Supreme Court allows insider trading appeal, overturning High Court's dismissal of Section 108(1) breach.

THE SUPREME COURT

144/06

Denham J.

Geoghegan J.

Fennelly J.

Macken J.

Finnegan J.

Between:

Fyffes Plc

Plaintiff/Appellant

-and-

DCC Plc

S & L Investments Limited

James Flavin

Lotus Green Limited

Defendants/Respondents

Judgment of Macken, J. delivered on the 27th day of July 2007

I am in agreement with the conclusions and findings in the judgment of Fennelly, J., and wish only to add some comments on two

matters which arose on the appeal to this court from the judgment of the High Court delivered on the 21st December 2005. By that

judgment the learned High Court judge held that the Plaintiffs had failed to establish that the Defendants or any of them had infringed

the provisions of Section 108(1) of the Companies Act 1990 (since repealed) (“the Act of 1990”). That section reads:

“It shall not be lawful for a person who is, or at any time in the preceding 6 months has been, connected with a

company to deal in any securities of that company if by reason of his so being, or having been, connected with that

company he is in possession of information that is not generally available, but, if it were, would be likely materially to

affect the price of those securities.”

Such dealing is commonly called “insider trading”. In these proceedings, it is alleged by the Plaintiff that the defendants had engaged

in insider trading, in that the third defendant, the Chief Executive of the first named defendant, had possession of inside information

concerning the business of the Plaintiff - obtained in his capacity as one of its non executive directors at the material time - while a

significant number of shares registered in the name of the first defendants, but owned beneficially by the second and fourth

defendants were being traded. The share sales dates are all in the month of February 2000. Having regard to the findings made the

learned High Court judge in respect of the arrangements leading to the dealing in the shares, it is not necessary to detail the precise

legal relationship existing between the Defendants, inter se.

The hearing in the High Court lasted a very significant number of days, and was preceded by lengthy written pleadings and by

discovery. In a carefully crafted and thoughtful judgment running to almost 400 pages, the learned High Court judge made findings on

all or almost of the issues canvassed in the course of the hearing. It is a measure of the care taken by the learned High Court judge

in her judgment that the appellants did not seek in this appeal to challenge any of the findings of fact. So far as concerns the

defendants, she found, inter alia, that the third defendant had “dealt” in the shares within the meaning of Section 108(1) of the Act

of 1990, and that there was sufficient evidence also to establish that the third defendant had also caused and procured the dealing

which resulted in the share sales. She also found that if the Plaintiff was entitled to its statutory remedy under the Act of 1990, it

was appropriate to treat all three corporate defendants as a single entity. No appeal was taken by any of the defendants to her

findings.

Although the Plaintiff does not challenge the findings of primary fact in the judgment, there was some debate before this court as to

which exact findings in the judgment constituted ones of primary fact, or inferences drawn from findings of fact, and as to the extent

to which this Court was free, within the ambit of the authorities on the matter - in particular the decision in Hay v O Grady [1992] 1

I.R. 210 - to come to its own conclusions on such aspects of the High Court judgment. Having regard to the conclusions I have

reached, I do not consider it necessary for the purposes of my judgment to reach a definitive view on the arguments raised as to the

precise ambit or the application of the principles enunciated in Hay v O’Grady, supra., and would prefer to leave this to a future case

where it essential to do so.

A very full outline of the facts is found in the judgments of Denham, J., Fennelly, J. and Finnegan, J. I set out therefore, only a brief

synopsis of the factual matrix against which both the High Court proceedings and this appeal took place. The Plaintiff was engaged

over many years in the importation and supply of fruit products, in particular, bananas. The market in this area, especially the trading

in bananas, became volatile, for various reasons, in the period leading up to the late 1990’s and at least to the dates of the share

sales. Market conditions had also affected the business of the Plaintiff’s competitors, such as Dole Food Company Inc., Chiquita

