Published: 13 February 2018
Area of Law: Equity Capital Markets, Investments
Don’t let regulation breach MAR your day
In December the Financial Conduct Authority (FCA) imposed a financial penalty of £70,000 on Tejoori Limited (Tejoori) for failure to inform the market as soon as possible of inside information about one of its key investments, as required by the Market Abuse Regulation (MAR). In this article we explore the detail of the ruling and what it means to companies which have listed bonds and other instruments which are subject to MAR.
The back story
Tejoori had two major investments, one of which (Bekon Holding AG) was the subject to a drag-along mechanism. This would have effectively required Tejoori to sell its shares to the bidding company, in a squeeze out by share purchase agreement for no initial payment. There was the possibility that the deferred payment would be significantly less than Tejoori’s valuation of $3.35 million. Tejoori had a mistaken understanding of the effect of the sale and purchase agreement and when it would be paid.
The FCA penalised Tejoori because it failed to release an announcement as soon as possible after being notified that the drag-along would occur. Tejoori’s misapprehension was highlighted by the fact that, once the takeover had been announced, there was a lot of speculation, mostly on bulletin boards, as to how much Tejoori would have received for its holding, with the Tejoori share price rising by 38% in two days. When it finally announced the details of the sale, however, its share price closed down 13%.
Details of the case
The BEKON shareholders’ agreement contained a drag-along provision that could be used by majority shareholders to require other shareholders to sell their BEKON Holding AG shares in the event of a takeover. In July 2016, Tejoori was notified that several major shareholders of BEKON had indicated that they would issue a drag-along notice to the other shareholders that would require them to sell their shares in BEKON as part of a takeover by Eggersmann Gruppe GmbH & Co. KG (Eggersmann). The drag-along notice would require Tejoori to sign a share purchase agreement (SPA) with Eggersmann.
Under the SPA, Tejoori would sell its BEKON shares to Eggersmann for no initial consideration with the possibility of receiving deferred consideration that was significantly less than Tejoori’s then known valuation of its investment in BEKON. Tejoori received the signed drag-along notice in July and its shares in BEKON were transferred to Eggersmann in August. Both BEKON and Eggersman issued press releases regarding Eggersmann’s acquisition of BEKON. The press releases did not refer to Tejoori and Tejoori did not release an announcement at that time.
Under MAR, companies are required to release information which is likely to affect the price of their shares or bonds or other tradeable instruments as soon as possible. The online bulletin boards contained clear evidence of speculation that the news would be good for Tejoori’s investment. Tejoori’s share price then rose by 38% over just two days after investors heard of the Eggersman buy-out of BEKON, not realising Tejoori had already had sold its shares. The failure came to light after the London Stock Exchange queried the quick rise in share price with Tejoori in August, however, the FCA found there had been “a misunderstanding of the legal effect of the SPA”, which meant Tejoori did not understand it had in fact sold its entire holding in BEKON. Tejoori, which first listed on AIM in March 2006, did not inform shareholders or the public about the sale despite it being classed as inside information.
Tejoori cancelled its admission to trading on AIM in December and co-operated fully with the FCA investigation, settling at an early stage in order to secure a 30% discount on the fine which would have otherwise been £100,000.
How does this affect businesses?
This is the first ruling since MAR came into force in 2016. It is very likely that the FCA will continue to impose further fines on companies in breach of MAR regardless of whether they act, or don’t act, recklessly or deliberately but, as with Tejoori, mistakenly. In addition to any financial penalty the reputational damage potentially caused by a breach could impact your business.
It is imperative that all companies with publicly traded shares, bonds or other instruments should have the appropriate processes in place to identify inside information and make such disclosures as are necessary.
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