S.C. No: 144/06

IpsofactoJ.com: International Cases [2007] Part 9 Case 14 [SCIre]


SUPREME COURT OF IRELAND

Coram

Fyffes Plc

- vs -

DCC plc

Denham J

Geoghegan J

Fennelly J

Macken J

Finnegan J

27 JULY 2007


Judgment

Justice Denham

(with whom Geoghegan J concurs)

  1. In this case the High Court was required to consider and to decide upon many complex issues. The case was at hearing before the High Court for 87 days, and the judgment contains 368 pages. However, on this appeal there is a single issue, that of 'price-sensitivity', in the context of alleged insider dealing.

  2. Fyffes Plc, the plaintiff/appellant, and hereinafter referred to as 'Fyffes', has appealed from the judgment and orders of the High Court (Laffoy J.), in which claims made by Fyffes were dismissed, and in which it was ordered that Fyffes pay to the defendants the costs of the action (with a few exceptions). Fyffes is a public company, with shares listed on the Dublin and London Stock Exchange, and business in the fresh produce trade, especially bananas.

  3. DCC Plc, the first named defendant/respondent, is a public company limited by shares. Mr Flavin, the third named defendant/respondent, has been Chief Executive of this company since 1976, and is Deputy Chairman. The second named defendant/respondent and the fourth named defendant/respondent, S & L Investments Limited and Lotus Green Limited, are Irish registered companies and are part of the DCC Plc group of companies. The defendants/respondents will be referred to collectively as 'the defendants'. Mr Flavin was a director of S & L Investments Limited, but not a director of Lotus Green Limited. Mr Flavin was a director of Fyffes, until his resignation from 9th February, 2000.

  4. Fyffes brought proceedings against the defendants claiming insider dealing in its shares. The central issue to be determined is whether the learned trial judge erred in concluding that the information in the possession of Mr Flavin, relating to the business of Fyffes, on three dates in February, 2000, when Mr Flavin dealt in the shares of Fyffes, was not price-sensitive vis-à-vis those shares.

  5. Fyffes sought, inter alia, a declaratory order that certain share sales were unlawful dealings within the meaning of Part V of the Companies Act, 1990 (the Act of 1990), and an account pursuant to s.109(1)(b) of the Act of 1990. In the High Court the parties agreed that the Court should determine first, whether the share sales were in breach of s.108 of the Act of 1990; and, secondly, whether, in principle, liability to account arose.

    The High Court

    Statutory Claim

  6. The High Court held that Fyffes had not discharged the onus of proving that, on 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. The High Court held that the statutory claim failed because Fyffes had not established the price-sensitivity issue: Fyffes had not established that, if the information contained in the November and December 1999 Trading Reports was generally available on 3rd, 8th and 14th February, 2000, it would have been likely to materially affect Fyffe's share price.

  7. The High Court summarised the conclusions it reached on this aspect of the claim as follows:–

  8. Having regard to the manner in which I have construed the provisions of Part V of the Act of 1990, essentially the following three questions remain on the statutory claim:

    (1)

    Who dealt in the Share Sales and in what capacity?

    (2)

    Did Mr. Flavin have, by reason of his connection with Fyffes, price-sensitive information on the dates of the Share Sales?

    (3)

    What are the consequences of the answers to the first and second questions?

    I have answered the three questions as follows:

    (1)

    (a)

    Mr. Flavin dealt as agent of the DCC Group.

    (b)

    DCC and S&L dealt as principals, so they cannot rely on s.108(9).

    (c)

    Lotus Green dealt as principal.

    (2)

    Mr. Flavin was not in possession of price-sensitive information at the dates of the Share Sales.

    (3)

    Therefore, the dealing was not unlawful under s. 108 and no civil liability to account arises under s. 109. However, I have concluded that, if the dealing was unlawful so as to give rise to a liability to account under s. 109, it would have been proper to treat the three corporate defendants, DCC, S&L and Lotus Green, as a single entity for the purposes of accounting for the profit accruing from dealing under s. 109. That conclusion is redundant because I have found that the dealing was not unlawful.

    Non-Statutory Claim

  9. On the non-statutory claim the High Court found:–

  10. It is worth reiterating that the basis on which the liability to account in equity may be imposed for insider dealing is that the insider director, in breach of his fiduciary duty, has made use of information acquired by him in that capacity for his personal advantage. To establish liability to account in equity against an insider, a corporate plaintiff bears a much heavier burden than it bears in establishing liability to account under s. 109(1), in that it must establish that the profit it seeks to attach was the result of the exploitation by the insider of the confidential price-sensitive information in issue for his own benefit.

    In my view, in this case, the evidence is not open to the interpretation that Mr. Flavin used the information contained in the November and December Trading Reports which is alleged to have been confidential and price-sensitive, the negative information in relation to Fyffes' trading and earnings performance in the first quarter of financial year 2000, so as to enable the DCC Group to exit from Fyffes in manner which would avoid any share price impact which would ensue from the disclosure of that information. In my view, on the evidence, it is clear that what motivated Mr. Flavin in his involvement in the Share Sales and what motivated the almost total exit of the DCC Group from Fyffes in February, 2000 was the opportunity to make a substantial profit because of the increase of the share price on the back of wof.com. The plaintiff has not established any evidential nexus between the profit which the Share Sales generated for the DCC Group and the use by Mr. Flavin, or the use by any of the boards of the corporate defendants, of the confidential information contained in the November and December Trading Reports. On any view of the evidence, that information simply had no bearing on the Share Sales.

  11. The High Court concluded that Fyffes had failed to establish a breach of fiduciary duty on the part of Mr Flavin, and that Fyffes was neither entitled to an account in equity, nor to damages, nor to compensation at common law. No appeal was brought from this decision and so the matter is not before this Court.

    Submissions of Fyffes

  12. On this appeal it was submitted, on behalf of Fyffes, that the trial judge erred in three respects:–

    1. The trial judge failed to draw the correct inferences from a number of critical facts found by her and, in particular, found that the information the subject of these proceedings was not price-sensitive on the basis of conclusions that, properly viewed, did not bear on the price sensitivity of the information at all. Further, her conclusions were inconsistent with her earlier findings.

    2. The trial judge having identified what she stated was the kernel of the price sensitivity issue then failed to assess the information in the possession of Mr. Flavin by reference to that test. Instead she purported to develop a “reasonable investor” test, by reference to case law which did not support the test as formulated by her. In particular, instead of applying a reasonable investor test to determine the materiality of the information, a different test was posed and applied by the Court. This was a test based upon whether the reasonable investor (had he had the information in question at the relevant time) would have concluded that that information would probably impact on Fyffes share price to a substantial or significant degree. This question is significantly different from the question of whether a reasonable investor would have viewed the information as material, and finds no support in any of the authorities. Furthermore, she failed to apply properly the reasonable investor test. Finally, the reasonable investor test is not provided for by statute and is inconsistent with what the Court is required to do under the statute.

    3. The trial judge failed to pay any regard whatsoever to the actual impact upon Fyffes’ share price when the information in the possession of Mr. Flavin on the dates on which he dealt (or information substantially similar thereto) was ultimately released to the market on 20 March 2000. Furthermore, she disregarded the events of 20 March entirely and failed to attach any weight to them, not only in determining the impact upon Fyffes' share price of the information in Mr. Flavin’s possession, but also in determining the nature and speed of the market reaction to adverse trading news concerning Fyffes.

  13. Fyffes did not request this Court to disagree with any findings of primary fact made by the trial judge. However, it was submitted that in determining, on the basis of the facts found, that the information in question was not price-sensitive, the trial judge fell into fundamental error. This error arose in the tests applied, the decision to exclude certain evidence, and was reviewable on appeal.

    Submissions of the Defendants

  14. The defendants submitted that the judgment of the High Court was correct and should be upheld by this Court. It was submitted, inter alia, as follows:–

    1. The intuitive approach to price-sensitivity permeates the entire of Fyffes' submissions and is wholly wrong.

    2. DCC did not suggest that appreciation of the total mix of information means that the market already knew precisely how Fyffes was affected by difficult trading conditions in its core business. DCC recognised that the market did not know precisely how currency weakness affected Fyffes or precisely how weak banana prices affected Fyffes. However, DCC submitted that it is only with an appreciation of the total mix of information available in the market, and the market conditions prevailing at the relevant dates, that one can assess what weight would be attached by the market to the allegedly price-sensitive information. It was submitted that the learned Trial Judge accepted this and carried out her assessment on that basis. The fact that Fyffes’ submissions failed to identify the total mix of information available, and the wholly abnormal market conditions prevailing, and advanced the intuitive approach to price-sensitivity, demonstrated the extent to which Fyffes wished to avoid this simple but hugely important proposition.

    3. It was submitted that there is no escaping the enormous significance of the finding of fact that no director or executive of Fyffes ever entertained the possibility that the November and December Trading Reports contained price-sensitive information. That finding undermines totally the intuitive approach to price-sensitivity advanced by Fyffes both in the Court below and in this Court. It is a finding which prompted the learned Trial Judge to suggest that there was an inherent or fundamental incongruity in the claim advanced by Fyffes. It was submitted that she might have described that claim as opportunistic in the extreme.

    4. As to the submissions of Fyffes that inferences drawn were not consistent with the facts, it was submitted that the most striking feature of this aspect of Fyffes’ submissions was the continued reliance upon a very small portion of the facts as found by the learned Trial Judge for the purpose of suggesting that the reasons which led to her conclusions are unsound. The whole approach was consistent with the mistaken intuitive approach to price-sensitivity. It was submitted to be wrong because it ignored the total mix of information available to the market and the extraordinary market conditions prevailing at the time of the Share Sales.

    5. As to the issue of price-sensitivity, it was submitted that this section of Fyffes’ submissions is characterised by some very convoluted reasoning. and that it was also unfair to the learned Trial Judge. It was submitted that she was much more careful and sophisticated in her analysis of the price sensitivity test than Fyffes’ submissions suggest. The emphasis upon what Fyffes describe as “the reasonable investor test” is misplaced because it is not a test in itself and was never expressed as such by the learned Trial Judge, but rather was an approach employed to emphasise the objectivity of the analysis required.

    6. As to the issue of share price movement on or after 20th March, 2000 as a valid proxy, it was submitted that the test adopted by the learned Trial Judge for evaluating an alleged proxy event is the correct test, both in law and in logic. As a matter of fact in this case, there was neither parity of information nor parity of market conditions. That being so, the share price movement on or after 20 March 2000 is not a valid proxy for the application of the statutory hypothesis, and is evidentially irrelevant.

  15. In conclusion, it was submitted on behalf of the defendants, that at the end of a lengthy and complex hearing, the learned trial judge produced a judgment of enormous clarity, that her findings of fact are not in dispute, her statement of applicable legal principles is correct, the inferences which she drew are inescapable, and that her conclusion is right.

  16. In oral submissions, Mr Cush for the defendants submitted that:

    1. The principles stated by the learned trial judge, at p.231 of the judgment, were correct.

    2. The approach of the learned trial judge to the facts was correct.

    3. The judgment followed the principles established by the learned trial judge.

    4. The findings of what the market knew on the dates of the share sales were very important findings of fact.

    5. The findings as to the Trading Reports were findings initially viewing items on their own and as an arithmetical exercise. These findings concluded that the Trading Reports were potentially price-sensitive, but they must be seen as an arithmetical exercise.

    6. Counsel submitted that the learned trial judge made important findings of fact based on expert evidence. For example, her finding that worldoffruit.com could offset current trading problems was grounded on the evidence of Mr Lawrie, Mr O'Brien and Professor Taffler.

    7. Counsel referred to p.342 of the judgment where the learned trial judge stated that the key question was 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 of Fyffes' share price to a substantial or significant degree. She stated “I think the answer to that question is that he would not”. Counsel reviewed the three reasons given by the High Court and submitted that they should be affirmed.

  17. Counsel referred to the fact that the High Court had not given a fourth reason – the “fundamental incongruity” point. (This was evidence of the view taken by Fyffes' directors at the time of the sale). He assumed this was because a 'reasonable investor' would not have known of Fyffes' directors' views. However, counsel submitted that, the evidence of the views of Fyffes' directors at the time of the sale of the shares is very probative.

  18. Counsel submitted that it was a careful judgment and that this Court should not interfere with it. He submitted that it was not an appeal pursuant to the Hay v O'Grady [1992] 1 IR 210 principles. However, he submitted that if he was wrong Hay v O'Grady does not address what an appellate Court should do with findings of a trial Court based on expert testimony. He referred to Designer Guild Ltd v Russell Williams (Textiles) Ltd [2001] 1 All ER 700.

