GC100: Listing Rules Guidelines Part III: Guidelines on obligations to notify dealings and Model Code compliance

Practical Law UK Practice Note 9-518-6569 (Approx. 16 pages)

GC100: Listing Rules Guidelines Part III: Guidelines on obligations to notify dealings and Model Code compliance

by GC100 and Practical Law Corporate with assistance from Stephanie Maguire, Freshfields Bruckhaus Deringer LLP

Scope of this note

These guidelines have been drawn up by the GC100 Listing Rules Working Group to assist members of GC100 to implement procedures for the purposes of complying with the requirements of (i) the Listing Rules in relation to dealings being restricted in accordance with the Model Code and (ii) the Disclosure and Transparency Rules (DTRs) in relation to the disclosure of dealings in a company's securities by directors and other senior managers.

For GC100 guidelines on:

Systems and controls, see Practice note, GC100: Listing Rules Guidelines Part I: Guidelines for establishing procedures, systems and controls to ensure compliance with the Listing Rules.
Insider lists, see Practice note, GC100: Listing Rules Guidelines Part II: Guidelines on the requirement to maintain insider lists.

GC100 is the association of general counsel and company secretaries working in FTSE 100 Companies. These guidelines, which do not necessarily reflect the views of all individual members of the GC100 or their employing companies, have been produced for guidance only. Nothing in these guidelines or the accompanying appendices represents advice by the GC100 or any of its members, Practical Law, Thomson Reuters Professional (UK) Limited or any of the participants in the Listing Rules Working Group to any person and none of the GC100, its members, Practical Law, Thomson Reuters Professional (UK) Limited and the participants in the Listing Rules Working Group accepts any responsibility or liability to any person for or in respect of the guidelines. It is the responsibility of individual companies to ensure that they understand, and comply with, the Listing Rules and DTRs and to take specific external advice (legal or otherwise) as they deem appropriate.

Note that, for the purposes of the Listing, Prospectus, Disclosure and Transparency Rules, the FSA was replaced by the FCA on 1 April 2013. For convenience, we refer to the FCA throughout these guidelines, although the FSA was the regulatory body responsible for decisions made and publications issued before 1 April 2013.

Section 1: Model Code: Overview and frequently asked questions

1.1 Overview

The Listing Rules require listed companies to impose restrictions on dealings in the company's securities by persons discharging managerial responsibilities (PDMRs). These restrictions are set out in the Model Code (LR 9, Annex 1).

The Model Code:

Requires those subject to restrictions to obtain clearance before dealing.
Prohibits dealings during "close periods" (prior to release of results).
Prohibits dealings while there is any inside information in relation to the company.

The relevant Listing Rules are LR 9.2.8R and LR 9.2.9G.

1.2 To whom does the Model Code apply?

The Model Code applies to PDMRs only, although a company may choose to apply its dealing policy to a wider category of people. (Previously, the Model Code also applied to all employees whose name was required to be placed on an insider list under the DTRs.)

1.3 Who is a PDMR?

A PDMR is:

A director of the relevant issuer.
A senior executive of such issuer who has:
- regular access to inside information relating, directly or indirectly, to the issuer; and
- power to make managerial decisions affecting the future development and business prospects of the issuer.

(Section 96B(1), Financial Services and Markets Act 2000 (FSMA).)

There is no guidance on the scope of the definition of "senior executive" in FSMA or the DTRs. Not all senior managers of the company will be PDMRs: it is a much narrower test. Companies should consider only individuals whose decision-making powers extend to matters which can affect the development or prospects of the company's business to be PDMRs.

It is not necessary for a PDMR to make decisions alone. A senior manager who is a member of a sub-committee of the board by way of delegated power is likely to be a PDMR even if he has no significant decision-making power outside his committee. Companies which have an executive management committee one level down from the board of directors should carefully consider whether the members of this committee are PDMRs.

It is the substance of the role that is important, rather than job title. A company should consider how much influence or responsibility a person has in managerial decision-making. Company secretaries who solely deal with administration and general counsel who offer legal advice only are not usually classified as PDMRs.

Further guidance on the definition of PDMR is contained in the Appendix.

