Disclosure and Model Code obligations in respect of the use of shareholdings as security
9 January 2009
The FSA, in its role as the UK Listing Authority, has recently received a number of queries relating to disclosure obligations in respect of transactions by persons discharging managerial responsibilities (“PDMRs”), such as directors, and their connected persons, who grant security over their shareholdings.
The rule in question (contained in Chapter 3 of the Disclosure and Transparency Rules dealing with transactions by PDMRs) is essentially a copy out of the relevant provisions of the EU Market Abuse Directive (MAD). As such, it does not provide a definition of what is meant by the term ‘transaction’ in this context. The FSA provided general contextual statements about the scope of the requirements in 2005 both in the Policy Statement regarding the implementation of the MAD provisions (PS05/03) and in the FSA’s List! Newsletter (List! 11 published in September 2005).
We confirm that grants of security over shares (by the creation of a security interest such as a pledge, mortgage or charge) are covered by the disclosure requirement in our Rules and consider that this is consistent with the statements we made in 2005. However, we recognise that we are implementing a European regime and it has become clear that there are differing approaches in some other Member States, based in part on local practices and structures or procedures for granting security over shares, including the circumstances in which legal title to shares transfers. We are therefore seeking to reach a common understanding on the detail of the MAD requirements in this area with the European Commission and our counterparts in the Committee of European Securities Regulators.
We consider that those PDMRs who have granted security over their shares should disclose this to the market as soon as possible and certainly no later than 23 January 2009. However, given the circumstances, we are not intending to take enforcement action in respect of prior failures to notify the market of grants of security.
Model Code
We also would remind listed issuers and their PDMRs that they should consider their obligations under the Model Code (Annex 1 to Chapter 9 of the Listing Rules), in particular the requirement to obtain clearance before dealing. The purpose of the Code is to ensure that PDMRs and employee insiders do not abuse, and do not place themselves under suspicion of abusing, inside information which they may have. The Code makes it expressly clear that “Dealing” includes 'using as security, or otherwise granting a charge, lien or other encumbrance over the securities of the company' (paragraph 1(c) (v)). Accordingly we can see no basis on which a director could have a legitimate excuse for not seeking clearance in advance where the company’s securities are to be used as collateral for a financing transaction. We expect listed issuers to deal with Model Code breaches by their directors.