    Law

  19. These are not criminal proceedings. At issue is whether there was civil liability for unlawful dealing in shares.

    Companies Act, 1990

  20. The relevant Irish statute law is the Companies Act, 1990, referred to as 'the Act of 1990'. Part V of the Act of 1990 relates to insider dealing. Definitions are given in s.107, and these include:

  21. “dealing”, in relation to securities, means (whether as principal or agent) acquiring, disposing of, subscribing for or underwriting the securities, or making or offering to make, or inducing or attempting to induce a person to make or to offer to make, an agreement –

    (a)

    for or relating to acquiring, disposing of, subscribing for or underwriting the securities; or

    (b)

    the purpose or purported purpose of which is to secure a profit or gain to a person who acquires, disposes of, subscribes for or underwrites the securities or to any of the parties to the agreement in relation to the securities;

  22. As the learned trial judge pointed out, what constitutes 'dealing' for the purposes of Part V is primarily a question of the construction of this term in s.107.

  23. The word 'securities' is defined as:–

  24. (a)

    shares, debentures or other debt securities issued or proposed to be issued, whether in the State or otherwise, and for which dealing facilities are, or are to be, provided by a recognised stock exchange;

    (b)

    any right, option or obligation in respect of any such shares, debentures or other debt securities referred to in paragraph (a);

    (c)

    any right, option or obligation in respect of any index relating to any such shares, debentures or other debt securities referred to in paragraph (a); or

    (d)

    such interests as may be prescribed;

  25. The key section in issue in this case is s.108, which governs civil liability for unlawful dealings in securities by insiders. It states:–

  26. 108.

    (1)

    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.

  27. Section 109 of the Act of 1990 provides for civil liability for unlawful dealing, and for liability to compensate and to account. Section 110 makes provision for exempt transactions. Section 111 establishes an offence, stating that any person who deals in securities in a manner declared unlawful by s.108 shall be guilty of an offence. Section 114 provides for penalties for offences under this Part: on summary conviction to imprisonment for a term not exceeding 12 months or a fine not exceeding £1,000, or both; and on conviction on indictment, to imprisonment for a term not exceeding 10 years or to a fine not exceeding £200,000, or both.

  28. The Act of 1990 was passed by the Oireachtas to meet the State's obligations arising under Council Directive of 13 November, 1989.

    Council Directive of 13 November 1989

  29. Council Directive of 13 November 1989 was adopted to coordinate regulations on insider trading and is the Directive relevant to this case. The aspirations and objectives of the Council may be seen in the recitals. For example, reference is made to the necessity of having confidence in the market, to protection against improper use of inside information, to the fact that insider dealing is likely to undermine confidence in the market and thus prejudice the smooth operation of the market. The recitals point out that necessary measures should be taken to combat insider dealing. It was recited as being advisable to adopt coordinated rules at a Community level in this field, as such coordinated rules would make it possible to combat insider dealing more effectively. The objectives are clearly stated, as being to protect the market from insider dealing.

  30. “Inside information” was defined in Article 1 as:–

  31. 1.

    'inside information' shall mean information which has not been made public of a precise nature relating to one or several issuers of transferable securities or to one or several transferable securities, which, if it were made public, would be likely to have a significant effect on the price of the transferable security or securities in question;

  32. “Transferable securities” was defined as follows:'-

  33. 2.

    'transferable securities' shall mean:–

    (a)

    shares and debt securities, as well as securities equivalent to shares and debt securities;

    (b)

    contracts or rights to subscribe for, acquire or dispose of securities referred to in (a);

    (c)

    futures contracts, options and financial futures in respect of securities referred to in (a);

    (d)

    index contracts in respect of securities referred to in (a), when admitted to trading on a market which is regulated and upervised by authorities recognized by public bodies, operates regularly and is accessible directly or indirectly to the public.

  34. The Directive sets out prohibited behaviour:–

  35. Article 2

    1.

    Each Member State shall prohibit any person who:

    by virtue of his membership of the administrative, management or supervisory bodies of the issuer,

    by virtue of his holding in the capital of the issuer, or

    because he has access to such information by virtue of the exercise of his employment, profession or duties,

    possesses inside information from taking advantage of that information with full knowledge of the facts by acquiring or disposing of for his own account or for the account of a third party, either directly or indirectly, transferable securities of the issuer or issuers to which that information relates.

    ....

    Article 6

    Each Member State may adopt provisions more stringent than those laid down by this Directive or additional provisions, provided that such provisions are applied generally. In particular it may extend the scope of the prohibition laid down in Article 2 and impose on persons referred to in Article 4 the prohibitions laid down in Article 3.

    ....

    Article 13

    Each Member State shall determine the penalties to be applied for infringement of the measures taken pursuant to this Directive. The penalties shall be sufficient to promote compliance with those measures.

    Article 14

    1.

    Member States shall take the measures necessary to comply with this Directive before 1 June 1992. They shall forthwith inform the Commission thereof.

  36. It was agreed by the parties that the Directive should inform the proper construction of the Act of 1990, Part V, which was introduced in Ireland to comply with the Directive.

    Hay -vs- O'Grady

  37. Reference was made by the parties to Hay v O'Grady [1992] ILRM 689. Hay v O'Grady is an important precedent on the function and jurisdiction of this Court in relation to findings of fact in the High Court, the inferences drawn in the High Court, and inferences (including contrary inferences) which may be drawn by this Court as an appellate Court. However, I am satisfied that this case turns on the construction and interpretation of statute law and the application of legal principles, and that Hay v O'Grady principles are not at the heart of the decision.

    Relevant Matters

  38. There are matters in this case which are relevant to any consideration of the terms of s.108 of the Act of 1990. Section 108(i) provides that “[i]t shall not be lawful for a person, who is connected with a company to deal in securities of that company, if by reason of his being so 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.”

    Person

  39. The person in issue is James Flavin, the third named defendant. Following on the findings of fact of the High Court, there is no issue on this matter.

    Connected

  40. Similarly, no issue arises on this factor. Mr Flavin was connected to Fyffes, he was a director of Fyffes until his resignation from 9th February, 2000. In such capacity he received information in the November and December 1999 Trading Reports.

    Dealt

  41. The High Court has held that Mr Flavin dealt in the shares on the three relevant dates in February, 2000. There was no appeal from that finding of fact and law.

    Securities

  42. The DCC Plc Group's shareholding in Fyffes dated from January, 1981, when it acquired a 9.46% stake in the company. On foot of that acquisition Mr Flavin joined the board as a non-executive director. Through the 1980s DCC Plc and S & L Investments Limited made additional investments in Fyffes, as a consequence of which the DCC Plc Group's stake increased to approximately 10.5%. Following the flotation of DCC Plc in May, 1994, its strategy from 1995 or 1996 was to exit from Fyffes when a suitable opportunity arose. The learned trial judge found that, with a view to mitigating its tax liability, in particular liability from capital gains tax on a future disposal of the shares, in August 1995 DCC Plc and S & L Investments Limited agreed to sell their shares in Fyffes to Lotus Green Limited. The agreed purchase price was paid by Lotus Green but legal title was not transferred, so DCC Plc and S & L Investments remained the registered owners of the shares. The High Court found that there was an accretion to the holdings in March 1998 through the medium of a scrip dividend and the new shares allocated then were registered in the names of DCC Plc and S & L Investments. There was no change thereafter to the ownership of the holding which contained both ordinary and preference shares, until February 2000 when all the ordinary shares were sold.

  43. The shares were approximately 10.5% of the issued share capital in Fyffes when they were disposed of on the 3rd, 8th and 14th February, 2000, for a sum in excess of €106 million. This gave a substantial profit to the DCC Plc Group. The prices obtained for the shares varied according to the dates, but were €3.20, €3.60 and €3.90, being an average price of €3.42.

  44. However, after the 20th March, 2000 Announcement, when the markets closed, the share price was €2.70 per share, and on 21st March, 2000 the share price was €2.46 per share.

    Information

  45. When Mr Flavin traded in the shares on the three dates in February, 2000, he had received in his capacity as non-executive director, the internal Trading Reports of Fyffes of November, 1999 and December, 1999. The December 1999 Trading Report was circulated to Board Members of Fyffes on 25th January, 2000. The November 1999 Trading Report had been circulated on 6th January, 2000. These Reports contain the information which Fyffes submitted was price-sensitive. This information is at the core of the case.

  46. In a nutshell, the issue on this appeal is whether the information which Mr Flavin had from the November and December 1999 Trading Reports was price-sensitive. Therefore it is necessary to consider that information carefully, and the information generally available in the market.

  47. The High Court pointed out that up to the year 2000 Fyffes' financial year extended from 1st November to 31st October in the next year. On 1st November, 1999 Fyffes announced the launch of wof.com. This was enthusiastically greeted on the market and it drove the share price. It reflected the sentiment in the market. Fyffes reported its preliminary results for the financial year ended 31st October, 1999 on 14th December, 1999 (the Preliminary Announcement). Fyffes reported that profit before tax had increased over the previous financial year by 5.1% to €82.9 million. It also reported that while turnover had decreased marginally, the total operating profit was €80 million, up 3.8%. In the outlook section it recorded that the Board believed that 2000 would be “another year of further growth for Fyffes”. These documents gave information to the market as to Fyffes' expectations for 2000. The information was positive for growth and increased dividends.

  48. Between Board meetings, the Board Members of Fyffes were sent monthly management accounts, accompanied by some narrative commentary. The management accounts for November 1999, referred to as 'the November 1999 Trading Report' was circulated to Board Members on 6th January, 2000. This was the first of the two documents which Fyffes submitted contained price-sensitive information. The December 1999 Trading Report was circulated to Board Members on 25th January, 2000. As this is the information which is submitted by Fyffes to be price-sensitive, I set it out in detail.

    The Trading Report

  49. The November 1999 Trading Report stated:–

  50. FYFFES PLC – MANAGEMENT ACCOUNTS – NOVEMBER 1999

    Sales of €122.0 million are €10.1 million below budget and €1.7 million lower than last year.

    Losses of €2.6 million are €2.3 million worse than budget, and €4.1 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 to 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, low market value for licence, and the weaker exchange rate of the Euro vis-à-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 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.

  51. The December 1999 Trading Report was as follows:–

  52. FYFFES PLC SUMMARY TRADING REPORT – DECEMBER 1999

    Sales:

    Total sales of €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 of €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 / Loss

    Budget

    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

    -

    Group Exps

    (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

    (The brackets, which indicate loss not profit, were omitted around the figures 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 a 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 to 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 competitors 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 be restructured, was improved on last year which suffered from unusual losses on Florida grapefruit. Results were lower in Denmark and in Greece and Anaco, due to weaker banana pricing.

    Produce:

    Ireland enjoyed its best trading for some time with 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 loses 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 has not 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 weaker UK banana pricing.

    The High Court Judgment on the information

  53. The High Court described the information in the November and December 1999 Trading Reports, inter alia, at p.254, and found as a fact, as follows:–

  54. The information contained in the November and December Trading Reports was unquestionably bad news about Fyffes’ trading and earnings performance in the first quarter. Taken on their own, a reasonable inference could be drawn from the figures that there was a real risk that Fyffes’ own expectations and analysts’ expectations for the first half and for the full year would not be met. It is true that the market did not know what Fyffes’ expectations for the first half were, although it did know what was achieved in the first half of the previous year. Nonetheless, given the size of the loss in the first quarter against the modest budget for that quarter, that there was a risk was a reasonable deduction.

    [emphasis added]

  55. The High Court described the Trading Reports, at various stages in the judgment, as detailed, precise, authoritative, and confidential and not generally available. The Court stated, as quoted above, 'that there was a risk was a reasonable deduction'. On the question as to whether, if the information had been publicly available at the date of the sale of the shares, it would have altered investors' expectations of Fyffes' future earnings and cash flow, the High Court held, at p.340:–

  56. Although there was some controversy on this point, on the evidence, I consider that investors would have been concerned about the outcome, not only for Fyffes’ full financial year, but also the outcome for the first half.

    [emphasis added]

  57. The High Court described an arithmetical approach and stated, inter alia, at p.255:–

  58. The absence of interpretation or a narrative explanation from management did not hinder the arithmetical exercise which enabled deductions to be made in relation to the likely adverse impact of the first quarter results on the half year or the full year and, to that extent, was immaterial. That the fresh produce business, including the banana business, was, and was known in the market to be, seasonal with the first quarter being the least profitable quarter, was also immaterial, to the extent that seasonality was factored into the prior year figures and the budget figures contained in the documents and was also built into analysts’ forecasts. The plaintiff suggested that a reader of the information would discern a worsening negative trend.

