Supreme Court allows appeal on insider dealing, holding undisclosed info would materially affect share price.

SUPREME COURT

2006 Record No. 144

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 Mr Justice Finnegan delivered on the 27th day of July 2007

This is an appeal against the decision of the High Court (Laffoy J.) given on the 10th February 2006. The hearing in the High Court ran

over 87 days. It is a tribute to the learned High Court judge that notwithstanding the complex and technical matrix of fact there is no

challenge to her findings in that regard on this appeal. The legal issues raised were likewise complex and devoid of directly referable

authority and it is likewise a tribute to the learned trial judge that this appeal relates to her decision on a single issue only.

I should also record my appreciation to counsel for their submissions, both written and oral, which were concise, clear and extremely

helpful.

The legislation

The Companies Act 1990, Part V, gives effect in this jurisdiction to Council Directive 89/592/EEC which relates to the market in

transferable securities. The objective of the Directive clearly appears from the following recitals in the same –

“Whereas, for that market to be able to play its role effectively, every measure should be taken to ensure that the

market operates smoothly;

Whereas the smooth operation of that market depends to a large extent on the confidence it inspires in investors;

Whereas the factors on which such confidence depends include the assurance afforded to investors that they are placed

on an equal footing and that they will be protected against the improper use of inside information;

Whereas by benefiting certain investors as compared with others, insider dealing is likely to undermine that confidence

and may therefore prejudice the smooth operation of the market;

Whereas the necessary measures should therefore be taken to combat insider dealing.”

Relevant to this appeal is section 108(1) of the Companies Act 1990 which provides as follows –

“108(1) It shall not be lawful for a person who is, or at any time in the preceding six months has been, connected with a

company to deal in any securities of that company if by reason of his 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.”

Facts relevant to the appeal

The appellant (“Fyffes”) is a public company its shares being registered on both the London Stock Exchange and the Irish Stock

Exchange. It was floated in 1981. The core business of Fyffes is dealing in bananas and fresh produce. Bananas account for 25% of

its turnover but 75% of its profits. At all times relevant to the appeal the chairman was Neil McCann, executive chairman Carl

McCann, the chief executive David McCann and the group finance director Frank Gernon. The first named respondent and the second

named respondent between them held 10.5% of the issue shared capital in Fyffes but at the relevant times the beneficial owner of

that shareholding was the fourth named respondent. Mr Flavin is the chief executive of DCC. Having regard to the findings of the

learned trial judge which are not challenged on this appeal the respondents can be treated as a single entity and I will hereafter refer

to them collectively as the respondents. The respondents disposed of their holding of ordinary shares in Fyffes in three tranches on

the 3rd February, the 8th February and the 14th February 2000. The issue in the High Court was whether at the dates of disposal the

respondents were in possession of information that was not generally available, but if it were, would be likely materially to affect the

price of those shares. It is sufficient for present purposes to say that the learned trial judge found that the respondents were in

possession of information not generally available but that if that information had been generally available it would not be likely

materially to affect the price of the shares.

The grounds of appeal

The appeal concerns solely the correctness of the learned trial judge’s decision that the information which was not generally available

in the possession of the respondents if it were generally available would not be likely materially to affect the price of the shares. In

order to determine the issue it is necessary to consider the learned trial judge’s findings and I propose to do that under the following

headings –

1. The information in the possession of the defendants that was not generally available.

2. The test to be applied to determine whether the information not generally available, if it were available, would be likely

materially to affect the price of the shares.

3. The evidential value of the conduct of Fyffes.

4. The evidential value of the conduct of James Flavin.

5. The evidential value of the events of 20th March 2000.

The information in the possession of the defendants that was not generally available

The information alleged to be price sensitive information is contained in two documents –

1. The management accounts for November 1999 circulated to members of the board of Fyffes on the 6th January 2000.

(The “November figures”)

2. Summary trading report for December 1999 circulated to the board of Fyffes on the 25th January 2000. (The

“December figures”)

To appreciate the significance of the two documents it is necessary that they should be placed in the context of the information

generally available in relation to Fyffes. This information was derived from a number of sources:-

1. Stock Exchange announcement 1st November 1999.

On the 1st November 1999 Fyffes made a Stock Exchange announcement of the launch of worldoffruit.com, an internet portal for the

fresh produce industry, including FruitXchange, a business to business online trading system. The significance of the announcement is

that at the material times there was strong sentiment in the market in favour of dot.com shares or shares with a dot.com element

which was a significant driver in the share price of such shares or shares containing such an element. At page 339 of her judgment

the learned trial judge said –

“The overall conclusion I have reached is that it is incontrovertible that there was very considerable enthusiasm for

dot.com stocks or stocks with a dot.com component in January and February 2000, but whether that enthusiasm merits a

diagnosis of mania is not something on which I need express a view. It is incontrovertible that the enthusiasm affected

Fyffes share price, in that it is incontrovertible that it was wof.com which was the main driver of Fyffes share price at the

time. However in my opinion, the evidence does not establish that the enthusiasm for the internet component of Fyffes

business at the time was of an order that investors regarded the underlying fundamentals of the core business to be

wholly irrelevant.”

I understand this to be an acceptance of the evidence of the defendants’ academic expert Professor Taffler in particular that

wof.com was not the only driver of the advance in the share price at the relevant time but was the major driver. The other drivers

canvassed in the evidence were the prospects for acquisitions or mergers by Fyffes and expectation of growth in its core business.

On 4th January 2000 the share price was €1.90: by 3rd February 2000 it was €3.20 and peaked at €3.98 on 18th February 2000.

2. Fyffes Preliminary Announcement for the year ended 31st October 1999.

Fyffes’ financial year runs from the 1st November to the following 31st October. It announces its results at half yearly intervals. It

announced its preliminary results for the financial year ended 31st October 1999 on the 14th December 1999. The board reported

adjusted fully diluted earnings per share for the year ended 31st October 1999 of €17.05, an increase of 10.4% on the previous year

and adjusted basic earnings per share of €18.58 an increase of 14.8% on the previous year. Profits before tax and exceptional items

increased by 5.1% to €82.9 million. On a slightly decreased turnover it was proposed to pay a dividend of €4.03 an increase of 20%

over the previous year. The company’s operations for the year had been affected by a weak euro but the impact of this had been

offset by reduced shipping charges and other logistical efficiencies and tighter cost control. The company’s produce business had

made good progress notwithstanding product over supply in the later stages of the year. The company’s net cash balances at year

end were €138.7 million up from €116.6 million at the previous year end. In relation to worldoffruit.com the preliminary announcement

contained the following information –

“On 1 November 1999, Fyffes launched worldoffruit.com, an e-commerce company involved in the development of an

internet portal specially designed for the fresh produce industry. Features of the website include fruitXchange, a

business-to-business online trading system, together with produce industry news, views and other services aimed at

adding value to users’ operations. It is envisaged that Fyffes will invest €10,000,000 in the initial development of this

venture. Third party investment partners will be sought from inside and outside the produce and technology sectors to

fully develop worldoffruit.com into the leading e-commerce portal for the fresh fruit industry.”

Finally with regard to prospects for the year to 31st October 2000 the preliminary announcement contained the following –

“Outlook

The results for the year maintained the group’s record of continuous growth.

For the coming year, operational focus will be directed to optimising those areas in which the group has particular

strength. In line with the publicly stated intentions of several other companies in the industry, Fyffes will be reducing its

overall banana import volumes in Europe by 10% for calendar year 2000, the benefit of which will be weighted towards the

second half of the year. In conjunction with this strategy, efficiencies in the group’s cost structures will continue to be

vigorously pursued.