Brands International Inc., and others. This had led to uncertainties, and, at least insofar as the Plaintiff’s competitors were

concerned, it had affected the earnings of those companies to the extent that their share values had fallen. Among the factors

affecting this market were an oversupply of fruit, particularly bananas, a sluggishness in the European markets for such products,

especially in the United Kingdom, unfavourable exchange rates between the Dollar and the Euro, and unduly high costs. It appears

clear from the evidence that the Plaintiff had, unlike its competitors, been able to “buck the trend” by careful handling of its costs,

and of the Dollar/Euro exchange rates in particular, although in the period prior to that under consideration, it had had to take steps

to reroute certain supplies of bananas away from its usual markets and into Portugal for sale. The precise extent of its controls, either

of the Euro/Dollar movements or as to its costs, was not known to the market. The Plaintiff had also recently successfully launched a

new internet company called wof.com which, on the evidence, had almost immediately drives the share price upwards very

considerably, and there was talk of a possible merger with one of its competitors. The consequence of these matters, including the

steps to control costs and manage the Dollar/Euro exchange rates, was that the Plaintiff, in its Preliminary Announcement issued on

the 14th December 1999, having detailed developments in respect of all its interests, was in a position to indicate that the following

year was expected to be “another year of further growth.”

The Plaintiff’s financial year ended on the 31st October, and its first quarter ran from November until the end of January in the

following year. These proceedings cover the period between November 1999 and the end of March 2000, a quite short but crucial

period of time, the corresponding period a year previously, and the period to the end of the Plaintiff’s financial year in October 2000.

Finally, the first Defendant, which had become a shareholder in the Plaintiff many years previously, wished to exit that company, as

the shareholding in the Plaintiff did not fit or no longer fitted its then investment strategy, and had determined to sell its shares when

an appropriate opportunity arose.

The price sensitive information which is the subject of these proceedings is that contained in two in house Trading Reports of the

Company. These are Reports for the month of November 1999, furnished to the members of the Board of the Plaintiff on the 6th

January 2000, and for the month of December 1999 furnished on the 25th January 2000. The Reports, according to the Plaintiff, and

on the findings of the learned high Court judge, disclosed “bad news” for the Plaintiff’s trading prospects. Subsequently, on the 20

March 2000 a Trading Statement was issued by the Plaintiffs, which led to an immediate drop in the share price. The information set

out in all these documents is fully set out in other judgments delivered today.

The only issue on this appeal is the Plaintiff’s contention that the learned High Court judge adopted and applied an incorrect test as

the appropriate test under Section 108(1) of the Act of 1990 for the purposes of determining whether the information contained in

the November and December Trading Reports was price sensitive. The Defendants, respondents to the appeal, support the test

adopted by the learned High Court judge.

The Test in Section 108(1)

Section 108(1) of the Act of 1990 in my view sets a single undivided test. All parties accepted the test must be an objective one.

The learned High Court judge adopted a test, propounded on behalf of the Defendants, the “reasonable investor” test, as the

appropriate test to meet the section. The Plaintiff did not accept that such a test was called for by the statute and did not consider

it an appropriate test.

In this appeal, the Defendants argued that the “reasonable investor” test adopted by the learned High Court judge is, in reality, a

mere tool or mechanism to ensure objectivity in the application of the section. The Plaintiff submitted that while it could, with

considerable reluctance, accept the use of a “reasonable investor” test for the purposes of assessing whether the information in

question was likely to be material to such an investor, in terms of his likely reaction to it, the section nevertheless does not envisage

such a test. The plaintiff argued that if it were the correct or an acceptable test for that purpose, such an investor would have to be

profiled, and had not been. On the question of assessing whether the market price of the shares would likely be materially affected by

the release of the information in issue, as Section 108(1) requires, the Plaintiff submitted that the test does not meet the Sections at

all and that the learned High Court judge wrongly adopted a “reasonable investor” test.

In my view, since what is sought to be ascertained by the court is whether the price of the shares in question would likely be

“materially affected” by the hypothetical placing on the market of the information in issue, stated plainly, Section 108(1) posits a

quite simple test. The exercise in determining this must of course be based on a hypothesis, since the information never, in fact,

came on the market. Courts are however asked on many occasions to carry out such exercises or analogous ones, in assessing, for

example, the proper value of property in stamp duty cases; or of shares or real property in cases of capital gains tax or capital

acquisition tax cases; the appropriate rent or value of property in all types of landlord and tenant, or real property or matrimonial

cases, whether between private individuals or companies or a mixture of both, and such like.