    The figures in the above table for variances from prior year and budget bear this out, in that they were getting larger in absolute terms, but whether this should be regarded of any significance, in my view, is doubtful. In general, the narrative gave very little inkling that matters would improve, except the statement that the European market had improved quickly in January with prices at budget level going into February. Conversely, there was nothing in the narrative to indicate that matters were getting worse.

    On the basis of the foregoing, the court was invited to conclude that intuitively the information appeared on its face to price-sensitive. The statutory test does not warrant drawing any conclusion in relation to the information contained in the trading reports standing alone. The furthest the court can go is that the information was of a type and quality that was potentially price-sensitive. Whether it was or was not, falls to be judged by applying the principles which I have adumbrated earlier.

  59. The High Court further stated, at p.340:–

  60. In applying the statutory hypothesis, having regard to the expert opinion, the basic premise is that share price movements reflect changes in investors' expectations in relation to a company's future earnings and cash flows. So the kernel of the price-sensitivity issue here is whether, had it been available on the dates of the Share Sales, the information contained in the November and December Trading Reports would have altered investors’ expectations about Fyffes’ future earnings and cash flows. Although there was some controversy on this point, on the evidence, I consider that investors would have been concerned about the outcome, not only for Fyffes’ full financial year, but also the outcome for the first half.

    In summary, the information contained in the November and December Trading Reports pertinent to Fyffes’ future earnings and cash flow was that, leaving Capespan out of the picture, Fyffes had incurred losses of €2.6m in the first quarter of financial year 2000, leaving it €13.7m behind its actual performance in the corresponding period in the previous financial year and €7.5m behind its own budget. As stated previously, a simple deduction from the figures is that Fyffes’ earnings for the remaining three quarters would have to be up €2.6m on its earnings for the whole of the previous year and simple arithmetic quantified that at €85.5m. The reasons given for the poor performance were weak banana prices in the U.K. market and competition in the multiple sector of that market, weak banana prices and oversupply in European markets, and the weakness of the euro against the dollar. The only information in relation to Fyffes’ expectations beyond the first quarter was that the European market was improving, whereas the weakness in the U.K. market was continuing.

    Findings of fact on the information

  61. The High Court made findings of fact in relation to the information in the November and December 1999 Trading Reports. These included the following:–

    1. The information in the November and December 1999 Trading Reports was bad news about Fyffes' trading and earnings performance in the first quarter.

    2. Taken on their own, a reasonable inference could be drawn from the figures that there was a real risk that Fyffes' expectations and analysts' expectations for the first half of the year and the full year would not be met.

    3. Given the size of the loss of the first quarter against the modest budget for the quarter, that there was risk was a reasonable deduction.

    4. The November and December 1999 Trading reports were detailed, precise, authoritative, confidential, and not generally available.

    5. Investors would have been concerned about the outcome, not only for Fyffes' full financial year, but also for the outcome of the first half.

    6. The information in the November and December 1999 Trading Reports was of a type and quality that was potentially price-sensitive.

    Deducible

  62. The findings of fact by the High Court were made from the November and December 1999 Trading Reports, which documents which were before this Court. I am satisfied that the findings of fact on those reports, as stated by the High Court, are deducible from the Reports themselves. The documents disclose loss by Fyffes, bad news about Fyffes, a real risk that Fyffes' expectations for the year would not be met. It was information which was potentially price-sensitive. All of these facts are deducible from the Trading Reports on their face.

    Cross Roads

  63. Having made findings of fact the High Court proceeded to enunciate and apply legal principles. I am satisfied that this is the cross-roads of the judgment. The basic facts as found by the High Court are not in dispute. In issue are the legal principles and the application of those principles. I am satisfied that the High Court fell into error in the identification and application of legal principles.

    Reasonable Investor

  64. The High Court used a legal principle referred to as 'the reasonable investor'. The learned High Court judge analysed, at p.342 whether, as a matter probability, on the 3rd February, 2000, the reasonable investor would conclude the information would impact on Fyffes' share price. It was held:–

  65. 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. 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 for 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 offset the impact of the current trading problems. In particular, the strength of the 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 [Fyffes] has not discharged the onus of proving that, at the dates of the share sales, Mr Flavin, by reasons of his connection with Fyffes, was in possession of information which, if generally available, would have been likely to materially affect the share price.

  66. I am satisfied that the learned trial judge erred in the principles identified and stated in the High Court judgment at pages 230-232. The High Court stated, on foot of the said principles, that the test to be applied, was, at p.232:–

  67. In applying the foregoing principles in the context of the factual matrix of these proceedings, the hypothetical test is whether on 3rd February, 2000, 8th February, 2000 and 14th February, 2000, had it been available to him, the information contained in the November and December Trading Reports, viewed by him against the “total mix” of information about Fyffes’ trading and earnings available on those dates, would have impacted on the judgment of the reasonable investor in relation to an investment decision about Fyffes’ shares to the extent that he would have concluded that the information probably would have a substantial effect on Fyffes’ shares.

    The learned trial judge profiled 'the reasonable investor' at p. 233:–

    It seems to me that, if the concept of the reasonable investor is to be meaningful in assessing objectively whether the availability of the November and December Trading Reports was likely to materially affect the Fyffes share price, it must represent the type of investor who was typically found in the market at the time. If that investor, on the evidence, was one who was anxious to own internet stocks or stocks with an internet element, the likely consequences of such predilection are a relevant factor.

  68. Thus the High Court, and counsel, referred to, and used the approach of 'the reasonable investor'. I do not find this to be an appropriate or useful legal tool. There is no reference to the 'reasonable investor' in s.108(i), or indeed anywhere in the Act of 1990. Nor may it be implied from the Council Directive. It is a method of interpretation which removes the analysis required one step from the law as stated. It creates a system where the law is being looked at through the eyes of a notional person and it renders the situation opaque. It is not a legal principle appropriate to the section. Indeed, as it is not expressly or impliedly in the section there would be a danger of legislating on the issue if this test were applied. In addition, there are a myriad of factors and investors in a market, and to choose some or either as representative of a reasonable investor appears subjective and arbitrary. The issue is the effect on the share price in the market of the information if the information were generally available.

    Offset

  69. For the reasons given, I am satisfied that the reasonable investor test does not apply, nor is 'the reasonable investor' an appropriate approach in construing s.108(1) of the Act of 1990.

  70. However, even if the reasonable investor test were to be accepted for the purpose of legal argument, which I do not consider to be the appropriate test, I find that there was a further erroneous approach by the learned trial judge. The High Court concluded that the information was not price-sensitive on a number of grounds.

  71. 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. I think the answer to that question is that he would not.

  72. The learned trial judge arrived at the conclusion that the information was not price-sensitive on a number of stated grounds.

  73. I am satisfied that it was erroneous to 'offset' the information against certain factors. Further, even if the factors were 'offset' they would not negate the price-sensitivity of the information.

  74. There were several factors referred to by the High Court.

  75. The legal principle of 'offset', applied by the learned trial judge, to determine what the reasonable investor would have concluded of the market, and then used to determine share price and price-sensitivity, is not in the statute, and there is no legal authority for it in this jurisdiction. Nor is it in the Council Directive.

  76. Rather than take such a circuitous route, the appropriate approach is for the Court to consider whether the information would be likely to affect the price of the shares on the market. There is no reason in law to view the market through the prism of a 'reasonable investor'. Quite apart from the fact that the use of such an approach requires viewing the market through the notional eyes of a 'reasonable investor', it raises the query of what factors would such a reasonable investor apply. The learned trial judge referred to four factors, as set out above, but this is an arbitrary choice. There are myriad of factors at play in a market. Experts analyse and differ each day. I am satisfied that the High Court erred in choosing factors and then applying them to 'offset' the information in the Trading Reports. The information disclosed a risk, and bad news for Fyffes, and this was not altered by making it generally available to the market. Other information, including the 'offsets' was already in the public domain.

    Common Sense

  77. Throughout the High Court judgment there was reference to an “intuitive” approach to the information. The learned trial judge referred to the Court being invited to conclude “that intuitively the information appeared on its face to be price-sensitive”. However, this was dismissed, and the High Court stated that the statutory test does not warrant drawing any conclusion in relation to the information contained in the Trading Reports standing alone. I am satisfied that this is an erroneous approach.

    Arithmetic Exercise

  78. It was submitted by the defendants that the initial findings by the High Court in the judgment, which were negative to the defendants' case, were made as a purely arithmetic exercise and that as such were superseded by the subsequent findings of the High Court. I am satisfied that is not a correct analysis, either by the High Court or by counsel. The findings as to the bad news, risk, etc, in the two Trading Reports, are at the core of the case. What has to be determined is whether this information, if generally available, would be likely to affect the price of Fyffes' shares. Having made these findings of fact the High Court then considered legal principles. The findings of fact should not be excluded or diminished by legal principles.

    International Jurisprudence

  79. The learned trial judge and this Court were invited to consider jurisprudence from around the world, on insider dealing. I find this to be of little or no value to the analysis of Irish law on this issue. The facts of the cases opened were readily distinguishable from the facts of this case. More importantly, the cases referred to related to decisions on specific statutory and regulatory laws which laws are not the law in this State, nor are the foundation for Irish law.

  80. What is of assistance is Council Directive of 13 November 1989. The Directive assists the identifying of the objective of the statute. The Council Directive in this case makes it clear that the objective is to protect the market from insider dealing. However, the words of s.108)i) of the Act of 1990 are clear and plain, are not ambiguous, and so it is not necessary to go to the Directive to apply a purposive approach to the interpretation of the Irish law.

  81. The words of s.108(1) are clear and plain, and it is not necessary to go further than the words of the Act in construing the section. Consequently, I do not require assistance from decisions of other jurisdictions on the construction of s.108(1). I respectfully disagree with legal principles enunciated by the High Court, which follow upon the analysis of law from outside Ireland and the European Union.

  82. Specifically, I find no assistance from the cases of the United States relating to the term “material information”, the subjective approach, and the reasonable investor test. I respectfully disagree with the adoption by the learned trial judge of a test grown upon such cases. Irish statute law is different to that of the United States.

    Likely Materially

  83. Section 108 of the Act of 1990 provides that it shall not be lawful for a person who is connected with a company to deal in any securities of that company if by reason of his connection with the company he is in possession of information that is not generally available and which is 'likely materially' to affect the price of those securities.

  84. The test is objective. Thus, the subjective view of Mr Flavin is not the test. Nor is the subjective view of the company directors: (I shall return to the issue of the directors' view when considering what was referred to as the 'fundamental incongruity').

  85. The information falls to be considered as if it had been generally available to the market on the days of the share sales. The test to be applied is objective, as to whether the information was likely materially to affect the price of the shares. The test is not whether a reasonable investor, if he had the information, would have concluded that the information would probably impact on the price of Fyffes' shares to a substantial or significant degree. I respectfully disagree with the approach of the High Court.

  86. The word “likely” is defined in the Oxford Dictionary as 'probable', 'such as well might happen ....', 'to be reasonably expected'. It is a word in common usage and meaning and is not a term of art. It envisages a situation which would probably arise.

  87. The word 'materially' is also not defined in the Act of 1990. It is a word in common usage, not dissimilar to 'significantly'. Thus the phrase 'likely materially', refers to a situation where information would probably significantly affect the price of shares, if it were generally available. I agree with the analysis of Fennelly J., built on the decision in Case 14/83 Von Colson and Kamarn [1984] ECR 1891, and his conclusion, that s.108 must be interpreted in the light of the Directive, and that the expression 'likely materially to affect those securities' must have the same meaning as 'likely to have a significant effect on the price of securities' in the Directive.

  88. Thus the nature of the information in the November and December 1999 Trading Reports has to be considered and its likely effect on the share price analysed. It is for the Court to determine whether the information is likely materially to affect the price of the shares.

  89. The facts found of this information have been set out earlier in the judgment. They are findings of bad news.

  90. Apart from applying a common sense approach to a warning as to profits, it is useful if a comparator is identified and the effect on share prices, of similar information being released on the market, considered. In this case in issue was whether the 20th March Announcement could be admitted in evidence, and the immediate reaction of the market to that Announcement which was a significant drop in the share price.

