Corporate Governance - The Fy
20 May 2008
Corporate Governance - The Fyffes Case
The Board of DCC has kept under continuous scrutiny the Fyffes plc litigation, which was launched in January 2002, and has carefully considered whether any corporate governance issues arose. The Directors have decided to address the matter comprehensively in a statement to be included in the Corporate Governance section of the Annual Report to be issued to shareholders in June 2008. It sets out the factors which they have taken into account in their corporate governance deliberations.
There has been substantial media coverage of the case. The true import of the High Court and Supreme Court judgments has not always been accurately reflected. Accordingly, the Directors have also decided to issue the statement by way of Stock Exchange announcement today, in advance of its publication in the Annual Report. The Directors hope that shareholders, on reading the statement set out hereunder, will have a better and more informed understanding of the Board's position on the matter.
THE FYFFES CASE
DCC Board Review, Action and Oversight
Over the past number of years, the Board of DCC has kept under continuous scrutiny the litigation which was launched in January 2002 by Fyffes plc against DCC, two of its subsidiaries and Jim Flavin under Part V of the Irish Companies Act, 1990 seeking an account of the profit arising on the sale of 31,169,493 shares in Fyffes in February 2000 by a subsidiary of DCC.
Fyffes claimed that certain Fyffes trading reports which had been sent to Fyffes directors including Jim Flavin, who was a non-executive director of Fyffes at the time, were price sensitive. In a judgment delivered in December 2005 the High Court concluded that the information in the trading reports was not price sensitive, that the involvement in the share sales of Jim Flavin as Chief Executive of DCC constituted a dealing by him under Part V of the Companies Act, 1990 and that he had not made use of that information which the Court found 'simply had no bearing on the Share Sales'. Only one finding of the High Court was appealed by Fyffes, namely its decision that the trading reports were not price sensitive. On 27 July 2007 the Irish Supreme Court overturned the High Court decision on this single issue.
The Board of DCC met later that day and, with the benefit of input from its legal advisers, reviewed the corporate governance implications of the Supreme Court judgment. After a full discussion under the Chairmanship of Michael Buckley, DCC's senior independent director, of all the issues arising the Board unanimously reaffirmed Jim Flavin in his role as Executive Chairman. The factors which it took into account in reaching this decision are set out below.
Following the announcement of the Board's decision, DCC's larger shareholders were contacted to explain the basis of the Board's decision and each of them was given the opportunity, if they wished, to discuss it with Michael Buckley.
The Board also set up a special Oversight Committee of non-executive directors, consisting of Michael Buckley (Chairman), Maurice Keane and Bernard Somers, to oversee independently all matters arising from the Supreme Court judgment on behalf of the Board. As part of that role the Committee subsequently directed the DCC input into the discussions that ultimately led to the settlement with Fyffes which was announced on 14 April 2008.
Legal Background and Key Findings
The Board believes it is important that it should set out for shareholders the legislative context of the High Court and Supreme Court litigation and the findings of the High Court judgment that were not affected by the Supreme Court decision, all of which it has taken into account in its corporate governance deliberations following the Supreme Court decision.
Possession v Use of Information - The Issue of Motivation
Part V of the Companies Act, 1990 was introduced in Ireland in order to bring into effect the provisions of Council Directive 89/592/EEC. The recitals to that Directive make it clear that the issue with which the Directive was concerned was the act of improperly using or taking advantage of inside information: -
'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, since the acquisition or disposal of transferable securities necessarily involves a prior decision to acquire or to dispose taken by the person who undertakes one or other of these operations, the carrying-out of this acquisition or disposal does not constitute in itself the use of inside information;
Whereas insider dealing involves taking advantage of inside information;'
The Directive therefore identified that insider dealing required both possession and improper use of price sensitive information. However, Part V of the Irish Companies Act, 1990 provided for a civil liability to arise for a party who deals in shares whilst simply in possession of price sensitive information. Furthermore, it did not stipulate that the party dealing or the company whose shares were dealt in must know or believe that the information was price sensitive.
Part V of the Irish Companies Act, 1990 was repealed by the Investment Funds, Companies and Miscellaneous Provisions Act 2005 upon the enactment on 6 July 2005 of Statutory Instrument No. 342 which implemented a new EC Directive on insider dealing (Market Abuse Directive 2003/6/EC). In contrast to the 1990 Act, the new legislation provides that a person 'who possesses inside information shall not use that information'.
The Irish High Court reached the following finding, which was not appealed to the Supreme Court, that Jim Flavin had not 'used' the information which was later determined by the Irish Supreme Court to be price sensitive:-
'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 a 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 worldoffruit.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'.
Having regard to that finding, the Board has legal advice that had the Fyffes action been brought relying only on Council Directive 89/592/EEC or upon the law as it now stands in Ireland, which requires 'use' of price sensitive information as opposed to mere possession, it would almost certainly have failed.
The High Court also found that 'the plaintiff has failed to establish a breach of fiduciary duty on the part of Mr Flavin'.
The Supreme Court in its judgment recited these conclusions of the High Court and stated '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'.
Another important factual finding of the High Court which was not affected by the Supreme Court judgment was as follows: 'I did not understand the Plaintiff to assert dishonesty on the part of any of the Defendants. In any event, I find that dishonesty was not established on the evidence'.
The only issue in the appeal to the Supreme Court was whether the information in the possession of Jim Flavin was, in law, price sensitive at the time of the share sales, notwithstanding that the information had no bearing on the share sales. In the words of the Supreme Court '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'.
