correct facts as quickly as possible.

Wavin’s assertion that it did in fact “immediately” disclose the information about the agreement in principle, in part considering the time and consultation needed to compose a press release, failed. Wavin should have disclosed the PSI no later than 5 May 2009 at 10:44 am Wavin ultimately disclosed the PSI on 5 May 2009 at 13:06 pm. That time period of two hours and 22 minutes did not satisfy the requirement of immediacy. The term “immediate” must be interpreted to mean “as quickly as reasonably possible”.

Comment: In recent years, the AFM has penalised multiple listed companies for failing to immediately disclose PSI. The recurring theme of these penalty decisions is that these companies failed to adequately respond to rumours, irrespective of their accuracy, circulating in the financial markets. To the AFM, an unusual development in the share price accompanied by the existence of rumours is often sufficient to conclude that a leak existed, even in cases in which the unusual development of the share price might have been caused by inaccurate rumours. Further postponement is then no longer permitted. According to the AFM, the company must then proceed to immediate disclosure of the PSI.

Although there are sufficient reasons to dispute the AFM’s position, in practice listed companies must take it into account. They can do so by taking adequate measures to limit the group of individuals that have access to the PSI on a need-to-know basis. Having an emergency plan on hand in the event of a possible leak is also recommended. In that regard, the share price and the media should be monitored and a draft press release should be kept on hand.

Failing to immediately disclose PSI can result in civil claims in addition to the administrative measures imposed by the AFM. In this case, for example, the Dutch investors’ association VEB is considering lodging civil proceedings against Wavin. Specifically, investors take the position that any loss in share price is a result of not knowing the PSI at the time they sold their shares. In light of these far-reaching consequences, listed companies should endeavour to ensure that PSI is handled in a prudent and careful manner.

Further Information

The European Finance Litigation Review is a quarterly publication on recent developments in the finance litigation and regulatory sector in key European jurisdictions.  For more information please contact Amy Edwards amy.edwards@alleovery.com.

 

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