    20h March Announcement

  91. The learned High Court judge excluded Fyffes' 20th March Announcement from having any evidential value. I am satisfied that this was an erroneous ruling.

  92. On 20th March, 2000 Fyffes gave a profit warning. This was described by the High Court, at p.14-15 of the judgment, as:–

  93. Fyffes’ Annual General Meeting was held on 20th March, 2000. On that day the chairman made a statement at the AGM and Fyffes issued a stock exchange announcement which was, in effect, a profit warning which, adopting the terminology used by counsel for the plaintiff, which I will refer to as the March 2000 Trading Statement. It was headed “Fresh produce trading” and stated as follows:

    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 month 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.

  94. This 20th March Announcement had an immediate effect on the share price. The trajectory of the share price was described by the High Court, at p.16 of the judgment:–

  95. Following the Preliminary Announcement on 14th December, 1999, Fyffes’ share price was on a upward trajectory for about two months, peaking on 18th February, 2000, when it closed at €3.98. Thereafter it fell back. It closed on the London Stock Exchange at €3.16 on 17th March. The Irish Stock Exchange was closed on that day. Following the profit warning in the March 2000 Trading Statement it closed on 20th March at €2.70. By the end of March it was at €2.20 and by the end of April it had fallen to €1.85.

  96. Evidence of a comparator does not require parity of information and market. The degree of similarity of the information in the Trading Reports and the 20th March Announcement requires to be analysed, as do the relevant markets, and the consequences to the share price of the comparative information becoming generally available. According to the degree of similarity of the information in the Trading Reports and the comparator, and in the markets, the weight to be accorded to the comparator may be determined.

  97. How does the information in the 20th March Announcement compare to that in the November and December Reports? The November and December 1999 Trading Reports referred to sales of €122 million being €10.1 million below budget and €1.7 million lower than the previous year, losses of €2.6 million being €2.3 million worse than budget, and €4.1 million worse than the previous year, due primarily to weaker banana prices. The loss for the month (November Trading Report) was €2.7 million compared to a budget profit of €1.2 million, and the previous year's profit of €2.8 million, due to weaker banana prices, European markets, and weaker exchange rate for US dollar. In December it was reported that total sales of €149 million were €11.3 million lower than budget due to non consolidation of Capespan and €6.1 million lower than the previous year due to lower UK produce throughput and the disposal of Swithenbanks. The analysis indicated a loss. As to January 2000, the forecast was for a profit of €1.3 million compared to a budget of €5 million and €6.3 million in the previous year. The shortfall was explained as being mainly due to weaker UK banana pricing. The 20th March 2000 Announcement referred to “trading environment .... difficult ...., market conditions .... below expectations .... recovery slower than anticipated ...., performance for first half of the year .... will be below that achieved last year.” I am satisfied that the information in the 20th March Announcement was significantly similar to the information in the Trading Reports of November and December 1999. This was illustrated by a useful table given in Fyffes' submissions identifying the similarities as follows:–

    December 1999 – Management Accounts Circulated to the Board on 25 January 2000

    Stock Exchange Announcement –20 March 2000

    (In relation to the performance of the banana division) “December showed very little improvement in market prices or sentiment with a multiple price war affecting an already oversupplied market. The UK result was very disappointing even after the diversion of food to Europe. Urgent contract renegotiations 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 UK market continues to be affected by competitors seeking to increase their multiple market share .... the short fall (in the January forecast against budget) is mainly due to weaker UK banana pricing.”

    “The trading environment in the early part of the current financial year has been difficult.”

    (For November / December 1999 there was a loss of €4 million which was €3.7 million worse than budget and €8.9 million worse than last year.) “Current forecast (for January 2000) is for a profit of €1.3 million compared to a budget of €5 million and €6.3 million last year.”

    “.... market conditions in the last two months of calendar 1999 were significantly below expectations. The usual recovery in the first month of calendar 2000 has been slower than anticipated ....”

    (By inference) At the end of the first three months, we expect the company to be €13.9 million behind the prior year, €7.4 million behind budget and to have incurred a loss of €2.7 million.

    “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 short fall 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 strategy remains active pursuit of further opportunities for consolidation in our industry.”

  98. The High Court excluded any reference to this announcement of 20 March, 2000. This was considered and described as not a 'valid proxy' in the judgment. The issue was analysed, from p.333 to p.338.

  99. The learned High Court judge stated:

  100. As I have indicated previously, I am satisfied, on the evidence, that it was the March 2000 Trading Statement, which was released by Fyffes on 20th March, 2000, the date of Fyffes’ AGM, that precipitated the adverse share price movement on that day and the following day and that the information released contemporaneously in relation to wof.com had no bearing on the share price movement.

    Earlier in this judgment, in considering the legal principles applicable to the price-sensitivity issue, I accepted as correct in principle the submission made by the defendants’ counsel that a post-market event is only of evidential value for the purpose of resolving the statutory hypothesis if two factors are present: that there is parity of information between the alleged price-sensitive information and the information which precipitated the putative proxy share price effect; and that the market conditions were the same on the date the hypothesis is being applied and the date of the putative proxy event.

  101. Having analysed the situation from those parameters the learned High Court judge held:–

  102. In the light of the foregoing, I have come to the conclusion that what happened on and after 20th March, 2000 is not a matter which is evidential value in applying the hypothesis posited in s.108(1).

  103. I am satisfied that the High Court erred. For the purpose of this analysis I will refer to the two factors raised by the High Court. I am satisfied that there are significant similarities between these documents, between the information contained in the November and December 1999 Trading Reports and the Announcement of 20th March, 2000. The Trading Reports indicated that there was bad news about Fyffes' tradings and earnings performance. The March, 2000 Announcement was a profit warning. All the documents came from Fyffes. The market on each of the relevant dates requires to be considered. It is the market as a whole which has to be considered, and the effect on the market of the information becoming generally available. I am satisfied that there were no significant differences between the market in February, 2000 and March, 2000. However, any differences which existed would affect the weight to be given to the evidence, but would not exclude the evidence.

  104. The Announcement of 20th March, 2000 being relevant, even if it is not given a heavy weighting, alters the balance of the evidence. It illustrates the effect on the share price of the release of information very similar to that in the November and December 1999 Trading Reports. This effect was very negative as, after the March 20th Announcement, the share price dropped.

  105. The 20th March Announcement also assists the issue of materiality. As the information in the 20th March, 2000 Announcement 'materially' affected the price of the shares, it follows that the information was price-sensitive. Therefore, similar information (in the November and December 1999 Trading Reports) was also price-sensitive.

  106. In the circumstances of this case the 20th March, 2000 Announcement was relevant evidence to the consideration of whether or not the information in the November and December 1999 Trading Reports was price-sensitive, and should not have been excluded. Other factors do not alter the fact that the information was price-sensitive.

  107. Further, the immediate effect on the share price of the bad news in the 20th March, 2000 Announcement as to the core business of Fyffes, showed that wof.com did not dominate the share price to the exclusion of the core business. This confirmed that whereas wof.com may have driven the shares, the core business was still critical to the share price.

    Conduct of Fyffes' Directors

  108. The defendants relied upon evidence before the High Court that at the time of the sale of the shares the Directors of Fyffes did not regard the information as price-sensitive. However, I am satisfied that this has no relevance to the issue before the Court. On this appeal the query is whether the information in the November and December 1999 Trading Reports was price-sensitive. The fact that evidence indicated that no director of Fyffes considered the possibility that the November and December 1999 Trading Accounts contained price-sensitive information is not relevant to the issues arising on s.108(1) of the Act of 1990.

  109. The test to be applied is objective, not the subjective views of the Directors. Nor, specifically, the subjective view of Mr Flavin. This law protects the market with an objective test.

  110. The High Court found that the reasonable investor might have regard to the absence of action by the company and to the decisions made in relation to Mr Ellis and Mr Halpenny. But that is not determinative. They may have been factors in the market but they did not alter the effect on the market of the information in the Trading Reports. While the issue of estoppel was raised, it was not pursued.

  111. This is not a case where Fyffes sold shares on the dates in issue. Thus no evidence is available as to any view it had as to price-sensitivity on those dates. Fyffes' directors were addressing different issues at that time, related to internal matters, such as the negative effect on shares of a profit warning, and regulatory issues. These considerations were not the analysis necessary to determine whether information was price-sensitive. The High Court erred in failing to have regard to this difference, and to the fact that it is possible to have price-sensitive information in advance of an announcement. Indeed, it seems reasonable that there is of necessity a time lag between obtaining price-sensitive information and the taking of the appropriate regulatory steps for the market. However, in any such situation there should be an abundance of caution in dealing in the shares of the company.

    Fundamental Incongruity

  112. The term 'fundamental incongruity' was developed during the hearing of the case in the High Court to refer to the submitted difference in the position of the directors of Fyffes in February, 2000 (when they did not appear to regard the information as price-sensitive) and their later action is bringing these proceedings which seeks an order declaring that the information was price-sensitive.

  113. This matter concerned the learned trial judge, although she made no actual findings. She stated:–

  114. That outcome on the price-sensitivity issue obviates the necessity to confront the fundamental incongruity in the plaintiff’s position, which I have highlighted earlier. However, it is difficult to see how a statute outlawing, and providing a remedy for, insider dealing could accommodate such a fundamental incongruity. That it could, would seem to be at variance with fairness and justice.

  115. However, the test is objective. The subjective views of the directors is not the issue. Section 108(1) protects the market. The object of the law, as described in the recitals to the Council Directive, is to protect the market from insider dealing. Fyffes' directors' view is irrelevant. The company is regulated by other rules. In fact at the time the directors were concerned with different issues – relating to Rule 9 and whether consents were necessary.

    Test

  116. The test, as set out clearly in s.108(1), is an objective test. Was there information? Was it generally available? If it was made generally available, would it be likely to materially affect the price of the shares on the market? The answer is equally clear. There was information. It was not generally available. It was bad news, it was information of a risk, it would concern the market. It was information likely to affect the price of the shares on the market. In considering the information it is not appropriate to offset that with information already in the market. The use of comparators is helpful. In this case there was a comparator in the 20th March, 2000 Announcement, which contained similar information. The 20th March Announcement, being a useful comparator, illustrated the effect on the market of similar information – which was price-sensitive, there was a significant drop in the share price.

    Conclusion

  117. In conclusion, this is an appeal by Fyffes from a decision of the High Court. The High Court held that information which Mr Flavin had, as a Director of Fyffes, on the 3rd, 8th and 14th February, 2000, when he dealt in Fyffes' shares, was not price-sensitive, and consequently that he had not dealt illegally in the shares. On this appeal Fyffes submitted that the information was price sensitive and that the High Court had erred.

  118. The relevant Irish law governing the appeal is s.108(i), Companies Act, 1990, which may be interpreted by reference to Council Directive of 13 November, 1989, which was adopted to coordinate regulations on insider trading to protect the market.

  119. There was no appeal from the primary findings of fact of the High Court. These facts are the basis for this decision and include the following. Mr Flavin was the person in issue, he was connected to Fyffes being a director of that company, he dealt in the shares on the 3rd, 8th and 14th February, 2000, when he had the information contained in the November and December, 1999 Trading Reports; which information was not generally available.

  120. The core issue on the appeal is whether the information in the November and December 1999 Trading Reports was price-sensitive. The nature of the information has been analysed in this judgment.

  121. The High Court found that the information contained in the Trading Reports was very bad news for Fyffes; that taken on their own a reasonable inference could be drawn that there was a real risk that both Fyffes' and analysts' expectations for the half and full year would not be met; that there was a real risk was a reasonable deduction; that investors would have been concerned about the outcome for Fyffes full and half year; that the information was of a type and quality that was potentially price-sensitive; that the information was authoritative and was not generally available.

  122. I am satisfied that the High Court erred in the identification and application of legal principles. The 'reasonable investor' approach does not apply in this jurisdiction, it is not a principle to be found in Irish law. However, even if it were an appropriate approach (which I do not consider it to be), I am satisfied that there was an error in 'offsetting' factors against the recognised price-sensitivity of the information.

  123. Also, common sense should not be excluded from the analysis. A finding that 'intuitively the information appeared on its face to be price-sensitive' is an important factor.

  124. The words of s.108(i) of the Act of 1990 are plain and clear. The section provides that it shall not be lawful for a person who is connected with a company to deal in any shares of that company if by reason of his connection with that company he is in possession of information that is not generally available and which is likely materially to affect the price of those shares. The test, as to whether the information is likely to affect the price of the shares, is objective. Thus the subjective view of Mr Flavin is not the test, nor is the view of the directors the test. The test is whether the information would be likely materially to affect the price of the shares, if it were generally available.

