23 March 2018
Following the recent press publicity about a failure by a former director of The Carphone Warehouse Group plc to disclose a charge over his shares, the Financial Services Authority (FSA) confirmed on 9 January 2009 that persons discharging managerial responsibilities (PDMRs), such as directors of listed companies and their connected persons, must notify their companies of transactions conducted on their own account relating to the grant of security, such as a pledge, mortgage or a charge, over their shareholdings. Main market companies must, in turn, disclose such transactions to the market under the Disclosure and Transparency Regulations (DTR), in particular DTR 3, or, in the case of an AIM company, under the AIM Rules.
Since the FSA’s statement, we have been assisting clients in reviewing the need for disclosure of transactions in listed companies and wish to remind clients, both PDMRs and listed companies, that all existing transactions relating to grants of security over shares not previously notified must be disclosed to the market by 23 January 2009. The FSA has confirmed that no action will be taken against directors or companies so long as disclosure is made by the deadline.
Given the complexity of the disclosure rules applicable to PDMRs of main market companies and directors of AIM companies together with the separate body of rules relating to disclosure of major shareholdings in listed companies (DTR 5), we set out below some key points to look out for. We would be delighted to provide further specialist advice regarding disclosure.
Was the transaction carried out on your own account?
Although the DTR does not provide a definition of transactions conducted ‘on own account’, informal FSA guidance sets out the following principles which suggest a transaction is ‘on own account’:
- A transaction which is the result of an action taken by a PDMR or otherwise undertaken with their consent;
- A transaction whose beneficiaries are mainly PDMRs; and
- Transactions having a material impact on a PDMR’s interest in a company.
- Which transactions do you need to disclose?
Any acquisition and disposal of shares, acceptance of awards, accepting or receiving an option or gifts from the company or a third party and the exercise of options by a PDMR. However, each transaction by a PDMR ought to be considered on its own facts to assess if it was conducted ‘on own account’ of the PDMR.
Example transactions would include a share pledge taken against either a personal loan to a director or a personal investment by a director.
- What does the Model Code require you to do?
Under the Model Code, a PDMR must seek the prior permission of the company before using his shares held in a main market listed company as security or otherwise granting a charge, lien or other encumbrance over the shares of the company. Clearance must therefore be sought by a PDMR before granting a share pledge.
Failure to comply with the Model Code should be addressed by the company directly.
- If the AIM Rules apply, what do they require you to do?
All deals by directors in AIM shares must be disclosed to the company, which must in turn make a public announcement to the market. Deals are defined very widely in the AIM Rules and catches grants of security over the AIM shares.
- Are you a PDMR?
In determining who is a PDMR, the key is to look beyond the job title and consider the substance of the role: PDMRs can be directors, senior executives or anyone else who has regular access to inside information of the company, and who has the power to make managerial decisions affecting the future development and business prospects of the company.
PDMRs will vary from company to company and not all senior managers of a company will necessarily be a PDMR – the group is narrower and includes senior employees who sit on the executive committee of a company even if they are not also board members, directors or other senior executives at subsidiary companies within the group. It is also often the case that PDMRs are also shareholders in the company. Company secretaries dealing with administration and general counsel offering legal advice only are not usually classified as PDMRs.
- Are you connected with a PDMR?
A person is connected with a PDMR if that person is the spouse, civil partner, child or step-child of a PDMR; is a company with which the PDMR controls more than 20% of the voting power in general meeting or is interested in at least 20% of the shares of the company; is a relative of a PDMR who has shared the same household as the PDMR for at least 12 months; or is a company which a PDMR or any connected person in the preceding categories is a director or senior executive who has power to make management decisions affecting the future development and business prospects of that company.
You are advised to urgently find out from PDMRs and directors and their connected persons whether there are any transactions relating to share pledges which have not yet been disclosed before 23 January 2009.