The completion of the Capespan transaction will bring Fyffes turnover significantly above the €2 billion per annum and

opens up important new opportunities in the fresh produce sector with the possibility for cost efficiencies in the marketing

and distribution of Cape and Outspan products and synergies with the group’s existing businesses throughout Europe.

The group’s exciting e-commerce initiative, worldoffruit.com, has substantial potential in the context of the revolutionary

impact that electronic trading is having on the business. In addition, the action to maximise the development potential of

its property assets offers significant prospects for increased shareholder value.

Fyffes continues to benefit from strong cash flow and the strongest balance sheet in the international fresh produce

sector. These leave it well positioned to develop the business further by organic growth and by sizeable strategic

acquisitions.

The Board believes that from this position of strength, 2000 will be another year of further growth for Fyffes.”

3. Announcement of strategic partnership with Computer Sciences Corporation 13th January 2000.

On the 13th January 2000 Fyffes announced a strategic partnership with Computer Sciences Corporation a leading developer of

internet market places. It was also announced that worldoffruit.com was in active discussions with a number of leading venture

capital companies to secure further funding for its development.

4. Chairman’s statement of 31st October 1999.

This statement gave in summary form much of the information contained in the Preliminary Announcement. It concluded with the

following statement –

“Your board believes that, from this position of strength, 2000 will be another year of further growth for Fyffes”.

5. worldoffruit.com Road Show

In late January and early February 2000 Fyffes executives conducted investor presentations in London, Edinburgh, Dublin, Chicago,

Milwaukee, San Diego, San Francisco, Boston and New York. These presentations ran from the 19th January to the 11th February and

are relevant to investor interest in the dot.com element in Fyffes shares at the date of the respondents’ sale of their shareholding.

6. Generally available information about the banana market.

This was dealt with by the learned trial judge in her judgment at page 241 as follows –

“On the evidence, the principal sources of information about Fyffes trading and earnings which the market had in late

1999, apart from what Fyffes itself told the market through results and other announcements, were:

(a) publicly disclosed information in relation to the state of the banana and fresh produce business globally through

announcements made by its competitors;

(b) global economic news about banana prices and exchange rate movements;

(c) reports and forecasts of stockbroker analysts; and

(d) media reports.”

In 1999 Fyffes was one of the main players in the global fresh produce market, its main competitors being U.S. corporations, Dole

Food Company Inc. (Dole), Chiquita Brands International Inc. (Chiquita) and Fresh Del Monte Produce Inc. (Fresh Del Monte). During

the third quarter of the calendar year 1999 the trading environment for fresh produce was difficult internationally and this impacted

adversely on the earnings of Fyffes competitors. This was manifested in results announcements and broker analysis. For example,

when Chiquita announced its third quarter results on 19th October 1999, it stated that third quarter banana pricing was lower in

Europe compared to prior years. It attributed the decrease to over-allocation of European Union quota in the early part of the year,

over-supply and continuing weakness in demand from Eastern Europe and Russia. The position did not improve and Chiquita issued a

cautionary trading statement on the 13th December 1999 again attributing the results to lower banana pricing in Europe. Similarly,

when Dole announced its third quarter earnings on 4th November 1999 it attributed the third quarter net loss from ongoing operations

primarily to “significantly weaker pricing in the European banana business due to higher market volumes as a result of increased

industrial licence allocations”. Fresh Del Monte was also affected by unprofitable banana prices in Europe. It issued a profit warning on

22nd December 1999.

The market was aware of the general trading difficulties in the banana market in Europe. It was also aware that Fyffes’ banana

division was its core business and that Fyffes sales of bananas were focussed almost entirely on the United Kingdom and European

Union markets. Before Fyffes announced its preliminary results for its financial year 1999 on the 14th December 1999 the analysts who

covered Fyffes business were aware of the over-supply and the weak banana prices in Europe. In the preliminary announcement

Fyffes told the market that, despite over-supply in the latter stages of the year, the produce business had made good progress in its

key market sectors. It disclosed another factor which had the potential to impact adversely on its banana trade, the euro/dollar

exchange rate.

It is then necessary to look at the November and December figures. The information in the possession of the respondents in issue and

alleged to be price sensitive is that contained in the November and December figures. I propose setting out the narrative portions of

the same in full.

Management Accounts for November 1999

“Sales of €122.0 million are €10.1 million below budget and €1.7 million

Losses of €2.6 million are €2.3 million worse than budget, and €4.1 million worse than last year and are due primarily to weaker

Banana prices.

Divisional Trading:

Bananas:

The loss for the month was €2.7 million compared with a budget profit of €1.2 million, and last years profit of €2.8 million,

was due to weaker banana pricing in the UK and European markets, lower value for licence, and the weaker exchange rate

of the euro vis a vis the US dollar.

Prices for UK multiple customers have been consistently below prior years for many months now, but the

November/December prices are also well below the budget levels. 130,000 boxes of Suriname fruit were diverted to

Portugal to ease the pressure on the market.

Partners:

Trading was quite good overall with profits on Cuban Florida Grapefruit compared to losses last year, improving Velleman

and Anaco. Profits in Spain were very solid, helped by a 25% reduction in Canary Island Banana volumes. Lembcke

includes €100,000 interest refund on tax.

Produce:

Trading in Ireland was in line with budget with the expected improvement between Swords and Beresford St. materialising.

However losses in Multifresh were €200,000 higher than budget due to lower multiple, and service provision volumes. This

was due to lower Cape volumes, and lower French apple volumes which were affected by the beef dispute. Iceland have

given notice to cease using the Chandlers Ford depot at the end of January, reducing volume throughput by 60%. France

has improved with the elimination of Terre de Fruit and Bredifrais and the absence of Swithenbanks has reduced losses by

€436,000.

Capespan:

The accounts do not include any Capespan figures as we are looking at the possibility of treating the November and

December losses as pre-acquisition, under the matching concept, since they relate largely to the completion of the

previous season.

The loss for the month of €1.6 million compares to a budget loss of €1.2 million due mainly to a disimprovement in the

Sterling/Euro rate from budget. There is very little sales in November (€9 million) and December, and the loss is all

overhead.

worldoffruit:

Losses are only staff and travel costs with no decision yet on write-off of development costs.

December:

The banana market has improved a little in December although the UK was affected by snow this week. December losses

are still expected to be €1.6 million which would be €1.6 million worse than budget and €4.9 million worse than last year.

Cumulative losses at end of December are expected to be €4.2 million which is €3.9 million worse than budget, and €9

million worse than last year.

There is some optimism that the banana market will improve from January due to cutbacks in production by the major

producers. This should not in theory impact on the EU market but it is expected to improve sentiment.

Summary Trading Report – December 1999

Sales:

Total sales €149 million were €11.3 lower than budget due to the non consolidation of Capespan and €6.1 lower than last year due to

lower UK produce throughput and the disposal of Swithenbanks.

Net Profit:

The pre goodwill loss for the month is €1.3 million compared to a breakeven budget and last year’s profit of €3.3 million, bringing the

cumulative pre goodwill loss to €4 million compared to last year’s profit of €4.8 million. This can be analysed as follows:

MONTH CUMULATIVE

Variance on: Variance on:

Profit/Loss Budget Last Year Profit/LossBudget Last Year

Bananas (2.6) (2.1) (4.2) (5.0) (5.6) (9.4)

Partners 1.2 (0.2) (0.2) 1.5 (0.4) 0.1

Produce 0.5 (0.2) 0.4 0.2 1.1

Other 0.2 (0.1) (0.2) 0.3 (0.2) (0.1)

Capespan - 1.2 - - 2.4 -

GroupExps (0.8) (0.1) (0.2) (1.4) (0.1) (0.2)

W.O. Fruit (0.2) 0.2 (0.3) 0.2 (0.3)

Interest 0.4 0.1 (0.2) 0.7 0.2 (0.2)

Total: (1.3) (1.3) (4.6) (4.0) (3.7) 8.9

Capespan:

The commencement date for the consolidation is under review as we are looking at the possibility of treating the

November/December losses as pre acquisition under the matching concept as they relate largely to the completion of the

previous season.