  125. The effect of such information on the market may be analysed with the assistance of a comparator. I am satisfied that the information in the 20th March Announcement was similar to that in the November and December 1999 Trading Reports, and that the effect of its release on the market is a valid comparator. The weight to be applied to such a comparator would depend on the degree of similarity of the information and of the market. In this case I am satisfied that the comparator, the 20th March Announcement and its effect on the share price in the market, was relevant evidence and should have been considered by the High Court. The High Court erred in excluding such evidence. In the circumstances of this case the 20th March, 2000 Announcement was relevant evidence in considering whether the information contained in the November and December 1999 Trading Reports was price-sensitive, and such a comparator should not have been excluded. Once introduced, the fact that the 20th March, 2000 Announcement materially affected the shares was relevant evidence, as was the immediate drop in the share price. This evidence is such that, taken with the findings of fact, it is an inevitable conclusion that the information was price-sensitive.

  126. For all these reasons I am satisfied that the information was price-sensitive. This finding determines the appeal.

  127. For the reasons given I would allow the appeal. I am satisfied that the November and December 1999 Trading Reports contained price-sensitive information. Consequently, the learned trial judge erred in concluding that the information in the possession of Mr Flavin, relating to the business of Fyffes, on three dates in February, 2000, when Mr Flavin dealt in the shares of Fyffes, was not price-sensitive vis-à-vis those shares.

    Justice Fennelly

  128. Introduction

  129. It used not to be considered any sort of sin to profit financially from the use of secret, private or privileged information. That was how fortunes were made. Now things are different. To trade on the use of inside information is recognised for what it is. It is a fraud on the market. The insider who exploits his access to the special knowledge he enjoys for the purposes of the company in his capacity as executive or director of a company commits a crime. He may be made, additionally, to answer for the profits he has made.

  130. The Appellant (whom I will call “Fyffes”) has sued to recover the very large profit some of the defendants made from the sale of shares in Fyffes. It claims that the third named defendant, Mr James Flavin, a very well-known businessman, and Chief Executive of DCC had access, in his capacity as a director of Fyffes, to inside information, which has come to be called, if inaccurately, price sensitive information, when he traded a very large volume of Fyffes shares owned by the other defendants in 2000.

  131. The High Court (Laffoy J), in a lengthy and meticulously detailed judgment, dismissed Fyffes’ claim after a hearing lasting 88 days. It is a tribute to the extraordinary patience and care of the learned trial judge that none of her findings of primary fact are challenged on this appeal. Nor does either party question her conclusions on several major legal and factual issues.

  132. A major issue at trial was whether Mr Flavin, as distinct from the fourth named defendant had “dealt” in the shares. The learned trial judge determined that issue against the defendants and there is no appeal. Another was whether the defendants could be made to account in equity for any profit made from the sales. She determined that issue against Fyffes and there is no appeal.

  133. The only issue on this appeal is the issue which was dispositive of the claim in the High Court, namely whether the information admittedly available to Mr Flavin at the time of the share sales was in truth price sensitive. The learned trial judge held that it was not. For that reason, she dismissed Fyffes’ claim.

  134. The learned trial judge was also deeply concerned by what she repeatedly described as a “fundamental incongruity” in the Fyffes claim. It is that Fyffes was totally aware, being the source and author of it, of the information it now alleges to be price sensitive. Yet it acted in a manner utterly inconsistent with the holding of any such belief. The learned trial judge did not find it necessary to draw any conclusions from the incongruity she identified. Fyffes believe, however, that she was mistakenly influenced by this perception in reaching her decision to dismiss the claim.

  135. The appeal turns on the assessment of the likely price effects of a limited body of comparatively simple facts. In large measure, as I will be saying later, they are the sort of facts upon which common-sense judgments and opinions can be formed without the input of an extraordinary degree of expertise. It is difficult to escape the expression that the length of the trial was the product of the large amounts of money at stake and the depth of the respective corporate pockets rather than of the complexity of the issues.

  136. The statutory provisions are brief. The Court was led upon expeditions into comparative jurisprudence from the United States and the orient, not always based on similar legislation. There is no Irish case-law. This is the first insider-trading case, apart from one criminal prosecution, in this jurisdiction.

  137. The claim of Fyffes, so far as relevant to the appeal, is for:

    1. a declaration that the sale by the first and second named defendants of in excess of 31 million ordinary shares in the plaintiff between 3rd February, 2000 and 15th February, 2000 constituted an unlawful dealing within the meaning of Part V of the Companies Act 1990 (the Act of 1990);

    2. an order pursuant to section 109(1)(b) of the Act of 1990 requiring the defendants and each of them to account to the plaintiff for any profit accruing to the defendants from those sales.

    The statutory claim is based on the contention that the sales were unlawful because, the plaintiff alleges, they were effected by Mr. Flavin at a time when he was in possession of price-sensitive information by reason of his directorship of Fyffes.

  138. The Facts: The Companies and the Shares

  139. The following is an abbreviated version of the basic facts found by the High Court.

  140. The learned trial judge summarised subsequent events as follows:

    Following the flotation of DCC in May 1994 its holding in the plaintiff, another public company, was perceived as being anomalous. Its strategy from 1996, and probably from 1995, was to exit from Fyffes when a suitable opportunity arose. With a view to mitigating its tax liability, in particular, liability for capital gains tax, on a future disposal of the holding, in August, 1995 DCC and S&L, which held part of the holding, agreed to sell the shares in Fyffes of which they were respectively the owners to Lotus Green. The agreed purchase price was paid by Lotus Green, but legal title was not transferred, so that DCC and S&L remained the registered owners of the shares. Just over a fortnight after the agreement, Lotus Green became resident for tax purposes in the Netherlands.

  141. Further shares, issued by way of scrip dividend, increased the DCC Group holding in Fyffes, which consisted of both ordinary and preference shares. It is not necessary, for the purposes of the appeal, to make any distinction between the three corporate entities in the DCC Group. All issues related to their separate interests in the shares were disposed of by the High Court. DCC can be treated as the owner of the shares.

  142. All of DCC’s ordinary shares were sold in three tranches – on 3rd, 8th and 14th February 2000 at prices of €3.20, €3.60 and €3.90 (an average of €3.42) per share. The three sales grossed in excess of €106 million, resulting in the accrual of a substantial profit to the DCC Group. Mr. Flavin resigned from the board of Fyffes with effect from 9th February, 2000.

  143. The Facts: Figures, Trading, Accounts

  144. Fyffes’ financial year, prior to 2000, ran from 1st November to 31st October. In common with other Irish public companies it announced its results at half-yearly intervals.

  145. Fyffes reported its preliminary results for the financial year ended 31st October, 1999 on 14th December, 1999. It reported that profit before tax and exceptional items in that year had increased over the previous financial year by 5.1% to €82.9 million. It also reported that, while turnover for the period decreased marginally, the total operating profit was €80 million, up 3.8%. In an outlook section, having recorded that the results for the year had maintained the Group’s record of continuous growth, it was stated that the board believed that 2000 would be “another year of further growth for Fyffes”. (my emphasis).

  146. On 29th October 1999 a Fyffes board meeting, which Mr Flavin attended, considered the budget for the financial year 2000. Comparison with the expected or budgeted figures for the year 1999/2000 and later management figures is at the heart of the debate about price sensitive information. Those figures sufficiently appear from the comparative table displayed later.

  147. The allegedly price sensitive information consists of the management reports for the months of November and December 1999.

  148. The November report stated:

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

    Commentary on the banana division was as follows:

    The loss for the month was €2.7 million compared to 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, low market 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.

    Looking forward to December the November report stated:

    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 December are expected to be €4.2 million which is €3.9 million worse than budget, and €9 million worse than last year.

    Some optimism was expressed about January, with mention of possible “improved sentiment.”

  150. The management accounts for December, 1999 were circulated to board members on 25th January, 2000. The introductory commentary was as follows:

  151. Sales:

    Total sales of €149 million were €11.3 million 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 ....

    The commentary on the banana division was as follows:

    December showed very little improvement in market prices or sentiment with a multiple price war effecting an already over supplied market. The UK result was very disappointing even after the diversion of fruit to Europe.

    Urgent contract renegotiations 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 competitors seeking to increase their multiple market share.

    The December management report concluded with the following commentary:

    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 weaker UK banana pricing.

  152. The learned trial judge set out a composite table in order to illustrate the information in relation to Fyffes’ pre-tax profit which can be extrapolated from the November and December trading reports in combination.

     

    (1)

    Actual

    FY 1999

    €’m

    (2)

    Budget

    FY 2000

    €’m

    (3)

    Actual

    FY 2000

    €’m

    (4)

    Variance

    (5)

    Gernon Forecast

    Actual

    €’m

           

    (a)

    Prior Year

    €’m

    (b)

    Budget

    €’m

    November

    December

    January

    1.5

    3.3

    6.3

    (0.3)

    -

    5.0

    (2.6)

    (1.3)

    1.3

    (4.1)

    (4.6)

    (5.0)

    (2.30)

    (1.30)

    (3.70)

    (3.43)

    (2.92)

    2.54

    Total Q1

    11.1

    4.7

    (2.6)

    (13.7)

    (7.30)

    (3.81)

    Capespan

     

    (2.5)

    (3.0)

     

    (2.50)

    Capespan Adjustment

     
     

     

    (9.80)

  153. It may be noted at once that the learned trial judge accepted that the figures shown or to be deduced from the November and December trading figures, “taken on their own,” represented “unquestionably bad news about Fyffes’ trading and earnings performance in the first quarter.”

  154. Before any consideration of the significance of these figures, it is, nonetheless, essential to draw attention to aspects of the market background.

  155. Worldoffruit.com

  156. In November 1999, Fyffes launched a new venture under the name of worldoffruit.com, described as “an Internet portal for the fresh produce industry including FruitXchange, a business-to-business (B2B) on-line trading system.” It would “combine B2B on-line trading with trade news ....” It was claimed that “through this dedicated industry website, businesses would have access to on-line trading and other services which will add value to their operations.”

  157. It was fully accepted by Fyffes at the hearing of the appeal that this worldoffruit.com venture had a very significant effect on the Fyffes share price in the ensuing months. It became, as the learned trial judge found, the “driver” of the share price. It is, consequently, unnecessary to describe the venture, its contents, its vigorous promotion or its prospects in greater detail. It is common case that, even if it had been successful, worldoffruit.com would not have contributed significantly or at all to the earnings of Fyffes in the short term. The share-price effect is sufficiently demonstrated by a table set out in the judgment. It will be necessary to bear this table in mind when assessing the likely price effect of the alleged price sensitive information:

    Dec

    1999

    Jan

    2000

    Feb

    2000

    Mar

    2000

    Apr

    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

     

     

     

     

  158. A major element in the case, which remained central to the contentions on the appeal was that, in the early months of 2000, surrounding the time of the relevant share sales, there was a world-wide phenomenon of fascination with stocks and shares based on businesses with prospects of prodigious profits from newly emerging internet ventures. The learned trial judge said that this was a “phenomenon variously described in the evidence by the colloquialisms “dotcom mania”, “irrational euphoria” and “irrational exuberance.”

  159. Her assessment of the influence of this phenomenon was as follows:

  160. The overall conclusion I have reached is that it is incontrovertible that there was very considerable enthusiasm for dotcom stocks or stocks with a dotcom 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 that enthusiasm affected Fyffes' share price, in that it is incontrovertible that it was the wof.com venture 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.

  161. At the hearing of the appeal, a consensus between counsel was that approximately €2 of the share price was attributable to the core fruit business and the excess related to worldoffruit.com. The table shows that the price rose from below €2 at the start of the year and that it rose to a peak of€3.98 on 18th February only to drop back to its starting point or below in mid to late April.

  162. Conduct of Fyffes

  163. I have mentioned the concern of the learned trial judge regarding what she perceived as the fundamental incongruity or inconsistency between Fyffes’ knowledge of the alleged price sensitive information and its failure to take relevant action either vis-à-vis Mr Flavin or the market.

  164. Fyffes made no announcement to the market following the circulation of either the November or December trading figures. Fyffes claims, in these proceedings, that Mr Flavin unlawfully profited from the same information in dealing in the shares on behalf of the DCC Group in early February. The information, Fyffes says, would have been, if released, likely materially to affect price. The Listing Rules of both the London and Irish Stock Exchanges impose obligations on companies to make disclosure of certain types of information which would be “likely to lead to substantial movement in the price of listed securities.”