1.4 Which dealings are caught?

The Model Code applies to dealings in securities. "Dealings" is defined widely and includes, for example:

Entering into, terminating or assigning a stock lending agreement in respect of securities of the company.
Entering into a contract (including a contract for difference) the purpose of which is to secure a profit or avoid a loss by reference to fluctuations in the price of any of the securities of the company.
The grant, acceptance, acquisition, disposal, exercise or discharge of an option over securities of the company.
Granting a charge, lien or other encumbrance over securities of the company.
Any other right or obligation, present or future, conditional or unconditional, to acquire or dispose of any securities of the company.

1.5 Which dealings are not caught?

The Model Code contains a list of transactions in relation to which clearance is not required. The list of exempt dealings includes:

Taking up rights in a rights issue or selling nil-paid entitlements to take up the balance of entitlements in a rights issue.
Accepting a takeover offer.
Dealings in the units of an authorised unit trust or in shares in an open-ended investment company.
Bona fide gifts by a third party to a PDMR.

1.6 What is the clearance procedure?

Clearance to deal can be given to:

The chairman by the CEO or, in his absence, the senior independent director or board committee nominated by the CEO or other officer nominated by the CEO.
The CEO by the chairman or, in his absence, the senior independent director or board committee nominated by the chairman or other officer nominated by the chairman.
Any other director or the company secretary by the chairman or a director designated by the board.
Any PDMR who is not a director by the company secretary or a designated director.

If the roles of chairman and CEO are combined, clearance for dealings by the individual holding that role must be given by the board as a whole.

Clearance to deal must be given by the relevant person within five business days of a request being made and dealing then must take place as soon as possible and in any event within two business days of clearance being obtained.

The company must maintain a record of the response to any dealing request and of any clearance given. A copy of the response and clearance (if any) must be given to the relevant person.

1.7 When must clearance not be given?

Clearance must not be given during a close period, being:

The period of 60 days immediately preceding (i) a preliminary announcement of the company's annual results (or, if shorter, the period from the end of the relevant financial year up to and including the time of announcement); or (ii) the publication of its annual financial report (or, if shorter, the period from the end of the relevant financial year up to and including the time of such publication).
Before publication of the half-yearly report, the period from the end of the relevant financial period up to and including the time of such publication.
If the company reports quarterly, the period of 30 days immediately preceding the announcement of the quarterly results (or, if shorter, the period from the end of the relevant financial period up to and including the time of the announcement).

Clearance must also not be given:

In any period in which there exists any matter which constitutes inside information in relation to the company.
On considerations of a short term nature. An investment with a maturity of one year or less will always be considered to be of a short term nature.

1.8 What are the obligations in respect of connected persons?

A director or other PDMR must take reasonable steps to prevent dealings by, or on behalf of, his connected persons on considerations of a short-term nature or during a close period. He must also advise his connected persons and investment managers acting for him of the name of the listed company of which he is a director or other PDMR, the close periods in which they cannot deal and that they must inform the company concerned immediately after they have dealt in the company's securities. "Connected persons" has the same meaning as used in DTR 3 (see section 3.3: Who is a connected person of a director or other PDMR?).

1.9 What penalties can the FCA impose for breach?

Penalties for breach of the Model Code are the same as for a breach of the DTRs. The FCA may impose either a fine or a public censure on the company (for example, if the company failed to enforce the Model Code) or on any person who was a director of the company at the material time if he was "knowingly concerned in the contravention". If any director fails to seek clearance for a relevant dealing due to a lack of understanding of his duties, the company may also be held responsible by the FCA for breach of Premium Listing Principles 1 and 2 as well as the individual director being liable for failure to make the disclosure.

Note that over the last few years there has been a definite change in the nature of the FCA's enforcement regime. The final notices issued to Lamprell, Nestor and Prudential (all during the first half of 2013) highlight that the focus of the FCA's sanctions seems to be that of deterrence, as opposed to market integrity, that fines are potentially becoming much larger, and that the FCA is prepared to take action for a company's systems failings even where there is no detriment to the market or investors.