The Capespan loss for November/December is €3 million compared to a budget of €2.5 million. The variance is due mainly

to lower volumes.

Bananas:

December showed very little improvement in market prices or sentiment with a multiple price war affecting an already over

supplied market. The UK result was very disappointing even after the diversion of fruit into Europe.

Urgent contract negotiations are required with ACP suppliers to correct the imbalance in the supply/demand curve which

occurs in November/December in the absence of autumnal natural disasters.

The European market has improved quickly in January with prices at budget levels going into February but the UK market

continues to be affected by competition seeking to increase their multiple market share.

Partners:

Trading was solid in Spain and well improved in Italy where volumes were particularly good. The Velleman procurement

business, which has not yet been restructured, was improved on last year which suffered from unusual losses on Florida

grapefruit. Results were lower in Denmark and in Greeve and Anaco, due to weaker banana pricing.

Produce:

Ireland enjoyed the best trading for some time with the new structure between Swords and Beresford Street working well.

However, the UK distribution business has been severely affected by lower Cape volumes and loss of CRS. Total UK losses

were €323,000 lower than last year which included losses of €856,000 for Swithenbanks which has since been disposed

of. We are examining the possibility of merging the Multifresh business with Capespan.

The improvement in France of €209,000 is due in the main to the elimination of losses in Terre de Fruit and Breidifrais.

worldoffruit. Com:

All staff and overhead costs have been expensed but development expenditure of €540,000 has been capitalised and the

depreciation policy has not yet been decided.

Other Activities

Margins in Allegro are lower than expected but good sales volumes have been achieved and the transfer of the business

from Sandyford to Finglas/Clonmel has been completed on schedule.

January 2000:

Current forecast is for a profit of €1.3 million compared to a budget of €5 million and €6.3 million last year. The shortfall is

mainly due to a weaker UK banana pricing.”

The preliminary announcement for the year ended 31st October 1999 was positive – an increase of 10.4% in fully diluted earnings per

share, an increase of 14.8% in adjusted basic earnings per share, an increase in profits before tax and exceptional items of 5.1% and

an increase dividend up 20% on the previous year. These results were achieved notwithstanding a slightly decreased turnover and a

weak Euro. Difficulties were off-set by reduced shipping charges and logistical efficiencies and tighter cost control. Again these

results were achieved notwithstanding product over supply in the latter stages of the year. Net cash balances had increased by

€22.1 million. Particularly relevant was the outlook for the year to 31st October 2000 on the statement:

“The Board believes that from this position of strength, 2000 will be another year of further growth for Fyffes.”

The optimism is repeated in the chairman’s statement.

The following information not generally available was available to Fyffes directors:-

i) From the November figures -

1. For November sales were €10.1 million lower than budget and €1.7 million lower than the previous year.

2. Losses were €2.3 million worse than budget and €4.1 million worse than the previous year.

3. On bananas there was a loss of €2.7 million compared to a budget profit of €1.2 million and a profit of €2.8 million

for the previous year.

4. Notwithstanding some improvement in the banana market in December, December losses were expected to be

€1.6 million worse than budget and €4.9 million worse than the previous year.

5. Cumulative losses at end of December were expected to be €4.2 million which is €3.9 million worse than budget

and €9 million worse than the previous year.

6. While there was some optimism that the banana market would improve from January 2000 due to cutbacks by

producers this would not impact on the EU market but would improve sentiment.

ii) From the December figures

1. For December sales were €11.3 million lower than budget and €6.1 million lower than the previous year.

2. For December the loss was €1.3 compared to a break even budget and a profit of €3.3 million in the previous

year.

3. The cumulative goodwill loss for November/December was €4.0 million compared to a profit of €4.8 million for the

previous year.

4. The banana market showed very little improvement in market prices or sentiment with a multiple price war

affecting an already over-supplied market.

5. Banana prices for January were at budget level but the UK market continued to be affected by competitors

seeking to increase their market share.

7. The forecast for January was for a profit of €1.3 million compared to a budget of €5 million and €6.3 million for

the previous year, the shortfall been mainly due to weaker UK banana pricing.

The November and December figures contained some detailed information not generally available in relation to a number of operations

in particular Capespan, Velleman, Greeve, Anaco, CRS, Swithenbanks, Terre de Fruit and Breidifrais: I would not consider this

information to be material although the same was rather more negative than positive.

The learned trial judge accepted that the November and December figures were authorative and contained detailed and precise

information. The figures for November, December and the January forecast showed “the hill which had to be climbed” in the last three

quarters of the financial year. The actual figure achieved in 1999 was €82.9 million. Fyffes expressed belief was that 2000 would be

another year of further growth. Analysts’ profit forecasts for the year 2000 were in the range €88 million to €92 million. If the

analysts’ forecasts were to be met profits for the remaining three quarters of the financial year would have to be between €90.6

million and €94.6 million. The information contained in the November and December figures was, the learned trial judge held,

unquestionably bad news about trading and earnings in the first quarter and taken on their own, a reasonable inference could be

drawn from the same that there was a real risk that the Fyffes’ own expectations and analysts’ expectations for the first half and for

the full year would not be met. While the market did not know what Fyffes expectations for the first half were, it did know what had

been achieved in the first half of the previous year. The learned trial judge concluded that the information available to the directors

was of a type and quality that was potentially price sensitive and with this I agree.

The test to be applied to determine whether the information not generally available, if it were available, would be likely

materially to affect the price of the shares

I have already indicated the information which was available to the respondents and contained in the November and December figures

which was not generally available. The respondents were connected with Fyffes and had the information by reason of that

connection. The issue on the appeal is whether had that information been generally available on the dates on which the respondents

dealt in Fyffes shares it would have been likely materially to affect the price of the shares. There are no Irish decisions on section

108(1) and authorities from other jurisdictions on similar legislation were relied upon by the parties.

Of some assistance are cases on the Securities Exchange Act 1934 in the United States. The purpose of that Act was to promote a

free and open securities market. The Act inter alia provides that it is unlawful 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.”

In this context the courts of the United States have considered the concept of materiality of information and have done so in the

context of the potential of the information, if disclosed, to affect the market price of a security. In S.E.C. v Texas Gulf Supher

Company 401 F.2d 833 [1968] Waterman J. at 849 dealt with information which is price sensitive –

“Thus, material facts include not only information disclosing the earnings and distributions of a company but also those

facts which affect the probable future of the company and those which may affect the desire of investors to buy, sell or

hold the company’s securities.”

and

“In each case, then, whether the facts are material within Rule 10(b) – 5 when the facts relate to a particular event and

are undisclosed by those persons who are knowledgeable thereof will depend at any given time upon a balancing of both

the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of

the company activity. Further the test in the United States for materiality is an objective one.”