  165. Curiously, however, and perhaps paradoxically both parties agreed at the hearing – and there was much evidence at trial related to the point – that Fyffes behaved properly in not making any announcement. It is easy to see why. The defendants could not accuse Fyffes of disrespect of the Listing Rules while defending the position that the relevant information was not price sensitive. Fyffes, on the other hand, were compelled necessarily, however uncomfortably, to justify their own conduct. As a corollary, they needed to argue that the November / December material was radically different from that which became available and was notified in March, which I will discuss shortly.

  166. To similar effect, the defendants pointed to personal behaviour of Mr Neil McCann in relation to Mr Flavin, which appears, at least at first sight, utterly inconsistent with any belief that the latter had behaved unlawfully in selling the shares in early February. This behaviour extended to the purchase of a celebratory bottle of champagne, upon which the learned trial judge remarked: “That seems to me to have been a generous and gracious gesture, and I attach no weight to it.” She attached more significance, however, to a letter of 4th February in which Mr McCann stated to Mr Flavin:

  167. Further to our meeting last evening it is encouraging to note this morning that the share price has stood up but I think, in all our interests, it would be helpful if the remainder of the shares are disposed of, so that they will not be overhanging the market. It is quite an achievement to have disposed of such a volume and get such a good reaction. Hopefully it augurs well for the balance.

  168. The letter also discussed the timing of Mr Flavin’s intended resignation from the board of Fyffes. Naturally, the defendants saw this letter as representing encouragement by Mr. McCann of the second and third sales. Its legal significance, if any, will be considered later.

  169. The defendants also placed particular reliance on notification to the stock exchange of two share transactions.

  170. These latter transactions, combined with the fact that no announcement had been made under the Listing Rules, played a material part in the judge’s conclusion that the information held by Mr Flavin was not price sensitive.

  171. The Profit Warning: 20th March

  172. A second major issue of contention concerned the effects of an announcement made by the company to the market on 20th March concerning its unfavourable trading experience in the early months of the financial year 1999/2000 and its admitted significant effect on the share price. In brief terms, the learned trial judge found that it was the poor trading results and not incipient disillusion with dotcom stocks that affected the share price on that day. Nonetheless, she decided to exclude this evidence in its entirety from her consideration of the effect of the alleged price sensitive information. She did so because she found that there was a lack of parity between the two sets of information and, because, she considered the market conditions for Fyffes to be very different on 20th March from the dates of the three share sales in early February. Fyffes criticise this ruling and I will consider the issue. First, I will refer to the facts.

  173. On 20th March 2000 at the AGM of Fyffes, Mr Neil McCann, as Chairman, made a statement which was notified contemporaneously to the stock exchange (the “March 2000 Trading Statement”), which was described by the learned trial judge as being, in effect, “a profit warning.” The announcement was headed “Fresh produce trading” and stated as follows:

  174. 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 month 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.

  175. Mr David McCann, Chief Executive of Fyffes reported at the AGM on the progress of worldoffruit.com. He stated that up to €20 million was “to be expensed as incurred, will be invested during 2000 ....” He stated that the Fyffes Group was working closely with its financial advisers to determine the optimal ownership and funding structures that would maximise shareholder value from its traditional fresh produce business and from its new e-commerce division. He also stated that €100 million was earmarked for new e-commerce businesses.

  176. The “profit warning” reached the market on 20th March. The learned trial judge made a clear finding regarding its effect on the price of Fyffes shares. They closed on the London Stock Exchange at €3.16 on 17th March. The Irish Stock Exchange was closed on that day. Following the profit warning in the March 2000 Trading Statement they closed on 20th March at €2.70. There was evidence from the defendants’ experts to the effect that the revelations in relation to trading performance made on 20th March, 2000 were not the cause of the share price decline on that day. The learned trial judge found that at 12.15 p.m. on 20th March, Regulatory News Service reported that Fyffes had issued a profit warning (the March 2000 Trading Statement) and almost immediately there was a significant decline in Fyffes’ share price of approximately 15% on the London Stock Exchange. She concluded that there was “coercive evidence that it was the March 2000 Trading Statement, and not the contemporaneous announcements in relation to the wof.com venture or the vagaries of rumours in relation to a possible merger, that provoked the adverse reaction.” Further information later that afternoon, first rumours of a possible merger between Fyffes and Dole, and later a statement by Fyffes playing down talk of the rumoured Dole deal, failed to generate a reaction.

  177. At trial the issue became whether the March 2000 Trading statement constituted, what came to be called “a valid proxy” for the November / December trading reports. The learned trial judge found that it did not. I will need to revert to that question, which is clearly of great potential importance.

  178. The High Court Judgment

  179. Three parts of the High Court judgment are of particular importance. They correspond with the three central grounds of appeal advanced by Fyffes:

    The first relevant part of the judgment contains the learned trial judge’s initial assessment of the November / December trading figures. The second contains her ultimate conclusion, including reference to the reasonable investor, that those figures did not represent price sensitive information. The third closely related section of her judgment contains her assessment of the March 2000 Trading Statement. It is logical to set out these aspects of the judgment in that order.

  180. High Court Assessment of November / December figures

  181. The learned trial judge commented as follows on the November / December figures:

  182. Being management accounts, they were authoritative. As regards quality and provenance, the information contained in them differed from the general information about trading difficulties available in the market. They were intended for internal use only and, as such, were confidential, which emphasises their sensitivity, although, in my view, not in any technical sense. They contained detailed and precise information: precise figures for actual losses in the months of November and December, 1999 and a forecast for January, which on the evidence, was made some time after the middle of January, and which would be assumed to be very accurate. From the figures given for deviation from prior year and budget, by a simple arithmetic calculation, it was possible to deduce what profits were achieved in each of the three months of the first quarter of financial year 1999 and the profits for which Fyffes had budgeted for each of the three months in the first quarter of the financial year 2000. The profit level which had to be achieved, as it was put, the hill which had to be climbed, in the last three quarters of financial year 2000 even to reach the profit achieved in the financial year 1999 was obvious: it was at least €85.5m, being the aggregate of the loss of €2.6m in the first quarter of financial year 2000, which had to be made up, together with the actual figure achieved in financial year 1999, €82.9m.

  183. She referred and appeared to accept the Fyffes contention:

  184. .... the market knew from the Preliminary Announcement that Fyffes’ expectations for financial year 2000 exceeded what was achieved in the previous year: in the outlook statement the market had been told of Fyffes’ belief that the year 2000 would be “another year of further growth” for Fyffes. Therefore, a reasonable deduction was that the hill to be climbed to meet budget in the final three quarters was higher than €85.5m.

    She continued in the same vein:

    .... at the time, analysts’ profit forecasts for financial year 2000 were in the range of €88m to €92m, from which a reasonable deduction could be made that the hill to be climbed to match those forecasts was very high indeed, between €90.6m and €94.6m.

  185. She encapsulated her own judgment on the November / December figures in a passage to which Fyffes attach the greatest importance. Fyffes complains that she failed to draw the appropriate conclusions from her own findings as here expressed. That passage reads:

  186. The information contained in the November and December Trading Reports was unquestionably bad news about Fyffes’ trading and earnings performance in the first quarter. Taken on their own, a reasonable inference could be drawn from the figures that there was a real risk that Fyffes’ own expectations and analysts’ expectations for the first half and for the full year would not be met. It is true that the market did not know what Fyffes’ expectations for the first half were, although it did know what was achieved in the first half of the previous year. Nonetheless, given the size of the loss in the first quarter against the modest budget for that quarter, that there was a risk was a reasonable deduction. The absence of interpretation or a narrative explanation from management did not hinder the arithmetical exercise which enabled deductions to be made in relation to the likely adverse impact of the first quarter results on the half year or the full year and, to that extent, was immaterial. That the fresh produce business, including the banana business, was, and was known in the market to be, seasonal with the first quarter being the least profitable quarter, was also immaterial, to the extent that seasonality was factored into the prior year figures and the budget figures contained in the documents and was also built into analysts’ forecasts. The plaintiff suggested that a reader of the information would discern a worsening negative trend. The figures in the above table for variances from prior year and budget bear this out, in that they were getting larger in absolute terms, but whether this should be regarded of any significance, in my view, is doubtful. In general, the narrative gave very little inkling that matters would improve, except the statement that the European market had improved quickly in January with prices at budget level going into February. Conversely, there was nothing in the narrative to indicate that matters were getting worse.

  187. The learned trial judge immediately qualified the views expressed in that passage as follows:

  188. On the basis of the foregoing, the court was invited to conclude that intuitively the information appeared on its face to price-sensitive. The statutory test does not warrant drawing any conclusion in relation to the information contained in the trading reports standing alone. The furthest the court can go is that the information was of a type and quality that was potentially price-sensitive. Whether it was or was not, falls to be judged by applying the principles which I have adumbrated earlier.

    At a later point, she accepted:

    Although there was some controversy on this point, on the evidence, I consider that investors would have been concerned about the outcome, not only for Fyffes’ full financial year, but also the outcome for the first half.

  189. The learned trial judge did not, at that point in her judgment, propound any test for reaching the required statutory conclusion. She developed, at a later point, a standard of the “reasonable investor” to which it will be necessary to return. It is more helpful, at this stage, to quote the judge’s ultimate conclusion that the information was not price sensitive together with her reasons for it. It was as follows:

  190. 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. 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 for 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 offset the impact of the current trading problems. In particular, the strength of the 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.

    High Court view of March 20th Trading Statement

  191. As already noted, the learned trial judge found that there was coercive evidence that the March 20th profit warning was the cause of the sharp drop in Fyffes share price which occurred on that day. She rejected evidence from the defendants to the effect that the reason for the fall was that sentiment for internet stocks had soured earlier in the month. She said that “the information released contemporaneously in relation to wof.com had no bearing on the share price movement.” She found as follows:

  192. On the totality of the evidence, it is quite clear that it was the bad news in relation to earnings which caused the share price decline on 20th and 21st March, 2000.

  193. Nonetheless, she declined to accept that that event was of any value in establishing the hypothetical proposition that the November / December trading figures would, if generally available, have had a material effect on the price. She based her conclusion on two comparisons: firstly, between the contents of the November / December information and the March 2000 Trading Statement; secondly, between the market conditions prevailing on 3rd, 8th and 14th February (the dates of the share sales) and on 20th March. She held:

  194. .... what happened on and after 20th March, 2000 is not a matter which is of evidential value in applying the hypothesis posited in s. 108(1).

  195. Her entire approach was based on her acceptance of the defendants’ proposition “that a post-market event is only of evidential value for the purpose of resolving the statutory hypothesis if two factors are present: that there is parity of information between the alleged price-sensitive information and the information which precipitated the putative proxy share price effect; and that the market conditions were the same on the date the hypothesis is being applied and the date of the putative proxy event.”

  196. In making the first of the comparisons envisaged by that proposition, she thought it important not to lose sight of the ultimate objective of the plaintiff in these proceedings, which is to procure an account of profits under that provision. She thus thought it relevant to examine “whether the evidence to date suggests that, assuming for the purposes of the argument that there would have been an adverse share price effect if the information contained in the November and December Trading Reports was generally available at the dates of the Share Sales, that share price effect is measurable in such a manner that one would have confidence in the fairness of the outcome.” Thus she found it necessary to consider “the prospect of quantifying the share price effect, if the information alleged to be price-sensitive had been generally available at the date of the Share Sales.”

  197. In respect of the first of these comparisons, the learned trial judge decided that:

  198. .... 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.

  199. In respect of the second, she found that market conditions were not the same as they had been on the earlier dates. This was based on the fact that o 3rd February Fyffes’ share price was rising, that it continued to rise up to and beyond 14th February, but that by 20th March the share price had come off its peak on 18th February and was in decline.

  200. High Court: the Reasonable Investor

  201. As already noted, the learned trial judge, in her determining and crucial passage, decided that the reasonable investor would not have concluded that the November / December trading information indicated a lowering of expectations about Fyffes’ earnings in the judgment. The learned trial judge had formulated a test for determining the price sensitivity of the relevant information based on the postulate of a reasonable investor. This was proposed by the defendants on the basis of case law from the United States.

  202. The court, the learned trial judge held, in assessing the significance of the relevant information and its hypothetical impact on the share price, “does so from the perspective of the reasonable investor making an investment decision, that is to say, a decision to buy, sell or hold the shares in the company.” The test is objective and the “question to be addressed is whether it is probable that the impact of the information would have a substantial or significant effect on the share price.” She drew attention to the words, “would be likely” in section 108(1).

