§ Mr. BrazierTo ask the Chancellor of the Duchy of Lancaster if he will make a statement on the application of section 47(2) of the Financial Services Act to transactions during the course of takeovers and other dealings and practices on the financial markets.
§ Mr. MaudeSection 47(2) of the Financial Services Act is directed against deliberate manipulation of the market. Some concerns have been expressed that the provision may go wider than was intended. In the light of these concerns it may be helpful to set out my Department's views on some of the points which have been raised.
It has been suggested, for example, that section 47(2) would prevent or inhibit certain actions which are at 119W present common and which are consistent with the takeover code. My Department's view is that the balance of dealings between offeror and offeree company is unaffected by the new provision, and it is difficult to see how actions taken in compliance with the code and not otherwise unlawful could constitute the offence of market manipulation.
In relation to takeover offers, it has been suggested that the act of buying shares of an offeree company might influence the price and lead in some way to a breach of section 47(2). If shares are bought by associates of the offeror or the offeree company, or by persons already holding 1 per cent. or more of the shares, these purchases must under the code be disclosed. My Department believes that in such circumstances it would not be possible to maintain that the purchase had created a false and misleading impression as to the value of or the market in the shares, since the market would be aware not only of the price and quantity of the purchase but also of the connection (if any) between the purchaser and the relevant parties to the take-over. Although the code does not provide for instantaneous disclosure, the requirements are well-established and recognised by the market as the means by which a false market is avoided.
Of course, not all purchasers are required under the code to disclose their purchases. Some people in this class may wish the offer to fail because they believe it is in the long-term interests of the offeree company that it should fail. They may, in genuine support of this belief, buy shares at above the offer price. Such a purchase would be based on a commercial assessment of the prospects of the company concerned, and even if others in the market had different views as to the value of the shares in question the Department does not believe that such purchases would amount to market manipulation. Thus we do not take the view that the section outlaws activity of this kind by those who hope that an offer will not succeed.
In such cases, there is of course a risk that anything said by or on behalf of the offeree company, for example about future prospects, may be inside information, or that any arrangements, however informal, would constitute a Companies Act concert party. Similarly, any financial arrangements raise questions as to whether unlawful assistance is being given. While actions in contravention of section 47(2) may themselves also contravene these provisions my Department does not believe that section 47(2) affects the application of such provisions. The scope for supportive action may therefore be extremely limited.
In a different context, it has been suggested that a person—say, a fund manager—who needs to buy or sell a large number of shares, and who does so in small quantities so as not to move the price against himself, might be guilty of market manipulation. This view appears to depend on it being accepted that a misleading
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£ million 1985 Population Thousands ERDF European social fund2 1986 1987 1988 1987 1988 West Midlands Region 5,183 40 67 25 9 17 Strathclyde Region 2,359 50 51 48 9 10 Greater Manchester 2,583 14 22 24 7 7 Merseyside County 1,481 33 6 8 8 7 impression as to the value of the shares is being created. The Department does not consider that in such a case the impression created is misleading. The fund manager has done nothing to indicate that he is not going to be a seller of further shares in the future. It would be a different matter if in some way he misrepresented a particular small purchase as his only purchase or dishonestly concealed his intentions in such a way as to induce a sale. Such actions, however, would be more likely to fall under section 47(1), which is a continuation (for these purposes) of what has been statute law for some time.
It has been suggested that there is some overlap between sections 47(1) and 47(2), in that a statement is capable of constituting conduct of the kind prohibited by section 47(2) even though it may not itself be prohibited by section 47(1). These two subsections define distinct offences and in committing an offence under section 47(2) a person may make statements which are not in themselves an offence under section 47(1). But in such a case it is not the statement itself which is an offence but the conduct which involves making that statement. As a prosecuting authority, the Department cannot envisage a case in which the making of a statement which was not a contravention of section 47(1) would, by and of itself, be held to be an act or course of conduct contrary to section 47(2), given the defence which section 47(3) provides.