In T.S.C. Industries Inc. v Northway Inc. 426 US 438 the Supreme Court was concerned with a different provision of the 1934 Act

and was concerned with statements that are false or misleading with respect to any material fact. Marshall J. at p.445 said –

“The question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or

misrepresented fact to a reasonable investor. Variations in the formulation of a general test of materiality occur in the

articulation of just how significant a fact must be or, put another way, how certain it must be that the fact would affect

a reasonable investor’s judgment. ”

At 449 Marshall J. said –

“The general standard of materiality that we think best comports with the policies of Rule 14(a) – 9 is as follows:

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in

deciding how to vote. This standard is fully consistent with Mill’s general description of materiality as a requirement that

‘the defect have a significant propensity to affect the voting process’. It does not require proof of a substantial likelihood

that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard

does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have

assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a

substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having

significantly altered the ’total mix’ of information made available.

The issue of materiality may be characterised as a mixed question of law and fact.”

Thus in these cases the courts were concerned with materiality of facts and not as in the present enquiry with materiality of share

price affectation.

The District Court in Singapore in Public Prosecutor v Allan Ng Poh Meng 1990 1. ML v, a criminal case of insider dealing, adopted a

“reasonable investor test” to determine if information, if generally available, would be likely materially to affect the price of securities.

At page x of the judgment Foenander, Senior District Judge, said –

“What has to be decided is whether the information would be ‘likely materially to affect the price’. Information that is

likely materially to affect the price is information which may well materially affect the price. Put in another way, it is more

likely than less likely that the price will be affected materially.”

And

“However the standard by which materiality is to be judged is whether the information on the particular share is such as

would influence the ordinary reasonable investor in deciding whether or not to buy or whether or not to sell that share. A

movement in price which would not influence such an investor, may be termed immaterial. Price is, after all, to a large

extent determined by what investors do. 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.

If an insider has any doubt about the legitimacy of dealing while in possession of information gained by reason either of

been a connected person, or by having an association or arrangement with a connected person then he should not deal.

He should not deal because his doubts are in effect telling him that the information may well have a price effect.”

The reasonable investor approach was also adopted in Malaysia in Public Prosecutor v Chua Seng Huat [1999] 3 M.L.J. 305 where

again the statutory provision required that information “might reasonably be expected to affect materially the price” of the security.

Chin J. at 328 profiled the reasonable investor.

The learned trial judge here having considered the authorities cited, dealt with the reasonable investor in the following terms –

“This leads to the profile of the reasonable investor. As a general proposition it is not clear to me that it should be

necessary to profile the reasonable investor any more than it is necessary to profile the reasonable man in applying the

principles of the tort of negligence.”

I respectfully agree.

The reasonable man while useful in determining whether or not conduct is properly described as being negligent is less than helpful

here. In the present case the learned trial judge used the phrase “the reasonable investor” as an indication that the test to be

applied for the purposes of section 108 (1) of the Companies Act 1990 is an objective test. Yet even the reasonable man test for

negligence involves in its application a subjective element in that it still remains a function of the judge to determine what the

reasonable man would have foreseen: see Glasgow Corporation v Muir [1943] A.C. 448 per Lord MacMillan at p.457. The judge may be

well fitted to identify the conduct to be expected of the reasonable man but may not be fitted by knowledge or experience to fulfil

the same function in relation to the reasonable investor. The difficulty was expressed by Bramwell J. –

“Here is a contract made by a fishmonger and a carrier of fish who know their business, and whether it is just or

reasonable is to be settled by me who am neither fishmonger nor carrier nor with any knowledge of their business.”

The difficulty in using the reasonable investor as a test, and not just to catergorise the test as objective, is compounded in that it is,

to my mind, impossible to profile the reasonable investor. There are innumerable categories of investor from the small private investor

who will check the value of his shares but now and then to the institutional investor who is in touch with the market throughout the

trading day. Is it the dealer who trades within the account or the trustee whose shareholding dates back decades? One investor may

concentrate on return, another on capital gain. An investor may be cautious or adventurous and to a greater or lesser degree. As

with the reasonable man described in Wingfield, Textbook on the Law of Torts (4th edition p.405) he may or may not have “the

courage of Achilles, the wisdom of Ulysses or the strength of Hercules” or “the foresight of a Hebrew Prophet”.

In my view the test is to be derived directly from the statute – if the information that is not generally available, if it were generally

available, would it be likely materially to affect the share price. The test is directed to the market effect and not the conduct of a

hypothetical reasonable investor. The reasonable investor test appears to me to derive from different legislative provisions where it is

necessary for the court to determine if the information is material. In section 108(1) “materially” is not directed to the non-disclosed

information but to share affectation. The courts function it appears to me is as follows -

1. First to determine the generality or “total mix” of information generally available.

2. To determine the information not generally available but available to the dealer.

3. To determine whether that information, if it were generally available, would be likely to materially affect the price of

the shares having regard to the total mix of information available in the market. The evidence which would normally be

available to the court, and which was available in this case, is the evidence of experts and the evidence of actual market

movements upon some or all of the not generally available information becoming available.

As to the quantification of movement in the share price necessary for the same to be a material affectation for the purposes of

section 108(1) of the Act this will depend on the particular share and the circumstances of the particular case. In the present case

there is little difference in the expert evidence and I would accept a likely movement of the order of 10% in the share price as a

material affectation.

The evidential value of the conduct of Fyffes

The respondents sought to rely on conduct of Fyffe’s after circulation of the November and December figures as showing that Fyffes

did not consider the information contained in the same as price sensitive and, as a corollary to that, that the information was not

price sensitive. As the conduct relied upon by the respondents are dealt with in detail by the learned trial judge I propose to deal

briefly with the same here.

1. A board meeting was held on the 9th December 1999 after circulation of the management accounts for November 1999.

The minutes of the meeting disclose that the Board’s attention was drawn to the shortfall in the November figures against

budget and the previous year and to the expectation that the situation would have deteriorated further by the end of

December. The preliminary announcement was made five days later in which it was forecast that the financial year 2000

would be “another year of further growth for Fyffes”. All members of the Board approved the preliminary announcement.

2. On the 25th January 2000 Fyffes made a Stock Exchange announcement in relation to the grant of options to Mr

Halpenny and the sale by Mr Ellis of shares. The December figures were circulated on the same day. The respondents

submit that by the announcements Fyffes by implication was telling the market that it did not have price sensitive

information as both these transactions, as the learned trial judge held, are captured by Part V of the Act of 1990.

Accordingly, it is submitted on behalf of the respondents, the directors of Fyffes did not consider the information in the

December figures price sensitive.

3. The conduct of the executive directors and senior management of Fyffes immediately following the first share sale on

3rd February 2000 it is submitted, is also evidence that they did not consider the information in the November and

December figures price sensitive. On 3rd February 2000 David McCann and Neil McCann met with Mr Flavin and

congratulated him on the sale and indeed purchased a bottle of champagne. The meeting was followed by correspondence

concerning the resignation of Mr Flavin from Fyffes’ Board. Mr Flavin’s resignation was announced on the 9th February

2000 coupled with tributes to his contribution to the Fyffes.

4. In advance of a Board meeting held on the 28th February 2000 a report for the three months trading to January 2000

was circulated to the Board together with a forecast for the following three months and for the half year and which

contained the following information:

Budget Actual Last

2000 2000 Year

€’000 €’000 1999

€’000

worldoffruit.com (635) (1,326) -

Fruit business 5,349 (2,559) 11,333

Total to end of 4,714 (3,885) 11,133

January

February 8,450 5,700 5,376

March 14,401 15,000 12,263

April 10,317 14,185 3,867

Cumulative – Half 37,882 31,000 32,639

year

The evidence of Mr Gernon who prepared the table was that the forecasts for February, March and April were not in any real sense a

forecast but were predicated that shortfalls would be made good by the proceeds of pending litigation. In the course of discussions at

the Board meeting Mr Scanlon, a director, said that careful consideration would have to be given to what should be said in relation to

current trading at the annual general meeting scheduled for the 20th March 2000. However the figures did not, it would appear,

prompt the other directors and in particular the executive directors to consider a trading statement or profit warning at that time.