  203. She then restated that test as follows:

  204. .... the hypothetical test is whether on 3rd February, 2000, 8th February, 2000 and 14th February, 2000, had it been available to him, the information contained in the November and December Trading Reports, viewed by him against the “total mix” of information about Fyffes’ trading and earnings available on those dates, would have impacted on the judgment of the reasonable investor in relation to an investment decision about Fyffes’ shares to the extent that he would have concluded that the information probably would have a substantial effect on Fyffes’ shares.

    The Appeal

  205. Three principal grounds of appeal are put forward on behalf of Fyffes. It will avoid unnecessary repetition if I reserve more detailed consideration of these grounds, of the respondents’ replies to them and of the facts to the point in this judgment when I come to express my own views.

  206. Fyffes’ accept all findings of primary fact without exception. Accepting the facts as found, they challenge the High Court judgment on three grounds, which I paraphrase as follows:

    1. That the learned trial judge failed to draw the correct inferences from the facts as found; in particular, her conclusions in rejecting the Fyffes allegation of price sensitivity were inconsistent with her own earlier findings;

    2. That the learned trial judge adopted an incorrect and inappropriate “reasonable investor” test; moreover, she failed correctly to apply the test as so adopted;

    3. The learned trial judge erroneously failed to pay any regard whatever to the March 20th Trading Statement.

  207. The respondents fully support the findings and conclusions of the learned trial judge. They argue strongly that they were based on the assessment of evidence, including very extensive expert evidence, heard and carefully analysed by the learned trial judge.

  208. The respondents also defend the grounds upon which the learned trial judge expressed concern about what she called the “fundamental incongruity” in the fact that Fyffes acted inconsistently with the proposition that information of which they were fully aware was price sensitive. They lay particular emphasis on the fact that Fyffes did not even consider that the information was such as to require an announcement to the stock exchange. They suggest that the learned trial judge might have gone further than she did.

  209. Applicable Legal Principles

  210. The sole issue on the appeal is whether the November / December trading report constituted price sensitive information. The question is whether it came within the scope of section 108 of the Companies Act 1990 (the Act of 1990), since repealed, which provided:

  211. 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.

  212. There is no appeal from the determination of the learned trial judge that Mr Flavin both caused and procured the dealing which resulted in the share sales. He was connected with Fyffes. The learned trial judge held that for the purposes of affording an effective remedy to Fyffes under section 109 of the Act of 1990, the three corporate defendants should be treated as a single entity.

  213. Part V of that Act implements the State’s obligations under Council Directive 89/592/EEC of 13 November 1989 coordinating regulations on insider dealing.

  214. The purpose of the Directive is to provide assurance to investors that they are placed on equal footing and that they will be protected against improper use of inside information, thus obviating the undermining of confidence in, and the smooth running of, the market. Member States were required to prohibit the misuse of inside information by those involved in the management of companies. They were not required to provide the type of civil remedy contained in Part V, though they were permitted to adopt more stringent measures than those required. The Directive contains the following definition of inside information:

  215. .... 'inside information' shall mean information which has not been made public of a precise nature relating to one or several issuers of transferable securities or to one or several transferable securities, which, if it were made public, would be likely to have a significant effect on the price of the transferable security or securities in question.

  216. The Act does not use a definition of “inside information.” It is obvious, however, that section 108 must be interpreted in the light of the Directive and so as to be in conformity with it – the principle of conforming interpretation. It is clear – indeed it was common case – that the expression, “likely materially to affect the price of those securities,” in the section must have the same meaning as “likely to have a significant effect on the price of ....” securities in the Directive. The term, in fact used throughout the trial and the appeal was “price sensitive information.”

  217. Where it is established that a connected person uses information to which he has access by virtue of his position in the company to deal in shares, that dealing is unlawful only if, assuing it were to be generally available, that information would be likely materially to affect the price of those. A court in applying that provision must address a hypothetical question. In fact, the information has not been available. Thus its likely effect has to be established by evaluation of the quality of the information in relation to the company and the state of the market.

  218. The parties were agreed that the statutory hypothesis does not envisage the information in issue finding its way into the market in any particular manner.

  219. The learned trial judge adopted an objective test for the purpose of arriving at the statutory hypothesis. As already indicated, she used the notion of a reasonable investor to enable her to answer the hypothetical question.

  220. The section contains no reference to a reasonable investor. It appears to envisage a simple question: what is likely to have been the effect of the availability of the information on the price of the shares? The learned trial judge, following a caeeful review of authorities form a number of jurisdictions, decided to look at the matter “from the perspective of the reasonable investor making an investment decision, that is to say, a decision to buy, sell or hold the shares in the company.” She was influenced in coming to this view by the similarity of the legislative purpose which underlies federal security law in the United States in particular.

  221. She identified as a “seminal decision” that of the United States Court of Appeals, Second Circuit in SEC v Texas Gulf Sulphur Company 401 F.2d 833 [1968]. That case concerned alleged violations of the provisions of s. 10(b) of the Securities Exchange Act of 1934 and Rule 10(b)-5 promulgated pursuant to it. Rule 10(b)-5 provided that it should be unlawful for any person, inter alia, “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 connection with the purchase or sale of any security. Although the legislative purpose of that provision may have much in common with section 108(1), it is structured differently. In this and other cases, the courts of the United States were required to commence with a threshold determination of the “materiality” of certain facts. The court explained that the test of materiality must necessarily be a conservative one, since many actions are “brought with the benefit of hindsight.” The court cited earlier authority to the effect that (page 849):

    The basic test of materiality is whether a reasonable man would attach importance .... in determining his choice of action in the transaction in question.
  222. Marshall J, writing for the Supreme Court of the United States in TSC Industries Inc. v Northway Inc. 426 U.S. 438. stated:

  223. 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.

    Here it can be seen that it was considered necessary to postulate the reasonable investor to test materiality. The statutory provision was different.

  224. It is possible to trawl through these and many other US authorities and to find useful pronouncements on the effects of information on markets. However, I have come to the conclusion that this body is more likely to confuse than to illuminate. In particular, there is no warrant and, more importantly, no need to insert the reasonable investor into the section. The section lays down a single test. That is whether the information alleged to be price sensitive would, if it were generally available, be likely materially to affect the price of those securities. The price is the price on the market. The market is comprised of many investors, wise and unwise, reasonable and unreasonable. At the time relevant to the present proceedings, it was generally agreed that some parts at least of the markets for shares and securities world-wide were in the grip of what was described by some as “dot.com mania.” Mr Cush, Senior Counsel, for the respondents argued at the hearing that fund managers and other major market operators necessarily had to take account of this phenomenon and to include dot.com stocks in their portfolios. That is undoubtedly true. Nonetheless, the problem remains. Can one apply the statutory test by reference to a reasonable investor? I do not think so. The court is required to make a judgment as to whether, on the statutory assumption, the information in question would have had a material effect on price.

  225. It should be added that the test ultimately adopted by the learned trial judge was a modified version of the reasonable investor. She said that the “key question” was “whether, as a matter of probability .... the reasonable investor .... 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.” Thus she used the reasonable investor not as a representative of all investors in the market whose response to the information might or might not lead to a material effect on the share price, but rather as a test of opinion as to how the market would respond. The respondents did not try to defend this latter formulation. Rather they treated it as a sort of aberration from the true reasonable investor test which the learned trial judge had formulated earlier in her judgment.

  226. In the result, I believe that the learned trial judge was mistaken in superimposing a test based on the reasonable investor on the single statutory test: would the price have been materially affected.

  227. Conclusions of the High Court on the Issue of Price Sensitivity

  228. I have already expressed the view that the learned trial judge was mistaken in adopting the criterion of the reasonable investor for the purpose of assessing the statutory hypothesis. Thus, her approach was flawed. She should have asked herself the simpler question, namely whether the November / December trading figures, if the information contained in them had been generally available, would have been “likely materially to affect the price” of the shares.

  229. With this important qualification in mind, I turn to consider the way in which the learned trial judge assessed the evidence. It is also necessary to decide whether she was right to exclude from consideration the market effects of the March 2000 Trading Statement.

  230. The passage of the High Court judgment, which describes the November / December trading report as “unquestionably bad news about Fyffes’ trading and earnings performance in the first quarter,” represented the major plank of Fyffes’s case on the appeal. She qualified this expression by the phrase “taken on their own.” She added that the “statutory test does not warrant drawing any conclusion in relation to the information contained in the trading reports standing alone.” The furthest she could go was to say “that the information was of a type and quality that was potentially price-sensitive.”

  231. Fyffes start from the position that the information was “intuitively” price sensitive. Intuition could not, of course, be a sound basis for reaching a legal conclusion on such an important issue. At the hearing, “common sense” was accepted as an appropriate substitute. In truth what Fyffes are saying is that it is that the November / December figures were so bad that they would obviously have had an adverse effect on the market. There is much force in that view. At the risk of being repetitious, it is worth identifying what the learned trial judge herself identified as the “bad news.”

  232. To begin with, she had already characterised the November / December management figures as authoritative, noting that: “As regards quality and provenance, the information contained in them differed from the general information about trading difficulties available in the market.” She described the information in them as “detailed and precise.”

  233. She considered that “a reasonable inference could be drawn from the figures that there was a real risk that Fyffes’ own expectations and analysts’ expectations for the first half and for the full year would not be met.” Here the market would be learning, firstly, that the two months’ figures fell significantly short of Fyffes’ own expectations of which the market had not, prior to then, been aware. Those disappointed expectations would have related not only to the first half but to the full year. It will be recalled that the first reason given by the learned trial judge for ultimately ruling against the price sensitivity of the November / December figures was that it was “too early” for the reasonable investor to form an opinion.

  234. She also pointed to “the size of the loss in the first quarter against the modest budget for that quarter ....”

  235. She considered the “absence of interpretation or a narrative explanation from management” to be immaterial, since an “arithmetical exercise [would have] enabled deductions to be made in relation to the likely adverse impact of the first quarter results on the half year or the full year ....”

  236. She made the important observation that the fact that “the fresh produce business, including the banana business, was, and was known in the market to be, seasonal with the first quarter being the least profitable quarter, was also immaterial, to the extent that seasonality was factored into the prior year figures and the budget figures contained in the documents and was also built into analysts’ forecasts.”

  237. She accepted Fyffes’ suggestion that a reader of the table (set out in her judgment and earlier in this judgment) “would discern a worsening negative trend” fromthe “figures e for variances from prior year and budget bear this out, in that they were getting larger in absolute terms ....”

  238. She analysed in some detail what was referred to as “the hill which had to be climbed in the last three quarters of financial year 2000 even to reach the profit achieved in the financial year 1999.” That hill was very steep. She calculated that, in the last three quarters a profit of “at least €85.5m” would have been necessary. That was made up of: the loss of €2.6m in the first quarter of financial year 2000 which had to be made up, together with the actual figure achieved in financial year1999, €82.9m.” All of this was accentuated if increased profit was to be assumed for the year 1999/2000. She referred to the 14th December prediction of another “another year of further growth” and, as already mentioned summarised current analysts forecasts of much higher figures.

  239. It is unnecessary to citefurther detail. The basic point is that the figures represented “unquestionably bad news.”

  240. The learned trial judge was, of course, right to emphasise the danger of taking such figures on their own. It is necessary to consider the context. The context is the market in Fyffes share at the relevant time and the market’s expectations in respect of those shares. It was observed at the hearing that good results may lead to a fall in the share price; conversely, poor figures may lead to a rise. All depends on expectations. In the first case, the market may have been expecting better figures than the good ones published; in the other, the figures will not have been as bad as had been feared.

  241. Having made that important qualification, however, one would look for something to counter the normal expectation that bad news about a company’s earnings and prospects will case a fall in the share price. Other things being equal, the November / December figures were such as to be likely to disappoint the market. There was nothing current that other things were not equal. There was no built-in expectation of bad news. Expectations were to the contrary.

  242. Thus, I find the approach of the learned trial judge surprisingly cautious. To my mind, the November / December figures were such as to cast serious doubt on the prospects of the company, not only for the first quarter, but also, as the learned trial judge herself observed, for the first half and even for the full year.

  243. The learned trial judge gave three reasons for ruling that the information was not price sensitive. Before expressing my views on those reasons, it is appropriate to form a view about the exclusion of the March 2000 Trading Statement.

