Directors' Duties and Insider Dealing Around a Profit Warning
Corran plc is listed. On 3 March its finance director learns that a major customer has cancelled a contract worth 22% of forecast annual revenue. The CEO tells the board on 5 March that the information is 'probably not material yet'. On 8 March the CEO sells 40,000 of his own shares at the prevailing price. On 12 March the company issues a profit warning and the share price falls 18%. A non-executive director had raised concerns on 5 March but was outvoted. The company's articles require board approval for share dealings by directors, which was not obtained. Corran's shares are admitted to trading on a regulated market, and the market abuse regime applies to it.
1. Analyse the CEO's share sale against the market abuse regime and the directors' duties owed to the company.
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Market abuse / insider dealing: The cancelled contract is inside information: it is specific, not publicly known, and if made public would likely have a significant effect on the share price - 22% of forecast revenue is plainly significant, and the 18% price fall confirms this. The CEO possessed it from 5 March at the latest.
Selling shares while in possession of inside information is insider dealing (dealing on the basis of inside information). The 'probably not material yet' comment is not a defence: materiality is judged by the likely price effect, not by management's optimism. The sale on 8 March, four days before disclosure, is strongly suggestive of dealing on the basis of the information. The market abuse regime prohibits this and exposes the CEO to regulatory sanctions, and potentially to criminal liability for insider dealing.
Directors' duties:
- Duty to act within powers / follow the constitution: the articles require board approval for director dealings; the CEO bypassed this, breaching the company's constitution.
- Duty to promote the success of the company: selling ahead of a profit warning and exposing the company to regulatory investigation harms the company's reputation and its relationship with regulators and shareholders.
- Duty to avoid conflicts of interest: the CEO placed his personal interest in avoiding a loss ahead of the company's interest in orderly disclosure.
- Duty to exercise reasonable care, skill and diligence: the CEO failed to escalate the information promptly for a proper disclosure decision.
The non-executive director who raised concerns acted properly and should ensure the concerns are minuted; being outvoted does not make her liable, but she should consider escalating to the board or seeking external advice.
2. Explain the disclosure obligations Corran faced between 3 and 12 March and what governance failures the facts reveal.
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Disclosure obligation: As a listed issuer on a regulated market, Corran is subject to the obligation to disclose inside information to the market as soon as possible once it arises, unless a permitted delay applies. A permitted delay (for example, to protect legitimate interests while not misleading the market) requires that confidentiality is maintained, the information is not leaked, and the regulator is informed afterwards. Here, none of that is evidenced: the board debated materiality for seven days, then the CEO traded, which is the opposite of maintaining confidentiality.
Timeline problems:
- 3 March: information arises; disclosure assessment should begin immediately.
- 5 March: board is told but concludes 'not material yet' - an unsupported conclusion given the 22% revenue impact.
- 8 March: CEO trades - a leak of the information into the market in the most damaging way.
- 12 March: disclosure, four days after the trade and nine days after the information arose.
The delay is not justified, and the CEO's trade converts a possible technical breach into a serious one.
Governance failures:
- No disclosure committee or clear escalation route - the FD knew on 3 March but the board only acted on 5 March.
- Materiality judged by assertion, not analysis - no quantitative assessment was documented.
- Failure to enforce the share-dealing code - the articles required board approval and it was not sought; the company should have a closed period before results and a clearance procedure.
- Board dynamics - a non-executive's concerns were outvoted without recorded reasoning, weakening challenge and increasing the risk that the board's decision cannot be defended.
Remedies: immediate disclosure, an internal investigation, notification to the regulator, suspension of dealing clearance, and a review of the disclosure and share-dealing policies.