5. A shareholder in the plaintiff, a retired stock broker, wrote to the chairman on 21st March 2000 following the plaintiff’s

March 2000 trading statement expressing concerns about the timing of the same. In his response of the 11th May 2000

the chairman justified the timing on the basis that November and December performance in the past had not been a

reliable indicator of trading for the remainder of a financial year and accordingly the plaintiff was not in a position to make

a properly informed assessment on the basis of the figures for those months.

The learned judge’s finding on the defendants’ submission was as follows-

“On an objective analysis, in my view, the evidence of what was said, done and written at the time does not reveal any

awareness on the part of Fyffes’ executives and senior management as of 3rd February 2000 that, if the information

contained in the November and December trading reports was generally available, it would have a susbstantial adverse

impact on Fyffes share price.”

There was, as described by the learned trial judge, a fundamental incongruity in the Fyffes stance – on the one hand it claims that

the information contained in the November and December figures and in the possession of Mr Flavin was price sensitive while the same

information in the possession of the executive directors and other non-executive directors of Fyffes was not considered by them to

be price sensitive.

There may be many reasons for this incongruity. The learned trial judge in the evidence before her found that it exists. However, the

subjective appreciation of Fyffes’ directors will not be determinative as the test to be applied is an objective one. The subjective

appreciation of Fyffes and its directors should go into the mix of evidence available as showing that experienced responsible executive

and non-executive directors of a public company had reached that appreciation. The weight to be attached to that evidence will

depend on their knowledge and experience and all the circumstances. Other than to remark on the incongruity it does not appear that

the learned trial judge attributed any evidential value to the same.

The evidential value of the conduct of James Flavin

This submission on the part of Fyffes mirrors that of the respondents in relation to the conduct of Fyffes. Emphasising the objective

nature of the test the learned trial judge remarked that a finding does not have to be made as to whether Mr Flavin knew that the

information was price sensitive, if indeed it was: to address the question of his knowledge with a view to determining whether the

information was price sensitive is to beg the question. However, as with the defendants’ submission in relation to Fyffes conduct, the

subjective appreciation of Mr Flavin has some evidential value in that it is the appreciation of an experienced director of a public

company.

The conduct of Mr Flavin relied upon by the plaintiff is the following:

1. On 31st January 2000 Mr Flavin contacted DCC’s legal advisers in relation to the proposed sale of the shares. Mr Price,

the solicitor, recorded the discussion. Mr Flavin said that “he had examined his conscience with regard to any price

sensitive information and he felt that he did not have any.” Mr Price was told that the share price had risen strongly in

the recent past largely related to the wof.com venture. As a result of the road show the market had up-to-date

information in regard to the venture. To Mr Flavin’s knowledge the first two months trading of the current financial year

“had not been all that wonderful”. He told Mr Price that Fyffes track record was to have an uneven pattern of results and

that two relatively poor months would not have been unusual. Mr Price advised that there did not appear to be any legal

obstacle to DCC disposing of its shareholding. Mr Flavin was reticent about the information contained in the December

figures which he gave to Mr Price: no information as to the shortfall against budget and previous year was given and he

made no mention of the January forecast. Mr Price’s advice on the limited information given to him would not assuage any

real concerns which Mr Flavin might have had.

2. On the 1st February 2000 Mr Flavin consulted Mr Scholefield on compliance issues and Mr Scholefield too kept a note.

The learned trial judge dealt with Mr Scholefield’s note in the following terms –

“Mr Scholefield recorded the following facts:

1. Mr Flavin was aware that the profits of Fyffes for the last two months to 31st December were behind

last year’s. There is a rider to this in terms that both Mr Flavin and Mr Scholefield had noted that,

although Fyffes had produced good overall profit growth over the last number of years, there had been

little evidence during those years of smoothness in terms of profitability for any one or two month

period over the previous year.

2. Mr Flavin only had information on the first two months of the year. The information was the same

information that was available to him at the time the Board of Fyffes approved the preliminary results

announcement in December.

3. The major influence on profitability in Fyffes was banana prices: which were closely followed by

industry analysts. This knowledge and trading commentaries from other companies in the sector meant

that a reduction in the profitability in the first two months of Fyffes then current financial year would

not be unexpected by the analysts.

4. Fyffes’ share price had more or less doubled since it announced the launch of its on-line trading

entity, wof.com. There was a rider that both Mr Flavin and Mr Scholefield surmised that the launch had

been a major factor in the share price performance.

5. Mr Flavin informed Mr Scholefield that Fyffes had been active in making presentations since the

results and therefore the market was likely to be as well informed as he was.”

It appears that Mr Scholefield was not given details of the actual performance of Fyffes for the months November and December nor

was he given the forecast for January. The appellant’s suggestion was that the compliance procedure engaged by Mr Flavin was

sham. The learned trial judge was satisfied that it would not be a proper inference to draw that Mr Flavin deliberately misrepresented

the import of the November and December figures in seeking advice from Mr Price and Mr Scholefield. She considered that process to

be neutral, supporting neither Fyffes nor the respondent’s case. This was the conclusion which the learned trial judge was entitled to

reach having heard the evidence of Mr Flavin, Mr Price and Mr Scholefield.

The evidential value of the events of 20th March 2000

On the 20th March 2000 Fyffes issued a trading statement – in effect a price warning. On that day and the following days Fyffes’

shares experienced adverse share price movement.

The following table sets out Fyffes’ closing price in euro on the Irish Stock Exchange in the critical months of December, 1999,

January, February, March, 2000 and April, 2000.

December 1999 January 2000 February 2000 March 2000 April 2000

Date Price € Date Price € Date Price € Date Price € Date Price €

01 1.60 04 1.95 01 3.26 01 3.35 03 2.25

02 1.63 05 1.98 02 3.32 02 3.55 04 2.00

03 1.62 06 1.98 03 3.20 03 3.60 05 1.95

06 1.62 07 1.97 04 3.50 06 3.65 06 1.98

07 1.60 10 2.25 07 3.70 07 3.65 07 1.97

08 1.60 11 2.23 08 3.60 08 3.50 10 2.00

09 1.60 12 2.25 09 3.68 09 3.20 11 2.12

10 1.62 13 2.58 10 3.85 10 3.45 12 2.15

13 1.65 14 2.55 11 3.85 13 3.55 13 2.08

14 1.80 17 2.63 14 3.90 14 3.43 14 2.05

15 1.99 18 2.72 15 3.90 15 3.35 17 1.93

16 2.00 19 2.63 16 3.93 16 3.30 18 1.97

17 2.00 20 2.60 17 3.95 20 2.70 19 1.97

20 2.00 21 2.60 18 3.98 21 2.46 20 2.00

21 1.97 24 2.70 21 3.95 22 2.60 25 1.93

22 1.97 25 2.62 22 3.87 23 2.50 26 1.87

23 1.98 26 2.80 23 3.87 24 2.62 27 1.85

27 2.95 24 3.80 27 2.55 28 1.85

28 3.14 25 3.75 28 2.55

31 3.30 28 3.55 29 2.55

29 3.40 30 2.40

31 2.20

The learned trial judge held that a post-disclosure market event is only of evidential value for the purpose of determining if the price

sensitive information would be likely materially to affect the price of the shares if, firstly, there is parity of information between the

alleged price sensitive information and the information which became available to the market and which precipitated the share price

affect and, secondly, if the market conditions were the same on the date of the relevant share sales and the date of the post-

disclosure market event. The learned trial judge identified differences between the information contained in the November and

December figures on the one hand and what the market was told on the 20th March 2000 and between the market conditions on the

dates of the share sales, the 3rd, 8th and 14th February 2000 and market conditions on 20th March 2000. Having done so she

concluded that what happened to Fyffes share price on and after 20th March 2000 was of no evidential value in applying the

statutory test.