Neither Council Directive 89/592/EEC, which the Act of 1990 transposes, nor Section 108(1) nor any other section of that Act makes

any reference to the “reasonable investor.” While it is true that the Act of 1990, and indeed the Directive, as well as American

legislation and that in other jurisdictions, all seek to prevent the undoubted unfair imbalances which could occur in the market from

the use of inside information, the legislation from which the “reasonable investor” test, as developed in American case law, is quite

different to Section 108 of the Act of 1990.

In the United States both the legislation and the applicable Rules prohibit several different types of activity. That most closely related

to the issues arising in a substantial number of the cases cited states that it shall not be lawful for a person:

“to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the

statements made, in the light of the circumstances under which they were made, not misleading”(emphasis added)

The prohibition arises in relation to, inter alia, the purchase or sale of securities. In the United States what requires to be determined

however is whether the information in question is, itself, “material”. That issue of “materiality” in the United States jurisprudence has

been tested by deciding whether a person to whom information is addressed, called the “reasonable investor” would attach

importance to it for the purposes of deciding his eventual choice of action, including his decision to buy or sell shares. The several

cases in which this issue and in particular the question of “materiality” has been considered, commencing with Securities and

Exchange Commission v Texas Gulf Sulphur, 401 F.2d 833 [1968] are analysed in detail in the judgment of, Finnegan, J., and I do not

need to cite them again. I am of the view that the “reasonable investor” test based on the legislation in question as interpreted in the

United States jurisprudence is not the appropriate test for assessing whether the price of shares is likely materially to be affected by

the information in question, “material” in the context of Section 108(1) of the Act of 1990 being more akin to “substantial”.

The Plaintiff also contends that, in any event, even if it were the, or a correct, test to adopt and apply, the learned High Court judge

did not apply the test already referred to in her judgment, but rather a reformulated “reasonable investor” test in her findings on

Section 108(1). She concluded:

"The key question is whether, as a matter of probability, on 3rd February, 2000, the reasonable investor, having

assessed the negative news about Fyffes’ performance in the first quarter in the context of the total mix of information

available about Fyffes’ prospects, would have concluded that the information indicated a lowering of expectations about

Fyffes’ earnings in the first half of financial year 2000 and in the full year of an order of magnitude that would probably

impact on Fyffes’ share price to a substantial or significant degree.”.

Counsel for the Defendants, in the course of his argument to this Court, suggested that it would be wrong to attach undue

significance to the precise choice of language used in the course of the judgment, since the essence of the exercise in the adoption

of the “reasonable investor” test by the learned High Court judge, was to ensure that the section is applied in an objective manner. I

do not think it is appropriate to look behind the actual definitions given or language used in the judgment. The learned High Court

judge was extremely careful in the construction of her judgment, and was meticulous in the manner in which she approached her

findings, separating those which were findings at face value or of a preliminary nature, for example in relation to the content of the

November/ December Trading Reports, or her analysis of the evidence, on the one hand, and her conclusions reached on questions of

law, including definitions, on the other hand. While therefore in the discursive sections of the judgment, she sets out certain

preliminary findings, in her conclusions on whether section 108(1) of the Act was met, she opted clearly for the “reasonable investor”

test as reformulated by her.

Section 108(1) itself does not require the Court to determine what the reasonable investor thinks or considers to be the likely effect

of the information on the share price. The Court must itself determine whether the price of the shares would likely be materially

affected. On the test as actually reformulated by the learned High Court judge, I do not find it necessary to go beyond what is said

by my colleague, Fennelly, J. in his judgment. I agree with his conclusions that here the learned High Court judge used the

reformulated test to ascertain, not just the question of his likely reaction to that information, but the reasonable investor’s opinion of

how the market would respond to the release of the information in question, a test not envisaged and not appropriate to the Court’s

determination of the issue found in Section 108(1).

Having regard to the foregoing, I find that whether in its original version appearing in any of the cases cited from the United States,

or in its reformulated version as finally defined by the learned High Court judge, the test adopted and applied was an incorrect legal

test. I conclude that the learned High Court judge thereby erred in law in the manner in which she defined and applied the appropriate

test for the purposes in Section 108(1) of the Act of 1990.

The March 20 Statement by the Plaintiff to the Market

On this second matter, the learned High Court judge determined that the market reaction to the Trading Statement released to the

market by the Plaintiff itself on the 20th March 2000, which was highly negative and caused an immediate drop in its share price,

should be discounted entirely in determining whether the information found in the November and December Trading Reports would be

likely materially to affect the market price of the shares in question.