In the course of carrying out his duties as Chief Executive of DCC, Jim Flavin exercised judgment at the time of the share sales in relation to the likely price effect of the Fyffes November and December 1999 trading reports. His judgment was that the trading reports were not price sensitive.
At the time, no other non-executive director or executive director of Fyffes thought that the information in the trading reports was price sensitive. The High Court judgment stated 'There is no objective evidence that any director or executive of Fyffes had any concern that, by reason of being in possession of the information contained in the November and December Trading Reports, Mr. Flavin was or might have been in possession of price-sensitive information. The evidence strongly suggests that such a possibility was not entertained at all'.
The Fyffes action was heard before the Irish High Court between December 2004 and June 2005 in a hearing which lasted for 87 days. Having heard witnesses of fact from both DCC and Fyffes and the opinions of several experts, the High Court concluded in its judgment delivered on 21 December 2005 that the trading reports sent to Jim Flavin were not price sensitive.
Fyffes appealed one finding of the High Court, namely the decision that the trading reports were not price sensitive. In a judgment on 27 July 2007 the Irish Supreme Court overturned the High Court on this single issue. In doing so the Supreme Court did not ascribe any bad faith to DCC or Jim Flavin.
The Board respects the judgment of the Supreme Court and acknowledges its financial consequences as embodied in the recent financial settlement with Fyffes.
In the introductory paragraph of his Supreme Court judgment Mr. Justice Fennelly wrote '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'. The Board of course agrees with this statement of general principle. The finding of the High Court that the share dealings in February 2000 did not involve the use or exploitation by Jim Flavin of the information in the trading reports was not appealed and was not affected by the Supreme Court decision. The Fyffes case was a civil action and did not involve any allegation or finding of dishonesty, fraud or crime. However, Mr Justice Fennelly's introductory statement of general principle has been inaccurately portrayed by some commentators in a manner which does not fairly reflect the true import of the High Court and Supreme Court judgments in this particular case.
Conclusion
The Board is satisfied that the established facts surrounding the sales of Fyffes shares in February 2000 fully support its view that the share sales did not involve any intentional wrongdoing on the part of Jim Flavin and in essence were an unwitting breach of civil law under the now repealed Part V of the Irish Companies Act, 1990.
Factual Background
Jim Flavin was a non-executive director of Fyffes from January 1981 until his resignation on 9 February 2000. In his capacity as a non-executive director he routinely received Fyffes trading reports, including the trading reports for November and December 1999, which were the first two months of Fyffes' financial year to 31 October 2000. These reports disclosed poor trading results and were the reports found by the Supreme Court to be price sensitive.
The DCC Group had owned a 10% ordinary shareholding in Fyffes, a listed fresh produce company, since 1981 and, following DCC's own listing in 1994, this shareholding had become anomalous and it had become the DCC Group's objective to sell it if an opportunity arose. On 3, 8 and 14 February 2000, in response to unsolicited offers from two stockbroking firms, a DCC subsidiary sold 31,169,493 Fyffes ordinary shares at prices of between €3.20 and €3.90 per share. The offers for the Fyffes shares arose from what the High Court judge described as the 'very considerable enthusiasm for dotcom stocks or stocks with a dotcom component in January and February, 2000'. In November 1999 Fyffes had launched a subsidiary called worldoffruit.com. In its Chairman's Statement dated 31 January 2000 included in its 1999 Annual Report Fyffes stated that worldoffruit.com 'looks set to dramatically change the way in which fresh fruit and vegetables are traded across the globe'. Resulting from the exuberance for dotcom stocks Fyffes share price rose from €1.60 on 1 December 1999 to a peak of €4.00 on 18 February 2000, notwithstanding the fact that it was known that Fyffes' core banana business faced very challenging trading conditions. For example, ABN Amro in a research note dated 14 January 2000 commented: 'Fyffes shares have rallied strongly since the full year results on recognition of its internet potential - but in blatant disregard to the recent profit warnings of its competitors Dole, Chiquita and Del Monte Fresh Produce'.
Arising from continued difficult trading into February and March 2000 in its banana business, Fyffes issued a profit warning on 20 March 2000 at a time when the dotcom bubble had begun to burst and when the Fyffes share price had already commenced a decline.
On 24 January 2002 Fyffes lodged a legal action under Part V of the Irish Companies Act, 1990 against DCC, two of its subsidiaries and Jim Flavin alleging that the trading reports for November and December 1999 were price sensitive and therefore that a civil liability arose to account for the profit arising on the sale of 31,169,493 shares in Fyffes in February 2000.
In a judgment on 21 December 2005 the Irish High Court concluded that the Fyffes trading reports were not price sensitive, that the involvement in the share sales of Jim Flavin as Chief Executive of DCC constituted a dealing by him under Part V of the Companies Act, 1990 and that he had not made use of the information which the Court found 'simply had no bearing on the Share Sales'. Fyffes appealed one finding of the High Court, namely the decision that the trading reports were not price sensitive. The Irish Supreme Court overturned the High Court decision on this single issue.
On 14 April 2008 a settlement was agreed with Fyffes and counterparties in respect of all claims, interest and costs for an amount of €41 million. An exceptional charge of €50 million for this amount and DCC's own costs has been made in DCC's financial statements for the year ended 31 March 2008.
For Reference:
Jim Milton
Murray Consultants
Tel: +353 1 498 0300
+353 86 255 8400
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