  244. The learned trial judge accepted as being correct in principle submissions made by the defendants that there were

  245. two prerequisites to a post-market event being of evidential value in applying the price-sensitivity hypothesis are that:

    (a)

    the information alleged to be price-sensitive should be substantially the same as the information which gave rise to the share price movement which is proffered as a proxy, and

    (b)

    the market conditions on the date at which the hypothesis is being applied are identical with market conditions on the date on which the supposed proxy event occurred.

  246. These propositions were based on a number of American authorities. I find them extraordinarily rigid. The learned judge herself rightly observed that this was “an exercise akin to the use of comparators for valuation purposes in litigation in a wide range of contexts.” Yet no such fixed set of rules is applied in such cases. Courts hear evidence of valuers offering suggested comparisons. The properties differ in size, nature and location. The court adjusts for all relevant factors.

  247. I do not think the US cases support such an approach. Principal among them was that of SEC. v Bausch & Lomb Inc. 565 F. 2d8[1977]. There the court criticized what it perceived as SEC’s “facile inference” based on fall of stock on one day that all information in possession of an individual was material. The court identified a number of specific convincing matters of fact to demonstrate the unreliability of the particular evidence. The second case cited by the defendants was Elkind v Liggett & Myers Inc. 635 F2d 156 [1980], a decision of United States Court of Appeal, Second Circuit, a case concerned with the quantification of damages. The Attorney General emphasised that the need for parity of information arose in that context. Mansfield J discussed the point at page 170 of the report as follows:

  248. 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, be entirely speculative. This has led some courts to conclude that the drop in price of the stock after actual disclosure and after allowing a period of time to elapse for the market to absorb the news may sometimes approximate 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 theory depends on the parity of the ‘tip’ and the ‘disclosure’. When they differ, the basis of the damage calculation evaporates.

  249. The need for “parity” there discussed arose from the need to have a reliable basis for calculating damages. It is, of course, dangerous to draw inferences from any piece of evidence relating to events on different dates. The court must be astute to see that the evidence is genuinely of value. The American cases do not, as I see it, establish the general propositions advanced by the defendants and opted by the learned trial judge. A simpler approach was adopted by an English court in Chase Manhattan Equities v Goodman [1991] B.C.L.C. 897. There the shares had been suspended for more than five months before the relevant information had its market effect. Applying a test remarkably similar to that in section 108(1), Knox J (at page 931 of the report) said:

  250. 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.”

  251. The question then is whether the learned trial judge was correct, on the facts, to exclude the March 2000 Trading Statement from her consideration. I do not think that she was. Both that statement and the November / December trading figures have been set out in full earlier in this judgment. There is remarkable similarity between their contents. Insofar as they differ, the earlier figures are more detailed. The learned trial judge described them as authoritative, detailed and precise. The March 2000 Trading Statement is expressed in general terms. I am satisfied that they conveyed broadly similar information about the trading experience of Fyffes in the first quarter. The time interval between them was some six weeks. Thus, the later information may be said to be more reliable, but that is all.

  252. Nor do I see that there was any such enormous change in market conditions as would justify excluding the effect of the March 2000 Trading Statement entirely from consideration. Fyffes submit that it provides real and palpable proof of the market reaction to such information. Its release led to an immediate fall of some 15% in the share price. Nobody has suggested that such a price movement was other than material. The trial judge was influenced by the fact that, in early February the share price was rising, whereas, by 20th March it was in decline. Fyffes point out, however, that the price on the two dates was approximately the same, with a peak in the interval at €3.95.

  253. In my view, the events of March 20th were a useful pointer to the likely market effect of the release of trading information of as substantially kind, if it had occurred on the various dates of the share sales in early February.

  254. Since the learned trial judge had decided, as a matter of principle, to exclude the March 20th events from her consideration, she did not have the benefit of using it in her ultimate assessment, to which I now turn.

  255. I have already remarked upon the view of the trial judge that the reasonable investor “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.” This seems to be in clear contradiction of her earlier assessment, under the heading of “bad news,”to which I have referred. Mr Cush made a distinction in argument between “risk” and “probability:” in the earlier passage the judge was referring to a “real risk,” whereas, at the end of the day she had to consider whether an effect on the share price was “likely.” The latter proposition is, of course, correct. However, news, good or bad, about a company may be likely to affect the share price of a company even though the disclosure relates only to a risk. It is a question of balancing the importance of the event against the degree of probability or risk of its occurring.

  256. The second reason was that the reasonable investor “would have concluded that prospects for 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 offset the impact of the current trading problems.”

  257. The notion of “offset was the subject of much argument at the hearing”. The Attorney General argued on behalf of Fyffes that it was inadmissible in principle. To the extent that they existed at all, both of the elements mentioned were taken into account in the share price prior to the hypothetical information becoming available on the dates of the share sales. The evidence was that the share price started out at just below €2 at the start of 2000. It then climbed to a peak of some €3.95 in mid-February. At least fifty per cent of the price related to the core business. The judge found that “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.”

  258. The Attorney General also submitted that there was no new information at all in relation to mergers.

  259. It is clear, on the evidence that Fyffes’ core business of fresh produce, especially bananas continued to represent a major component of its share price. It follows that bad news of the sort contained in the November / December trading report would be likely to affect the market in the share adversely. There is no doubt that, as the judge correctly found, the worldoffruit.com venture had become the driver of the share price in January and February 2000. It does not follow that the trading report would not have had an effect on the market. The very notion of offset supposes that there something to “offset.” It suggests a balancing of one influence against another. If the effect of the worldoffruit.com venture was to counteract or to cancel the effect of the “bad news,” it would still have materially affected the price. The statutory test does not postulate a fall in price.

  260. The third reason given by the judge for concluding that the information was not price sensitive was that Fyffes had made announcements regarding the share transactions involving Mr Ellis and Mr Halpenny and that the company itself had made no announcement. Fyffes does not contest the proposition that it was possible to infer from these events that the company did not have price sensitive information which it had not released. However, as was submitted by the Attorney General, it did not follow that these facts would have confused the hypothetical reasonable investor postulated by the judge. The existence of such facts could not, in principle undermine the statutory test. To do so would be to undermine the effect of the statutory provision. The statutory hypothesis would be automatically negatived in every case where the company itself had made no announcement. It must not be forgotten that the focus of Part V and of the Directive is on insider dealing. Insiders cannot be allowed to use inside information merely because – perhaps especially because – the company does not itself disclose it.

  261. A court, asking itself whether a piece of information would have had a material effect on prices on one date, is entitled to have regard, for reasons I have given, to the effect of the release of broadly similar information on another date not too far removed in time. In my view, the events of March 20th provide compelling evidence that the November / trading reports, if generally available on the dates of the share sales, have materially affected the share price.

  262. The ultimate conclusion of the learned trial judge was necessarily affected by what I have described as two errors: she should have adopted a straightforward test of market effect, without the interposition of the reasonable investor; she should not have excluded the effect of the release March 2000 Trading Statement. Were it not for these two aspects of her judgment, it seems very likely that her own compelling findings of fact would have led her to infer that the price would have been materially affected.

  263. On this appeal, I would find as a fact that the information contained in the November / December trading figures would, if it had been generally available on the dates of the share sales, have been likely materially to affect the price of Fyffes shares.

  264. Fundamental Incongruity

  265. The foregoing conclusion is not affected by the circumstances considered by the learned trial judge to give rise to a fundamental incongruity. Those facts have been set out earlier in this judgment. Perhaps the most striking of all the facts, though one rightly discounted as being devoid of legal weight, was the purchase of a celebratory bottle of champagne. That fact coupled with the ensuing letter written by the Chairman sits ill with the allegation of illegality which is the basis of the present claim.

  266. However, the only matter which could conceivably have carried legal weight was the fact that the company made no announcement to the market pursuant to the Listing Rules. Rule 9.2, which had only been introduced in the January, 2000, obliged companies to communicate to the market “without delay of all relevant information which is not public knowledge ....” concerning specified matters, including “the company’s expectation as to its performance ....” which “if made public, would be likely to lead to substantial movement ....” in the share price.

  267. This topic occupied a great deal of time in the High Court. In the end, it seems to be without legal consequence. Neither party contended that Fyffes was in breach of Rule 9.2. The defendants abandoned any claim based on estoppel.

  268. One can only conclude that the “fundamental incongruity,” if there is one, is just that. It may arise from the remedy provided by the legislature to the company itself. The Directive does not require Member States to provide a civil remedy to a company against those trading in its shares in breach of section 108(1). The incongruity would not exist if the plaintiff were another party to a share transaction, not in possession of the relevant information, and suing by virtue of section 109(1)(a) for loss sustained by him.

  269. Part V provides a statutory remedy, which is not defeated by incongruity.

    Justice Macken

  270. 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:

  271. 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.

  272. 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.

  273. 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.

  274. 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.

  275. 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.”

  276. 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.

  277. 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.

  278. 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)

  279. 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.

  280. 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.

  281. 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.

  282. 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.

  283. 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:

  284. 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]

  285. 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”.

  286. 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:

  287. 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.

  288. 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.

  289. 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).

  290. 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.

  291. The March 20 Statement by the Plaintiff to the Market

  292. 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.

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

  294. 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.

  295. 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.

  296. 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

    1. rumours of a Senate investigation of the company’s monopoly;

    2. adverse medical reports on the safety of the company’s product;

    3. the likelihood of the company facing stiff competition; and

    4. 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.

  297. 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.

  298. 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.

  299. 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:

  300. 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]

  301. 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).

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

  303. 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.

  304. 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.

  305. 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.

  306. 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.

  307. 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.

  308. 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.

  309. 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.

  310. 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:

  311. 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]

  312. 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.

  313. 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.

  314. 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”.

  315. 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.

  316. I would therefore allow the appeal.

    Justice Finnegan

  317. 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.

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

  319. The legislation

  320. 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 –

  321. 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.

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

  323. 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

  324. 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.

  325. The grounds of appeal

  326. 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.

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

  328. 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”)

  329. 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.

  330. 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 –

  331. 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.

  332. 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.

  333. 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 –

  334. 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.

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

  336. 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.

  337. 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.

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

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

    5. worldoffruit.com Road Show

  340. 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.

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

  342. 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.

  343. 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.

  344. 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.

  345. 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.

  346. 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. Lembckeincludes €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 / Loss

    Budget

    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

    -

    Group Exps

    (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.

  347. 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:

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

  349. The optimism is repeated in the chairman’s statement.

  350. The following information not generally available was available to Fyffes directors:–

    1. 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.

    2. 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.

      6. 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.

  351. 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.

  352. 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.

  353. 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

  354. 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.

  355. 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 –

  356. 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.

  357. 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 –

  358. 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.

  359. 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 –

  360. 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.

  361. 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.

  362. 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 –

  363. 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.

  364. 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.

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

  366. 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.

  367. I respectfully agree.

  368. 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. –

  369. 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.

  370. 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”.

  371. 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.

  372. 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.

  373. The evidential value of the conduct of Fyffes

  374. 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 2000

      €’000

      Actual 2000

      €’000

      Last Year 1999

      €’000

      worldoffruit.com

      (635)

      (1,326)

       –

      Fruit business

      5,349

      (2,559)

      11,333

      Total to end of January

      4,714

      (3,885)

      11,133

      February

      8,450

      5,700

      5,376

      March

      14,401

      15,000

      12,263

      April

      10,317

      14,185

      3,867

      Cumulative – Half year

      37,882

      31,000

      32,639

      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.

  375. The learned judge’s finding on the defendants’ submission was as follows –

  376. 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.

  377. 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.

  378. 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.

  379. The evidential value of the conduct of James Flavin

  380. 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.

  381. 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 –

    3. 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.

  382. 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.

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

  384. 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.

  385. 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.

    Dec

    1999

    Jan

    2000

    Feb

    2000

    Mar

    2000

    Apr

    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

     

     

     

     

  386. 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.

  387. 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 –

  388. 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.

  389. 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.

  390. 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. –

  391. 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.

  392. 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.

  393. 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:

  394. 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.

  395. 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.

  396. 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.

  397. 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.

  398. New information in the trading statement of 20th March 2000

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

  400. 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.

  401. 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.

  402. 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.

  403. 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 –

  404. 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.

  405. 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.

  406. 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.

  407. 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.

  408. The learned trial judge’s conclusion

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

  410. 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.

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

  412. 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.

  413. 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.

  414. 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.

  415. 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.

  416. Conclusion on the appeal

  417. 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.

  418. 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.

  419. In these circumstances I would allow the appeal.


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