In dealing with the March 20 Trading Statement, the learned High Court judge stated that:

“It was the March 2000 Trading Statement… that precipitated the adverse share price movement on that day and the

following (days) and that the information released contemporaneously in relation to wof.com had no bearing on the

share price movement.”

She found however that this “post market” event, namely the market reaction to the March 20 Trading Statement, could only be

considered an appropriate “proxy” for the likely effect on the share price of the release of the information in the November/ December

Trading Reports, if two conditions were met. She found that these two conditions were not met in that, firstly, there was a lack of

“parity” between the Trading Statement and the earlier reports and secondly, the “market conditions” in respect of the shares were

not identical on the later date in March to those existing on the earlier sales dates in February.

As to the reaction to the information contained in the March 20 Trading Statement for the purposes of assessing whether the earlier

information was price sensitive, the case law invoked by the Defendants in that regard was again, essentially, but not exclusively,

that emanating from the United States. Of the two main cases cited, I consider that neither is apt nor legally relevant in determining

whether the statutory conditions required by Section 108(1) are met in the present case. The first of the cases is Securities and

Exchange Commission v Bausch & Lomb Inc. 565 F.2d8 [1977]. There, the United States Court of Appeals, Second Circuit, was

dealing with an appeal from a decision of the lower court rejecting the SEC’s application for a permanent injunction to restrain further

disclosure of information on the basis that information alleged to be “material” in the sense used in the United States legislation had

earlier been disclosed by the Chairman of the company. The appeal court rejected the argument of the SEC, which sought, simpliciter,

to invoke a fall in stock prices on one day following the disclosure of the information, as establishing that all information which had

been disclosed by the Chairman to analysts on the prior date was “material”. The appeal court found that the fall in price was due to

a series of important events, among them (a) rumours of a Senate investigation of the company’s monopoly; (b) adverse medical

reports on the safety of the company’s product; (c) the likelihood of the company facing stiff competition; and (d) most importantly,

according to the court, the fact that the parent of the company’s main competitor was about to acquire the patent for a competing

lens. That series of very important legal and commercial events had, it said, caused the drop in the share price, not the information

alleged by the SEC to have been material. Critically all these events had occurred, and the share price had already fallen greatly, prior

to the disclosure of information which the SEC claimed was material. While the court did look at the fall in share price on the later

date, having regard to the foregoing matters on which they based their findings as to the reason for the share price drop, it rejected

the “facile inference” proposed by the SEC. In reality the Court was not determining the materiality of the released information on the

basis of an alleged lack of “parity” of information at all, but rather on the basis that entirely different matters caused the drop in the

first place, thereby rendering it wholly unnecessary to carry out any comparison exercise.

In the second cases, Elkind v Liggett & Myers Inc. 635 F2d 156 (1980), the issue of parity was used primarily in a different context,

namely, for the purposes of determining damages in a case where there had been established a material misstatement of information,

as prohibited by American law.

While these two cases referred to in the context of the materiality of the information, are useful in seeing how, globally, issues

concerning “insider trading” are dealt with in other jurisdictions, in particular the United States, I do not think the last two cited cases

are of telling assistance in determining whether, had the information in issue been hypothetically released on the market on particular

dates, this would likely have materially affected the market price of the Plaintiff’s shares.

The Plaintiff invoked, inter alia, the English case of Chase Manhattan Equities v Goodman [1991] B.C.L.C 897. In that case certain

inside information had been in the possession of a party during the course of dealings for the sale of the company’s shares, the shares

in a company had been suspended for a period of time, the suspension was lifted, and then there was a clear drop in share price

when information was released onto the market and trading in the shares recommenced. In the course of the judgment in that case,

the provisions of the Companies Securities (Insider Dealing) Act 1985, inter alia, were under consideration. There is in that Act a

definition of “unpublished price sensitive information” in the following terms:

Any reference in this Act to unpublished price sensitive information in relation to any securities of a company is a

reference to information which – (a) relates to specific matters relating or of concern (directly or indirectly) to that

company, that is to say, is not of a general nature relating or of concern to that company, and (b) is not generally

known to those persons who are accustomed or would be likely to deal in those securities but which would if it were

generally known to them be likely materially to affect the price of those securities. (emphasis added).