The learned trial judge’s conclusion as to the evidential value of the events of 20th March 2000 was based on her analysis of a

number of decisions and it is necessary to look at these in some detail. In Chase Manhattan Equities v Goodman [1991] B.C.L.C. 897

the information alleged to be price sensitive was that the defendant was about to resign as a director of Unigroup, and that he was

claiming that a debt entered in the accounts of Unigroup as being due from another company, Dewfield, was in fact owed by Unigroup

to Dewfield which if true would have dramatically affected Unigroup’s balance sheet. He was also aware that the company’s auditors

were of the view that a charge considered to be stg. £1,000,000 should be reduced to stg. £250,000. On the 8th October 1987 the

Stock Exchange suspended dealing in Unigroup’s shares at the request of its directors. The suspension was lifted on the 29th

February 1998. On 7th October 1987 Unigroup shares traded at stg. 1.72p. When the suspension was lifted they traded in the range

stg. 50p to 55p. The defendant had sold shares in Unigroup Plc on the 5th October 1987. The issue in the proceedings was whether

at the date of the sale the defendant was in possession of unpublished price sensitive information which if generally known would be

likely to materially affect the price of the shares. Knox J. found that the defendant was in possession of information which would, if

generally known, have been likely to affect the price of the shares and went on to say –

“The proof of the 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.”

In S.E.C. v Bausch & Lomb Inc. 565 F. 2 d 8 [1977] the United States Court of Appeals considered the evidential value of post-

disclosure market events. The principal financial spokesman of the defendant divulged the company’s first quarter earnings forecast to

an analyst on the 16th March 1972. In 1971 the company had obtained approval for soft contact lens on the back of which both

earnings and stock soared. However there were problems on the horizon. Sales were falling. Medical studies indicated that soft

contact lens were less safe and effective than conventional vision aids due to bacterial contamination. Competition was imminent.

Analysts and the market generally were aware of the problems and the stock price was falling in February and March 1972. On the

first quarter earnings forecast being disclosed to the analyst he immediately telephoned his firm’s trading manager and he withdrew his

“buy” recommendation for the company’s shares. At 2 p.m. the company’s stock had fallen seven points on an unprecedented volume

of 330,000 shares. However 95% of the stock sold on March 16th had been traded before the withdrawal of the recommendation and

a major part of the price decline had also occurred before the withdrawal. The substantial decline in the value of the company’s stock

on March 16th was not an uncommon phenomenon in the company’s recent history. The shares on March 16th had plunged forty

points. In short the market was extremely bearish on the stock. There had been adverse publicity on March 15th which prompted one

investor to dispose of one hundred thousand shares on March 16th almost one third of the volume for the day. Against this

background Kaufman C.J. was not impressed with the argument that the share decline on the 16th March was precipitated by the

disclosure of the company’s first quarter earnings forecast. Other factors in the market were sufficient to precipitate the drop in stock

value on the 16th March. The decision in this case is fact specific and does not support the respondents submission that before post-

disclosure share price movement has evidential value there must be parity of market conditions: rather it shows that in determining

whether the post-disclosure market event is relevant one must look at all circumstances affecting the market at the date of the

post-market event.

Elkind v Ligett and Myers Inc. 65 F 2 d 156 [1980] was a class action on behalf of purchasers of stock in Ligett and Myers Inc.

against the company for its failure to disclose material information in relation to earnings and operations and the giving of that

information to certain persons who sold stock in the company. The company had a record year in 1971 and what it described as an

equally auspicious first quarter in 1972. The first quarter figures were released on 3rd May 1972 and showed earnings up from 81 cent

per share to one dollar per share. April earnings showed a decline with some recovery in May. There was no public disclosure of the

adverse developments. In particular sales of J & B Whiskey were slow and there was increased competition for a dog food product. On

the 17th July 1972 the company’s chief financial officer disclosed to an analyst that there was a good possibility that earnings would

be down. Preliminary earnings figures were available to the Board on the 17th July and showed earnings per share for the first half

year down from $1.82 in the previous year to $1.46. A press release was made on the 18th July. The learned trial judge cited the

following passage from the judgment of Mansfield J. –

“The “value” of the stock traded during the period of non-disclosure of the tipped information (i.e. the price at which the

market would have valued the stock if there had been a disclosure) is hypothetical. Expert testimony regarding that value

may, as the District Court found in the present case, have been entirely speculative. This has led some courts to

conclude that the drop in price in the stock after actual disclosure and after allowing a period of time to elapse for the

market to absorb the news may sometimes approximate to the drop which would have occurred earlier had the tip been

disclosed. The court below adopted this approach of using post-public disclosure market price as nunc pro tunc evidence

of the value of the stock during the period of non-disclosure.

Whatever may be the reasonableness of the nunc pro tunc value method of calculating damages in other contexts, it has

serious vulnerabilities here. It rests on the fundamental assumptions (1) that the tipped information is substantially the

same as that later disclosed publicly and (2) that one can determine how the market would have reacted to the public

release of the tipped information at an earlier time by its reaction to that information at a later, proximate time. This

period depends on the parity of the tip and the disclosure. When they differ the basis of the damage calculation

evaporates. One could not reasonably estimate how the public would have reacted to news that the Titanic was near to

an iceberg from how it reacted to the news that the ship had struck an iceberg and sunk.

In the present case the July 10th tip that preliminary earnings would be released in a week is not comparable to the later

release of the estimated earnings figures on July 18th nor was the July 17th tipped information that there was a good

possibility that earnings would be down comparable to the next day’s release of the estimated figures”.

In short what was there held was that, in assessing damages, the court should not simply take the difference between the value of

the shares in question on the date of sale and the value of the shares on the date of public release of the price sensitive information:

it would only be appropriate to do so if there was parity between the price sensitive information and the publicly disclosed information

and if the market conditions were the same. The court was not concerned with the evidential value of a post-disclosure market event

in determining materiality but only with the manner in which the lower court had calculated damages. In fact the court went on to

discuss other measures for calculating damages, the causation-in-fact approach and the disgorgement measure. The former would

permit recovery of damages caused by erosion of the market price of the security that is traceable to a tippee’s wrongful trading,

that is to compensate the uninformed investor for the loss in market value that he suffered as a direct result of the tippee’s conduct.

The latter, the approach opted for by the court, makes the tipper and tippee liable up to the amount gained by their misconduct.

The learned trial judge was referred to S.E.C. v Lund 570 F. Supp. 1397 [1983] . The facts in this case were that a company P & F

was negotiating a joint venture involving a casino in Las Vegas. On the following Monday at a meeting a formal letter of intent would

be signed. A P & F insider gave this information to Lund who purchased stock in P & F. The letter of intent was signed on the 6th

August and when trading in the shares opened on that day the stock price rose dramatically and Lund made a profit of $12,500. The

issue for the court was whether the information obtained by Lund was material, that is if there was a substantial likelihood that a

reasonable investor would consider the information important in making an investment decision. In the course of his judgment Lucas

D.J. said:

“Certainly a reasonable investor would have considered P & F’s participation in a joint venture involving a gambling casino

to be important. Lund received specific information about a definite project. The proposed venture was a major

undertaking for P & F which would have a significant affect on the value of its assets and its earnings potential. The fact

that Lund purchased a substantial amount of P & F stock after receiving this information and that this was his only

purchase of P & F stock in approximately ten years further indicates that the information was material. Finally, the rapid

increase in the trading volume of and price of P & F stock following the disclosure of the joint venture confirms the

conclusion that a reasonable investor would have considered this information to be important in making an investment

decision with respect to P & F stock. The court finds, therefore, that the information which Lund received from H was

material information.”

