Ruling on price sensitivity issue stands as guide for future cases

Business Opinion: The price sensitivity question at the core of the huge Fyffes/DCC trial is one that provided great opportunities for chat as it involved an assessment of a hypothetical scenario.

The judge, Ms Justice Mary Laffoy, was presented with the question - was the Fyffes share price likely to have been materially affected if the confidential information known to DCC chief Jim Flavin in February 2000, had become generally available?

Her judgement was 367 pages long and a huge part sets out how she came to answer the hypothetical question. It is the first ruling on such an issue in the civil courts and stands as guidance for future cases.

In her ruling Ms Justice Laffoy quoted a US case where it was said that "materiality depends on the significance the reasonable investor would place on the withheld or misrepresented information". In another case she quoted: "If generally available, it is the impact of the information on the ordinary reasonable investor, and thus on price, which has to be judged in an insider dealing case... The test is an objective one."

Ms Justice Laffoy looked at the concept of "reasonable investor" and quoted a Malay court that said such an investor should be someone between the extremes of an expert who had conducted specific research on the company in question, and a daily retailer out to make a quick buck. The court stated: "He must be... an investor who possesses general professional knowledge as opposed to the said daily investor or a person who has made specific researches."

Ms Justice Laffoy said the information at issue in the Fyffes/DCC case had to be considered in the context of February 2000. "The assessment of the share price effect must be made having regard to all of the factors which have a bearing on the value of the company's shares at the date of dealing." The assessment must be carried out objectively, ie "the subjective views of the insider are irrelevant".

One of the issues in the case was the dot.com phenomenon that existed in February 2000. Ms Justice Laffoy said it seemed to her that she would have to consider a reasonable investor to have been caught up in the enthusiasm for dot.com stocks, if the reasonable investor idea was to have meaning. In February 2000 Fyffes' worldoffruit.com project was creating a lot of investor interest.

It was argued in court that a material change in a share price was a change of more than 10 per cent or between 5 per cent and 10 per cent. However the judge did not think the principles she had adopted could accommodate such a general view. What was required was "a specific assessment as to what constitutes a substantial or significant movement in relation to the specific share on the specific day of dealing".

The defendants in the case argued that the information available to Mr Flavin, a non-executive director of Fyffes at the time, had not led Fyffes to make a statement to the market as it would have been obliged to, under market rules, if it had truly believed, at the time, that the information was such that it would bring about a material change to the share price if released. Ms Justice Laffoy found that a reasonable investor must be one who would have noted the significance of the fact that an announcement had not been made by Fyffes.

The confidential information available to Mr Flavin "was unquestionably bad news about Fyffes' trading and earnings performance in the first quarter", the judge said. However the information had to be put in context. It could not be decided that, standing on its own, intuitively the information was price sensitive.

This latter point had been argued by Fyffes but the judge pointed out that there was little to show that in January and February 2000, Fyffes executives felt the information to be "intuitively" price sensitive. This was a "fundamental incongruity" in Fyffes' stance.

Ms Justice Laffoy found that if the information Mr Flavin had become generally available, the "reasonable investor" would have considered it in the light of the dot.com phenomenon, the fact that Fyffes had not issued a profit warning and that it had in December predicted that 2000 would be a year of further growth. He would have inferred from the fact that Fyffes had allowed a senior executive to trade in shares, that the company still believed it could make its 2000 targets. "I think he would conclude that it was too early in the financial year to make a judgment" about the likely outcome for Fyffes in 2000, she decided.