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Law for Business

Knowhow - guidance - precedents

27 NOV 2012

To Disclose or Not to Disclose : that is the Question

What do Reckitt Benckiser, Carphone Warehouse and National Express all have in common? No, not a new cleaning product for phones and buses, but a regulatory ticking off and adverse publicity over failures to disclose share pledges.

Listed companies are well aware of their market notification obligations where a shareholder acquires or disposes of certain levels of shares, but the more onerous notification obligations relating to directors and PDMRs (Persons Demonstrating Managerial Responsibility) appear to be less well known by some.

Reckitt Benckiser recently fell foul of these rules when it failed to notify the market that its Chief Executive, Rakesh Kapoor, used shares worth £7.4m (at 2012 prices) as collateral for a personal loan secured from Bank of America Merrill Lynch in 2010. This failure was compounded when further shares were added in instalments taking the total value of shares pledged to £8.7m (at 2012 prices). The regulations require that where shares are used as collateral for loans, the market and thus the Company's investors must be informed as soon as possible. It appears that Mr Kapoor notified Reckitt, but that Reckitt did not act on that notification. This breaches the FSA Model Code, part of the Listing Rules which govern listed companies and the Disclosure and Transparency Rules.

To add insult to injury, the internal Reckitt's review which highlighted this omission also brought to light a failure to notify the market of a sale of 200,000 shares in December 2008 (worth £7.3m at 2012 prices) by the then head of Latin American and Australasian business, Freddy Caspers, who was a PDMR and whose share dealings were also required to be disclosed.

Although Reckitt's failure to notify was embarrassing in the press coverage it attracted and the FSA is still considering what action to take, the failure by David Ross, who was a Director of Carphone Warehouse and National Express to disclose his dealings had more serious personal consequences. Mr Ross used £14.5m of shares as collateral against £100m of loans in 2008 but failed to make the necessary timely market announcements. This failure let to huge adverse publicity and ultimately to Mr Ross's resignation from the Boards of both companies. Following this, in 2009, the FSA clarified the position about disclosures and directors and PDMR's personal responsibilities - which makes it all the more embarrassing for Reckitt Benckiser to now have to come clean on its more recent disclosure failings.

Listed companies should therefore consider all actions relating to shares by shareholders, particularly those of directors and PDMR shareholders and in the spirit of transparency consider whether any market disclosure is necessary or desirable. Shareholders must also recognise their responsibility to notify the company of actions relating to shares in order to allow the company to make any appropriate disclosures and avoid both breach of regulation and adverse publicity.

Kate Anthony Wilkinson

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