In assessing damages the court applied the disgorgement measure and rejected the out of pocket measure adopted by the court

below in Elkind v Ligett and Myers. The learned trial judge in S.E.C. v Lund did not base his decision on the materiality of the tipped

information on lack of parity or identity of market conditions.

The facts in S.E.C. v Falbo 14 F Supp.2 d 508 ]1998] were that while working as an electrician the defendant had eavesdropped and

obtained information about a possible takeover by Grand Met of a company, Pillsbury. He also obtained information through his wife

who worked for Grand Met. He was thus in possession of more specific and more private information than was available in the market

where there was a great deal of speculation and rumour about a possible takeover. He availed of this information by trading in

Pillsbury stock. Leisure D.J. held that the information obtained was material – there was a substantial likelihood that a reasonable

investor would view it as significantly altering the “total mix” of information available having regard to the probability that the event

would occur and the anticipated magnitude of the event relative to the totality of the company’s activity. The post-disclosure share

movement showed that the information in Falbo’s possession was not fully impounded in the share price. He accorded evidential value

to the post disclosure market in the shares. Damages were awarded on the disgorgement basis.

I am satisfied that these cases are not authority for the proposition that the court is precluded from looking at post-disclosure share

movement as having evidential value in relation to the materiality of the non-disclosed information unless there is parity of that

information and the information coming to the market at both relevant dates and the market conditions are the same. In assessing

the weight to be attributed to such share price movement clearly the court must have regard to any discrepancies between the non-

disclosed information and the information disclosed which affected the market. Again regard must be had to any differences in the

state of the market generally and the market for the particular share at the relevant dates. In the present case regard should be had

to the enthusiasm which existed at each of the relevant dates for dot.com shares. The share price movement on and after 20th

March 2000 taking into account any discrepancy between the non-disclosed information and the information actually disclosed and

any difference in the market for the particular share and the market generally on the date of the share sales and the date of

disclosure is of evidential value and ought to have been taken into account.

New information in the trading statement of 20th March 2000

The Stock Exchange announcement by the plaintiff on 20th March 2000 reads as follows:-

“Fresh Produce Trading

The trading environment in the early part of the current financial year has been difficult. In particular, market conditions

in the last two months of calendar 1999 were significantly below expectations. The usual recovery in the first months of

calendar 2000 has been slower than anticipated, particularly because of the continuing weakness of the euro against the

dollar. As a result, we expect that the performance for the first half of the year, on a like for like basis, will be below that

achieved during the same period last year. Present trading is slightly improved but, at this stage, it is too early to predict

whether the shortfall can be recovered in the second half.

Despite the exceptional market conditions so far this year, we remain confident about the future prospects of the fresh

produce sector and of the Fyffes business in particular. The group’s strategy remains the active pursuit of further

opportunities for consolidation in our industry.”

The learned trial judge correctly identified both similarities and differences between the information contained in this announcement

and the information contained in the November and December figures. In relation to November and December, in each case it was

made clear that market conditions were significantly below expectations. In the trading statement it was stated that the usual

recovery in January and February 2000 was slower than anticipated as a result of continuing weakness of the euro against the dollar.

In the December figures this much was clear in relation to January and the comments in relation to February were tempered by

negative comment about competition in the U.K. multiple market. The trading statement of 20th March 2000 contained information not

contained in the November and December figures in that it dealt with the first half of the financial year 2000 and by implication with

the months of February, March and April: on a like for like basis it was expected that performance for the half year would be below

that which was achieved in the first half of the prior year. The learned trial judge found, correctly, that a reasonable inference to be

drawn from the November and December figures was that there was a real risk that Fyffes’own expectations and analysts

expectations for the first half and the full year would not be met notwithstanding that they had nothing to say about the full financial

year 2000.

In these circumstances the court should have regard to the similarities and the differences and accord to the events of 20th March

2000 and days following evidential value in determining the effect which the undisclosed information would have had on the market if

it had been disclosed at the date of dealing.

In assessing its evidential value regard must, of course, be had to the totality of the additional information contained in the trading

statement. In addition to dealing with trading, on the same date Fyffes dealt with worldoffruit.com in an upbeat manner as follows –

“worldoffruit.com

worldoffruit.com, the internet market place for the global fresh produce industry, was launched in November 1999.

fuitXchange, its on-line trading system, and fruitAuction, its on-line produce auction, are both now operational. Almost

200 traders have been registered and volumes across the site are growing in line with the company’s business plan. Sales

offices have recently been opened in the United Kingdom. Spain, The Netherlands, France and Italy, and others are

planned for the U.S. in the near future. A new user-interface will be launched in early April and further value-adding

services are in development. It is expected that up to Eur. 20 million to be expended as incurred, will be invested during

2000 on further technical developments and marketing spend.

The group is working closely with its financial advisers to determine the optimal ownership and funding structures that will

maximise shareholder value from its traditional fresh produce business and from its new e-commerce division.

Euro 100 Million earmarked for new e-commerce Businesses

Our experience in creating and developing worldoffruit.com has generated new and valuable business skills within the

group, particularly in the area of business-to-business e-commerce. Fyffes intends to leverage these skills to develop this

new area of business. Several opportunities have been identified to replicate the worldoffruit.com concept by establishing

similar on-line trading platforms for other industries and these are being actively explored.

The group is willing to consider investing up to Eur. 100 million over the next two years in alliances and joint ventures with

key participants in other sectors for the purpose of development internet market places for their industries.”

In the present case it seems to me that it is also appropriate to have regard to this “up beat” information in determining the weight to

be given to the market reaction to the 20th March trading statement profit warning. This information contains a significant advance

on information previously available as to the progress of the dot.com element of the plaintiff’s business which element was the main

driving force of the advance in the plaintiff’s share price.

As to market conditions on the 20th March 2000 the learned trial judge concluded that these were different from those which

prevailed at the date of the share sales, the 3rd and 14th February. She held that this was due to a combination of profit taking, the

demand for Fyffes shares having been satiated by the sale of the DCC holding or an incipient disenchantment with internet stocks or

stocks with an internet component. These are elements to be taken into account in attributing evidential value to the events of 20th

March 2000. However she regarded as conclusive the evidence that the information in the trading statement of 20th March 2000

caused the decline on that date and immediately thereafter. That decline was not caused by any bursting of the intercom bubble.

The following it seems to me must follow from the learned trial judge’s findings. In the early part of 2000 there were two elements in

Fyffes business, the traditional or core business and the dot.com element. The driving force of the increase in Fyffes share price

which saw that price double was the dot.com element. The trading statement in relation to the dot.com element was upbeat and

positive. In relation to the core business it was distinctly negative. It is not too simplistic to conclude that the fall in share price on

the 20th March 2000 and days following was caused by the market’s reassessment of Fyffes core business in the light of the trading

statement. The profit warning replicated the information available to the Board as to trading in November and December 1999 and

expectations for January 2000. The forecast for February was certainly not optimistic. From the December figures it was quite clear

that there was a significant shortfall in November as against budget and the previous year, that there would be a further shortfall in

December and most likely in January and with some pessimism for February. Because the December figures quantified the shortfall, the

impact was much more dramatic than the significantly more bland narrative of the trading statement. I think it unlikely that any one in

possession of the December 1999 figures would be surprised by anything in the trading statement in respect of the first half year.

