UK: FSA fines Woolworths plc - what is inside information?

The decision of the FSA to fine Woolworths plc £350,000 has been widely reported (see, for example, this report in the Financial Times). The case concerned Woolworths' delay in disclosing information (a variation in a subsidiary's contract with a supplier which would reduce profits by £8 million) about which it became aware of on 20 December 2005.  Disclosure was made on 18 January 2006, when Woolworths provided a Christmas trading update. On this day the company's shares fell from 36.75p to 32.25p (a fall o just over 12%).  

The FSA argued that Woolworths' failure to disclose before 18 January 2006 breached Disclosure Rule 2.2.1 and Listing Principle 4. Rule 2.2.1 requires the issuer of listed securities to disclose inside information as soon as possible on a Regulated Information Service. Listing Principle 4 requires the communication of information by a listed company to those holding its securities (and potential holders) in order to avoid the creation or continuation of a false market in the securities. 

The FSA's Decision Notice is well worth reading because there is discussion of the definition of inside information. An important part of this definition is the requirement that if the information were generally available, it would "be likely to have a significant effect on the price of the qualifying investments or on the price of related investments" (emphasis added). Woolworths argued that the information about the contract did not satisfy this part of the definition because a share price fall of at least 10% is needed for there to be a significant effect and that when determining whether information is inside information, reference should be made to what caused the share price movement.  Woolworths contended that news about the contract variation explained less than half of the share price fall on 18 January and for this reason it was not inside information.  

The FSA rightly rejected these arguments and observed:

...it is the wrong approach to seek to analyse the amount of an actual fall that might be attributed to a particular piece of information in order to determine whether it was 'inside information'. Indeed it is an unworkable test if the relevant piece of information was not in fact disclosed".

"The FSA is satisfied that the Variation resulted in a profit reduction of more than 10% and that this is, on any view, information of a type that a reasonable investor would be likely to use as part of his investment decisions".