This definition, while not identical in its entirety to Section 108(1) of the Act of 1990, bears some considerable similarity to it, and

specifically refers to the question of determining whether the information would be likely “materially to affect the share price of the

securities”. To the extent therefore that the case was considering this very phrase, I deem it to be helpful in ascertaining the correct

test to adopt and apply in the context of Section 108(1).

As to the effect of the subsequent drop in share price the judge stated:

“I am satisfied that all three of the matters listed above would if generally known have been likely materially to affect

the price of the company’s shares. The proof of that pudding is in the eating in that when the suspension which followed

almost immediately, was lifted the price of the company’s shares was very sharply down.”

I agree with the Defendants that it is impermissible to conclude that a mere fall in the price of shares after information is released

establishes, ipso facto, the likely effect on the market price of shares upon the hypothetical release of similar or even the same

information on the earlier relevant dates, a test also rejected in the case of SEC v Bosch & Lomb, supra.

The Plaintiff argues, however, not that the proof of the pudding test should be adopted automatically, or adopted and applied in some

over simplistic manner. Rather it submits that the later information and the market reaction to it ought to have been considered by

the Court with a view to itself establishing whether, firstly such information is sufficiently similar. Secondly, it argues that had the

information in the later March 20 Trading Statement been properly compared with the information in the November/ December Trading

reports, and properly taken into consideration, the reaction to the release of the March 20 Statement, would in the present case,

have acted as a very good pointer to what would have occurred if the information in the November/ December Trading Reports had

been released on the market at the appropriate sales dates.

I am of the view that some test must be adopted to ascertain whether events occurring at a subsequent date and affecting the

share price of a company, can be used for the purpose of establishing what is required by Section 108(1) of the Act of 1990. That

test may be one requiring appropriate parity between two sets of information, but I have reservations about the requirement that the

conditions in the market place must be identical. There are, however, two reasons why I am of the view that the test, even if

appropriate, was not correctly applied in the present case. The first concerns the two components in the test itself. The second

concerns the interposing of the “reasonable investor” in the application of the parity test.

As to the question of parity, this requires, not that the information in question should be identical, but according to its ordinary

dictionary meaning, that there should be “functional equivalence” between the two sets of information. It is therefore necessary to

see whether in the present case there was some sufficient similarity between the information released by the Plaintiff on the 20th

March 2000 and that appearing in the November/ December 1999 Trading Reports. If there is, then even taking parity as an

appropriate test, the learned High Court judge ought not to have rejected the former as having no evidential value whatsoever. A

very helpful chart appears in the judgment of Denham, J., showing the respective information set out side by side. The similarity

between them is striking. Both contain undoubted bad news for the Plaintiff. There was clear evidence in both the November/

December Trading Reports figures and in the narrative description in the March 20 Trading Statement, as to unfavourable trading in

the first quarter of the new financial year, up to the end February 2000, and continuing, as well as many other examples of a similar

kind.

While it is true that the March 20 Trading Statement is structured in a different way, and does not include all of the detail or identical

figures to those in November/ December 1999 Trading Reports, this can be explained by the fact that the Plaintiff, on the 20th March

2000, was furnishing a statement pursuant to its obligations under the Stock Exchange Rules where formality might be considered the

norm. The earlier information which consisted of in house information being distributed to members of the Board of the company, is

naturally drafted in a different format, with a concentration on figures. The learned High Court judge had already found that the

absence of any narrative in the October/November Trading Reports did not lessen the “story” which was being told by the figures or

its clear adverse impact. The earlier information had been described by the learned High Court judge as being “authoritative, detailed

and precise”, a finding not challenged by the Defendants. The later information is, for understandable reasons, less detailed certainly

in terms of figures but tells a similar story.

