The FCA has fined Tejoori Limited the sum of £70,000, after discount of 30% for early settlement.
Tejoori was at the time an AIM listed company. It was a self-managed and closed-ended investment company. Its interim results for the 6 months ended December 2015 showed that it held two investments at the time, with a total value of USD 17.26m. One of the two was an investment in BEKON Holding AG, which it valued at USD 3.35m. In broad summary, a number of events occurred in summer 2016 which culminated in Tejoori having to transfer its entire shareholding in BEKON pursuant to a drag along provision. Further, it would receive no initial consideration for the transfer and only a possibility of deferred consideration based on an earn out, but likely to be materially lower than the level at which it had valued its investment.
BEKON and the purchasing company put out press releases (Tejoori did not) at the time of the transfer of the shares. Speculation followed somewhat later on bulletin boards about the amount that may have been paid for Tejoori's shares, and the Tejoori share price rose some 38% over 2 days. The LSE subsequently became involved. This led to the Nomad preparing an RNS on behalf of Tejoori shortly afterwards, which accurately described the position. The FCA found that Tejoori ought to have disclosed the information before this point, deciding that it should have done so approximately a month before the actual transfer took place.
There are a few points worth noting:
- There is an interesting question about the moment on the timeline at which Tejoori had breached the provision. That is, the moment at which it should have disclosed because it had sufficiently precise information which, if it were to be made public, would be likely to have a significant effect on price.
- Information is deemed to be precise if it indicates a set of circumstances that exists or may reasonably be expected to come into existence, or an event which has occurred or which may reasonably be expected to occur, where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the price of the financial instrument.
- There may well have been some real discussion around when on the spectrum the relevant point of time was.
- The Notice alights on the relevant point being 12 July 2016. This was the day on which Tejoori was informed that there was a reasonable expectation it would soon be required to sell its investment for no initial consideration with the possibility of receiving deferred consideration, but at a relatively low level compared to its valuation of the investment. That was the day when BEKON informed its shareholders that the share purchase agreement (SPA) was ready to be finalised, noted that several major shareholders had indicated that they supported the sale and intended to use their drag along rights, and when it provided its shareholders with the draft drag along notice, the final SPA and the spreadsheet calculating the consideration that Tejoori as a shareholder could expect to receive from the sale.
- Those involved in enforcement will know that there is no mental element required to breach the provision. In the case of Tejoori, it is plain that there was no intention to do so. Indeed, the Notice is at pains to point out the company's various mistaken beliefs. For example, Tejoori mistakenly believed that its BEKON shares would not be transferred until it had received the deferred consideration, a figure that would be calculated by future performance of certain projects over 5 years. It mistakenly believed that the value of its investment in BEKON would not change simply by entering into the agreement for sale that it entered into. Plainly, this lack of knowledge as to the effect of events, and there being no recklessness found, contributed to this being Level 2 only in degree of seriousness (where Level 5 is the most serious).
- As to the precise level of fine, the FCA used Tejoori's average daily market capitalisation as its staring point on the basis that this reflected the harm or risk of harm resulting from the breach. Applying its Level 2 percentage to this, however, gave a figure of only some £8,500. This was felt not to be a sum sufficient to achieve credible deterrence, and the sum was accordingly increased to a headline figure of £100,000. As those familiar with enforcement will know only too well, the FCA has a very wide discretion on the amount of fine to levy. Increasing the figure produced by the calculation over tenfold is a stark illustration of that wide discretion. (On this, readers may also want to look at the Rio Tinto case that we cover elsewhere in this issue ("17 October 2017: Rio Tinto Plc fined £27 million for DTR breaches"). In that case, the FCA reduced significantly the figure produced by the market capitalisation calculation as it was felt to be disproportionate to the breach.)
The Market Abuse Regulation (MAR) was introduced on 3 July 2016. The FCA's finding was in a broad sense no great surprise, although some of the details might be. However, it followed soon after the introduction of MAR, and the FCA was keen to announce it as the first fine on an AIM company for late disclosure following the introduction of MAR.