Disclosing Bad News

2nd March 2009

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Disclosing bad news to the market is never something that directors enjoy.  That reluctance is likely to be heightened in the current state of the market when disclosure may cause the share price to plummet.  But the regulators have given notice that they will not take a lenient view of companies who fail to meet their disclosure requirements.

The FSA has warned, “In the current difficult economic climate many companies will be monitoring their cash flow, compliance with covenants and their head room against bank finance facilities on a regular basis.  Directors will need to bear in mind their obligations to inform the market about any inside information, i.e. information that will be likely to have a significant effect on the share price…”.  AIM Regulation is similarly demanding compliance with the disclosure requirements in the AIM Rules.

Central to the decision whether to disclose bad news is whether the information “would be likely to have a significant effect on price”.  This will be the case “if, and only if, it is information of a kind which a reasonable investor would be likely to use as part of a basis of his investment decisions”.  If the bad news is information of this type then it must be disclosed and that’s that.

In issuing final notices and imposing fines on Entertainment Rights plc and Wolfson Microelectronics plc on 19 January 2009, which in turn followed the final notice issued to Woolworths Group plc on 11 June 2008, the FSA has made clear:

  • Companies cannot refuse to disclose negative price sensitive information because it will cause a fall in the share price or result in the share price not representing the “true” value of the company.
  • Justifying non-disclosure of information by off-setting negative and positive news is not acceptable, and instead both types of information should be disclosed and the market should be allowed to determine whether they cancel each other out.
  • There is no set percentage or other figure to determine whether there is a “significant effect on price”, and it does not follow (as was argued in the Woolworths case) that a share price fall of 10% or more attributable to a particular piece of information is needed for there to have been a “significant effect on price”.

Companies faced with the question of whether to disclose bad news should consider the matter very carefully and take appropriate advice to avoid censure for withholding full disclosure to the market.

Tom Shaw is a partner in the corporate finance group of solicitors Speechly Bircham LLP.  He is recognised as a legal expert by Legal Experts 2008 and is a member of the QCA Legal Committee.

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