I agree with counsel for the defendants that since the March 20 Trading Statement represents, and would be known to the market to

represent, the Plaintiff’s own statement pursuant to its obligations under the Stock Exchange Rules, it would carry great weight. That

of itself is not, however, a reason for holding that there was no sufficient “parity” between the two. Even assuming, as I must, that

the information in issue in the October/ November Trading Reports could come onto the market by any means, and not necessarily by

means of a statement from the Plaintiff, and therefore might not carry the same weight as a statement issued by the Plaintiff

pursuant to the Stock Exchange Rules, I am satisfied that, even allowing for any appropriate discounting of wholly dissimilar elements,

the degree of functional equivalence between the information in the documents being compared, was such that the market reaction

to the release of the later March 20 Trading Statement should have been taken by the learned High Court judge as constituting a

good pointer for how the market would have reacted to the earlier information, had the latter been released at the sales dates.

I confess also to having considerable difficulty in accepting the additional test which the learned High Court judge laid down in

assessing whether there was “parity” between the later information and the earlier information. In that regard she considered that:

“What is relevant is what the impact of the information would have been in the market on the date of the Share Sales.

That impact would have been conditional by what the market already knew about Fyffes. The market knew that banana

trading was difficult for Fyffes, because of pricing and exchange rate factors. It also knew from the preliminary

announcement that Fyffes was reducing its overall banana import volumes in Europe by 10% for calendar year 2000, but

that the benefit of this would be weighed towards the second half of the year. From the same source it knew that

Fyffes was committed to vigorously pursuing efficiencies in the Group’s cost structures. Viewed in the context of the

other information available to him, the reasonable investor might well have deduced at the beginning of February 2000

that Fyffes’ management had not formed the view that its own expectations for the first half or for the full year would

not be met. In that respect the information contained in the March 2000 Trading Statement was fundamentally different

because, by that information, Fyffes was formally telling the market that it had revised downwards its expectations in

relation to the first half and was uncertain whether it would meet its target for the full year.” (emphasis added)

I find no equivalent approach in the jurisprudence cited. The enquiry in SEC v Bausch Lomb, supra., was an exercise carried out by

the Appeal Court itself to see if indeed the drop in price was attributable to the disclosures the SEC alleged were material. The Court

found that on a straightforward enquiry, the adverse events already referred to were the cause of the drop in share price. It seems

clear that in those circumstances, it was not necessary to make any comparison of the type adopted and applied here. The view of

the “reasonable investor” was not interposed into the enquiry.

It is not the view of the reasonable investor which is the key factor in determining whether the later information lacks parity with the

earlier information. Rather this is a fact finding exercise for the court to undertake, so as to enable it properly to assess whether the

drop in share price following the release of the later information, constitutes a good pointer to what would have happened in the

market at the earlier relevant dates. In my view, interposing the reasonable investor into that exercise was also an error in law on the

part of the learned High Court judge.

As to the second of the ingredients in the “proxy” test proposed by the Defendants and applied by the learned High Court judge, I

confess to finding it difficult to concur with her finding that the market conditions, not being identical, suffised to exclude any

consideration of the market reaction after the 20th March. Although radically different market conditions might well lead to a different

result, it would be next to impossible to find, on any two dates, even those quite close together, absolutely identical market

conditions, save in fortuitous or highly exceptional circumstances. The test to be applied therefore cannot be based on a requirement

that in all circumstances the market conditions must be identical. Provided that there is sufficient and appropriate similarity between

the market conditions, the condition of the market after the release of the March 20 Trading Statement was not such as to justify

the total rejection of the subsequent immediate and significant fall in share price. The main difference stated by the learned High

Court judge was that on the first dates the market was rising, and in late March the market was falling. The Plaintiff has pointed to

the fact that the share price on the two dates was about the same, although there had been a peak between the two dates which

the market price reached 3.95. I find that, on the application of the correct test, the market conditions were sufficiently similar to be

taken into account. In consequence of the foregoing findings, both as to parity and as to market conditions, I find that the learned

High Court judge erred in law in not taking into account the fall in the share price consequent upon release of the information released

on March 20th 2000 on the grounds that it did not represent an appropriate “proxy”.

Having found as I have, the position which arises for consideration is whether the conclusions of the learned High Court judge ought

to have been different. For the reasons set forth in the judgment of Fennelly, J., on this issue, I concur fully with his findings. The

conclusion of the learned High Court judge ought to have been that the information appearing in the November/ December Trading

Reports, had it been released at the relevant dates, would have materially affected the plaintiffs’ share price, and that Section 108(1)

of the Act of 1990 had been breached by the defendants, and I so find.

I would therefore allow the appeal.