UK: using shares as security - FSA clarification

The Financial Services Authority has today issued a statement in which it clarifies the operation of Disclosure and Transparency Rule 3.1 and the Model Code with regard to using shares as security. The operation of these rules has proved controversial, following the resignation in December 2008 of David Ross, deputy chairman of Carphone Warehouse Group plc, for his failure to disclose (see here and here). 

DTR 3.1 requires persons discharging managerial responsibilities (e.g., directors) to disclose transactions conducted on their own account in shares of the issuer, or derivatives or any other financial instrument relating to those shares. With regard to this rule, the FSA states that it includes grants of security over shares (e.g., pledges, mortgages and charges). The FSA nevertheless notes:

"we recognise that we are implementing a European regime [the Market Abusive Directive 2004/72/EC] 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".

In the statement, the FSA also reminds listed companies of their obligations under the Model Code (Annex 1 to Chapter 9 of the Listing Rules) and, in particular, the obligation on directors to obtain clearance (in accordance with paragraph 4 of the Code) before using the issuer's shares as security. In this regard, the FSA warns:

"... 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".