When is a listed company required to make certain information about its activities public? This is the key question in a recent judgment by the Trade and Industry Appeals Tribunal (College van Beroep voor het bedrijfsleven) (the Tribunal).
On 14 February 2014 the Tribunal reversed the decision of the Dutch financial markets authority (AFM) to impose two administrative fines of € 144,000 each on Fortis SA/NV and Fortis NV (now Ageas). With its decision, the Tribunal overruled the lower court on administrative matters (the lower Court), which upheld the fines.
Back in 2007, Fortis published in its Trading Update only parts of the information it had concerning its investments in subprime loans. According to the AFM, due to Fortis’ withholding of information regarding the subprime exposure of € 8.6 billion, investors were not sufficiently able to assess the risks of these investments and “the impact thereof on Fortis’ value in the long term”. By not publishing information needed by (potential) investors, Fortis violated its legal duty to make public price-sensitive information.
In the present case, the question of law the Tribunal is confronted with is whether information regarding Fortis’ subprime investments qualifies as price-sensitive information that Fortis had to make public. More precisely, the legal issue relates to the last of four elements that make information price-sensitive: would disclosure of information on Fortis’ subprime exposure have had a significant effect on the price of Fortis’ shares?
EU law dictates that the fact that a reasonable investor would be likely to use that subprime information as part of the basis of his investment decisions, is an important indication that this ‘significance requirement’ has been met.
Where the lower Court, along with the AFM, expressly considered the subprime exposure information as significant since reasonable investors would, for various reasons, be likely to use that information, the Tribunal comes to a rather different conclusion. The Tribunal rules that the AFM failed to sufficiently substantiate that Fortis’ subprime information qualifies as price-sensitive. In doing so, the Tribunal refers to the limited impact of Fortis’ subprime exposure on Fortis’ 2007 results.
The Tribunal appears to assume that, given the limited impact of the exposure on Fortis’ 2007 results, Fortis’ subprime investments had no material effect on Fortis’ activities and that therefore the related information can’t qualify as significant. To support its assumption, the Tribunal refers to the approval of the Trading Update by the Belgian Financial Authority (CBFA). CBFA was aware of Fortis’ subprime investments but did not require full disclosure to the public. Furthermore, the Tribunal points to the statement of CBFA’s chairman that there were no problems in September 2007 regarding subprime investments. What is striking is that the Tribunal doesn’t at all make clear from the above why it follows that a reasonable investor would not be likely to use Fortis’ subprime exposure information.
Therefore, without challenging the correctness of the Tribunal’s conclusion that Fortis’ subprime information can’t qualify as price-sensitive, a more thorough substantiation would certainly have benefited the judgment.
To Fortis (at least what’s left of it), the Tribunal’s decision means a small bright spot in dark days. At the moment, Fortis and its former directors are facing civil class actions from affected investors while the Dutch Supreme Court recently confirmed the ruling of the Enterprise Chamber of the Amsterdam Court of Appeal, that the way in which business was conducted at Fortis between September 2007 and September 2008 constitutes mismanagement. Fortis’ investments in subprime loans and its communication in this respect form a substantial part of the basis of these actions. Furthermore, about three weeks after the Tribunal’s annulment discussed here, the Tribunal declared in another market abuse case Fortis’ appeal against a different fine imposed by the AFM to be unfounded.
Leaving the ‘reasonable investor’ undiscussed, the Tribunal’s judgment remains cloudy in respect of the ‘significance’ requirement of price-sensitive information. More thorough substantiated judgments would certainly benefit both listed companies and the AFM.