Again I think it likely that had the actual figures in the December trading report been generally available on 20th March, rather than

the more limited information contained in the trading statement, the effect on the market would have been even more dramatic. Had

the learned trial judge accorded evidential value to the events of 20th March and days following I think it inevitable that she would

have come to these conclusions having regard to her finding that the evidence is coercive, that the adverse share price reaction on

20th March 2000 was caused by the negative trading information contained in the March 2000 trading statement.

The learned trial judge’s conclusion

The learned trial judge’s conclusion was succinctly set out by her as follows –

“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 the 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. I think the answer to that question is that he would

not. I think he would conclude that it was too early in the financial year to make a judgment about the outcome for

Fyffes’ existing business in the first half. That conclusion is consistent with what Fyffes told the disgruntled shareholder in

the letter of 11th May 2000, which I have quoted earlier. But more importantly, I think he would have concluded that

prospects of a merger or a major acquisition and the potential of the wof.com venture, which were the main focus of the

interest of the market at the time, would off-set the impact of the current trading problems. In particular, the strength of

sentiment for Fyffes’ wof.com venture at the time, as evidenced by what was happening to the share price, was such

that he would have concluded that an adverse share price reaction was not likely. Moreover he had no reason to suppose

that Fyffes own expectations about future earnings had changed. On the contrary the announcements in relation to the

sale of Mr Ellis’s shares and the grant of options to Mr Halpenny suggested they had not, as did the fact that no

announcement had been made under the Listing Rules.

Accordingly, I hold that the plaintiff has not discharged the onus of proving that, at the dates of the share sales, Mr

Flavin by reason of his connection with Fyffes, was in possession of information which, if generally available, would have

been likely to materially affect the share price.”

I agree with the learned trial judge’s statement as to the key question but I would substitute for “the reasonable investor” the

“market”.

As to the impact which the information – authoritative and detailed and precise and which as regards provenance differed from the

general information about trading difficulties available in the market – would have had upon the market if it were generally available I

make the following observations. The information in the December figures was far more specific than that in the March 2000 trading

statement. It put figures to the problem and dramatic figures they are. Fyffes’ statement on 14th December 1993 told shareholders

that the Board believed that 2000 would be another year of further growth. It appeared from the December figures that in the first

quarter of the financial year 2000 it would sustain losses and not profits in line with budget or the previous year. On a simple

mathematical basis a great deal would have to be achieved if the previous year’s first half figures and full year figures were to be

realised and if the market’s expectations exemplified by analysts forecasts for the year were to be achieved.

There were two elements to Fyffes business, its core business and wof.com. As found by the learned trial judge the 20th March fall in

the share price was attributable to the information relating to the former. In respect of wof.com the 20th March 2000 statement

contained upbeat and positive information.

Finally as I understand the market, and indeed as appeared from the evidence, at the hearing it moves in anticipation. The share price

will move upwards in anticipation of good results and downwards in anticipation of poor results. The anticipation is fed not just by

information emanating from the company but by brokers and analysts’ opinions as to what the future holds. The wof.com venture is a

case in point: the information available to the market made it clear that a substantial investment was required but in due course

returns could be expected. Thus the dramatic increase in Fyffes’ share price was driven by anticipation of what would happen in the

future: should the expectation become reality it will already have been factored to a considerable extent into the share price.

Likewise anticipation of a future decline in earnings will drive down a share price and this indeed is what happened after 20th March

2000. This being the case had the market possessed the hard information in respect of November and December 1999 and the

forecast for January 1999, particularly having regard to the scale of the shortfall against budget and previous year’s earnings and the

market’s anticipation of a year of further growth, the share price would have been affected. Giving to the events following 20th March

2000 evidential value provides a reasonable guide to the nature of the market reaction which could be expected to this information. I

bear in mind that the 20th March 2000 statement while containing more up-to-date information is much less detailed and is devoid of

quantification of the extent to which the company’s own expectations have not been met. For these reasons I am satisfied that had

the December figures in particular been available on the dealing date, the 3rd February 2000, and the subsequent dealing dates the

share price would have been materially affected.

Finally the learned trial judge in looking at the information contained in the November and December figures in the context of the

information available in the market concluded that prospects for a merger or major acquisition and the potential of the wof.com

venture which was the main focus of the interest of the market at the time would off-set the impact of the current trading problems.

The evidence however is clear that there are two separate elements in Fyffes, its core business and the wof.com venture. The

increase in the share price in early 2000 was driven by the wof.com venture. It is thus possible to ascribe a value to each of the two

elements in Fyffes business and the expert witnesses had no difficulty in doing this. If adverse trading information becomes available

in respect of one aspect it is reasonable to attribute to that to a reduction in the market’s valuation of that aspect and indeed this is

what the learned trial judge did. It is clear from Fyffes accounts that the company was cash rich at the end of its trading years 1998

and 1999 having cash reserves of €116.6 million and €138.7 million in those years respectively. There was no positive change in this

position by 3rd February 2000. Arguably there was a negative change, in that the investment made and the investment yet to be

made in the wof.com venture was likely to reduce the cash reserves impacting on the possibility of mergers or acquisitions. An

alternative to reducing its cash reserves to invest in the Dot.Com venture was for Fyffes to obtain venture capital: then should that

venture be successful Fyffes’ share of the returns would be reduced as a proportion of the returns would inevitably go the venture

capital investor. I am satisfied in these circumstances that the possibility of mergers or acquisitions was in any event fully factored

into the share price at the relevant times. With regard to the wof.com venture its contribution to the share price was dealt with in

evidence. If that contribution was going to increase irrespective of the fortunes of the core business so that notwithstanding the

undisclosed information becoming available the share price remained constant, surely absent the disclosed information the share price

would have increased even further: if because of the disclosure the share price remained constant rather than increasing that is

affectation within the meaning of the section. The events of 20th March 2000 show that notwithstanding the dot.com enthusiasm a

lessening of expectations in relation to returns on the core business would adversely affect the share price.

Conclusion on the appeal

1. The “reasonable investor” concept is derived from the jurisprudence of the United States developed in relation to a

quite different statutory regime with differently worded provisions. It is of no assistance in applying the statutory test. As

shorthand for describing the test as objective it is unobjectionable. The statutory test is this: if available to the market

would the non-disclosed information be likely materially to affect the price of the shares.

2. The learned trial judge made clear findings of fact. However she rejected the post-disclosure events of 20th March

2000 and days following as having no evidential value. While expert evidence is of value, where, as here, there are serious

conflicts in the same, the court may have to rely on common sense. In this regard post-disclosure market events,

properly evaluated, constitute objective evidence. The greater the parity between the information coming into the market

in advance of those events and the non-disclosed information and the greater concurrence between market conditions at

the date of sale and the date of disclosure the more cogent and compelling that evidence will be. There is sufficient

concurrence between the information contained in the November and December figures and the trading statement of 20th

March 2000 to make the market reaction to the trading statement compelling evidence as to the manner in which the

market would react to the information contained in the November and December figures. The learned trial judge found

that the affectation of the share price was due to the disclosure contained in the trading statement. She was in error in

excluding entirely from her consideration the market events on 20th March 2000 and days following. Had she availed of

this evidence, having regard to her findings of fact. It is inevitable that she would have concluded that the non-disclosed

information in the possession of the defendants, if available to the market, would have affected the share price and to a

material extent: the actual affectation by the trading statement was of the order of 15% and the evidence was clear

that affectation of the order of 10% is material.

3. In these circumstances I would allow the appeal.

Fyffes v DCC & Ors