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Editorial

Insider Dealing

April 2006 - Corporate & Commercial. Legal Developments by Dillon Eustace.

More articles by this firm.

VI IRISH COMPANY LAW UPDATES INSIDER DEALING

In late December, Ms Justice Laffoy issued her long-awaited judgment in the Fyffes? multi-million euro insider dealing action against Jim Flavin and his company Development Capital Corporation Plc ("DCC") and two of its subsidiaries.

Ms. Justice Laffoy ruled that the defendants were not in possession of price sensitive information at the time they sold their shares in Fyffes and as such, no civil liability to Fyffes arose.

Background

In early 2000, Fyffes’ shares were trading on the Irish stock market at near all-time highs. On three dates in February 2000, DCC, an investment group with a shareholding in Fyffes, sold a total of approximately 35.8 million Fyffes shares through its Dutch subsidiary Lotus Green, making a profit of €85 million.

On 20 March 2000 Fyffes issued a profit warning, largely due to underperformance in the banana trade and currency movements. Shares fell that day to €2.70 (from €3.16 on March 17) and continued to fall to €1.85 by the end of April. Fyffes brought a claim in January 2002 against DCC, Jim Flavin, and two DCC subsidiaries, S&L Investments Limited and Lotus Green, claiming that Jim Flavin used inside information to sell the shares prior to this decline.

The claim was brought under insider dealing legislation, which states that anyone who deals in shares on the basis of unpublished materially price-sensitive information can be held liable for the difference between the market price of the shares and the price they would have been dealt in if the information was public, and to account to the company that issued the shares (in this case, Fyffes) for any profit from the deal.

Fyffes’ legal team argued that Jim Flavin, as a director of Fyffes, was in possession of information about the trading performance of the company, which, if in the public domain at the time DCC sold its shares, would have reduced the value of the Fyffes shares.

In their defence, the defendants raised two key points:

First, they argued that the information possessed by Mr. Flavin was not price-sensitive information. Expert witnesses produced by DCC’s advisers contended that the information Mr. Flavin held was not price-sensitive, i.e. if made public, it would not have materially influenced the value of the Fyffes shares.

Secondly, they argued that the shares were sold through the DCC subsidiary Lotus Green, of which Mr Flavin was not a director. Mr Flavin further argued that he had no authority to con-duct the sale of the shares.

Judgment

In her 367-page judgment Ms. Justice Laffoy determined that the two critical issues to decide were the following:

• whether or not Mr. Flavin “dealt” in Fyffes shares, and
• whether or not Mr. Flavin possessed price-sensitive information at the time the shares were sold.

On the first issue, she found that, from the evidence, Mr. Flavin did “deal” in Fyffes shares in relation to the sales in February 2000, and that it was clear that he controlled the whole process of selling the DCC shareholding in Fyffes. She stated that “the relevant point is whether the specific transactions … would have occurred but for the fact that Mr. Flavin acted as he did. In my view, the answer is that they would not.”

On the second issue, however, Ms. Justice Laffoy unequivocally held that Mr. Flavin’s dealing in the shares was not an unlawful act, as Mr. Flavin did not possess price-sensitive information in relation to the shares. A key piece of evidence was a letter from Fyffes chairman Neil McCann to a shareholder in May 2000 which stated that Fyffes was satisfied an earlier profit warning would not have been merited, based solely on the performance of the company in November and December 1999. Ms. Justice Laffoy held that there was a “glaring contradiction” between that letter and Fyffes’ case against Mr Flavin. She concluded that as “the dealing was not unlawful … no civil liability to account arises.”

She also held that Mr. Flavin had not acted in breach of his fiduciary duties to Fyffes be-cause, in her view, Mr. Flavin did not use the allegedly confidential and price-sensitive trading information in dealing in the Fyffes shares.

PROPOSED CORPORATE KILLING OFFENCE

The Law Reform Commission (the "LRC") has published its Report on Corporate Killing (the "Report").

The Report incorporates draft headings for a Corporate Manslaughter Bill and contains two main recommendations:

• Firstly, that a new statutory criminal offence of corporate manslaughter be enacted which would make an undertaking (such as a company, public body or a partnership firm) responsible for a death arising from its gross negligence.
 
 
Secondly, that there should be an offence for 'senior managers' of grossly negligent management causing death. Within the Report, the LRC recommends that this offence should apply to ‘high managerial agents’ defined as: “a person being a director, manager or other similar officer of the undertaking, or a person who purports to act in any such capacity, whether or not that person has a contract of employment with the undertaking.” The Report states that such a person who was found to have acted with gross negligence in a way that contributed to the corporate offence could also be prosecuted personally and be liable to imprisonment for up to 12 years and/or an unlimited fine. The Report also recommends that such a person could also face possible disqualification from acting as a manager in an undertaking for up to 15 years.

PROSECUTION BY THE OFFICE OF THE DIRECTOR OF CORPORATE ENFORCEMENT

The Director of Corporate Enforcement announced the first conviction by the Office of the Director of Corporate Enforcement (the "ODCE") under Section 243(1) of the Companies Act, 1990. That section makes it an offence for an officer of a number of different types of company (including bodies corporate who are incorporated outside the State but who do (or did) business inside the State) to, amongst other things, destroy or falsify any book or document affecting or relating to the property or affairs of the body in question or be privy to any such act.

The case before the District Court related to a person who was a director of, and the secretary to, an Irish private company who falsely represented to his bank that the financial statements of the company for the year ended 31 July, 2003 had been audited by a Dublin firm of auditors when in fact they had not. The Defendant pleaded guilty and was fined €500 and was ordered to pay costs of €300.

The Director of Corporate Enforcement, said that this was the first time that the ODCE has prosecuted this offence and went on to say he wished to widen the type of company law of-fences which the ODCE would prosecute, and, subject to existing resource constraints, will continue to advance their enforcement efforts in 2006.

This case and the statement of the Director of Corporate Enforcement illustrates the reach and approach of the ODCE with regard to the issue of corporate compliance and enforcement and underlines the fact that the ODCE is, and will continue to be, concerned with the prosecution of a broad range of offences, indictable or otherwise, contained in and detailed under the Companies Acts, 1963 to 2005. The statement of the Director of Corporate Enforcement may also be indicative of an intention to seek further resources for the ODCE to enable it to carry out its functions in the stated manner.

COMPANIES REGISTRATION OFFICE UPDATE

The Companies Registration Office has indicated that during 2006, every company in the pool of the worst 5,000 companies will be subjected to one of the following enforcement actions:

  • section 371 notice/court appearance
  • company or director prosecution (the latter focusing on the directors of multiple or re peatedly out-of-date companies)
  • a “no warning” strike-off i.e. the cycle will begin with the issuing of the statutory strike-off notice without the usual prior warning period.

To remove themselves from this list the affected companies must file all outstanding annual returns.

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