For more information on Lamprell, Nestor and Prudential as well as details of other final notices issued by the FCA, see Practice note, FCA and FSA final notices regarding breaches of the DTR and LR.

For a breach of the Listing Rules or DTRs, the FCA applies a five-step framework when setting the financial penalty:

Step 1 – Disgorgement of any profit derived from the breach.
Step 2 – Determination of a figure which reflects the seriousness of the breach (for example, the revenue arising from the relevant product or the market capitalisation of the company).
Step 3 – Adjustment for any mitigating and aggravating factors.
Step 4 – Adjustment for deterrence if required.
Step 5 – If applicable, application of an early settlement discount.

This framework gives the FCA a significant degree of discretion. Where there is a breach of the Model Code and DTR 3, the starting point for the "seriousness of the breach" under step 2 is likely to be, as was the case for Reckitt Benckiser (January 2015), a percentage of the value of the transactions undertaken by the PDMR up to a maximum of 20 per cent. In the case of Reckitt Benckiser, the breaches were not deliberate or reckless and there was no information to suggest that there was a significant loss or risk of loss to investors or other market users, and therefore the relevant fine was only based on 5 per cent. of the value of the transactions concerned.

Section 2: Practical guidance on Model Code compliance

Individuals bound by the Model Code must seek clearance to deal in the company's securities. Companies must require the relevant individuals to whom the Model Code applies to comply with the Model Code and companies must take all proper and reasonable steps to secure their compliance. In practice, this means that companies need to ensure that the restrictions on dealings are widely understood by their PDMRs, that the relevant individuals are aware that the restrictions apply to them and that systems are in place to apply the correct clearance procedures under the Model Code.

Companies should consider undertaking the following steps:

Produce memorandum on share dealing code. Produce a memorandum on the company's share dealing code (or the Model Code, as the case may be) and give it to directors, other PDMRs and any others whom the board has decided should be subject to the share dealing code (or Model Code). Require each person receiving such memorandum to acknowledge receipt of the memorandum in writing.
Update company's code. Where a company has its own share dealing code (instead of the Model Code), check that such code is no less rigorous than the Model Code. Simply having a code in place is not enough - it must be reviewed regularly and enforced in order to facilitate and encourage the compliance of the company's PDMRs with the Model Code and to enable the company to identify and deal promptly with instances of non-compliance.
Review share dealing code to identify and mitigate risk. Periodically review the way in which the share dealing code (or Model Code) works so as to identify and mitigate risks arising from it. For example, consider including compliance with PDMR obligations in relevant contracts of employment; requiring PDMRs to provide contact details for any nominees or custodians through which they held their shares; arranging for markers to be put against all PDMR shareholdings and reconciling the company and PDMR shareholding records on a periodic basis.
Put in place effective systems and controls. Ensure that the company has systems and controls in place to identify and manage inside information (see GC100: Listing Rules Guidelines Part I: Guidelines for establishing procedures, systems and controls to ensure compliance with the Listing Rules and GC100: Listing Rules Guidelines Part II: Guidelines on the requirement to maintain insider lists).
Organise training. All directors and PDMRs should be aware of and understand their obligations under the Model Code. Premium Listing Principle 1 emphasises the importance of ensuring that directors understand their responsibilities and obligations as directors. It is not sufficient for a company to rely on the experience and knowledge of its board members and PDMRs. The company should have in place an on-going training programme. It should also consider sending out regular emails attaching the company's share dealing code (or Model Code, as the case may be) and notifying directors and other PDMRs of forthcoming close periods. Consider requiring each director and PDMR to acknowledge that they are aware of and understand their obligations under the Model Code.
Ensure requests and clearances are in writing. Requests should not be made and clearances should not be given verbally - they should all be in writing. Companies may wish to produce prescribed documents for dealing requests, dealing approvals and dealing notifications (see, for example, Appendix 6: Share dealing clearance and notification form of GC100: Listing Rules Guidelines Part II.) Where a company has prescribed documents, these should be used. Companies should consider reminding directors and other PDMRs that, once clearance has been given, any dealing must take place as soon as possible and in any event within two business days of clearance being received.
Require notifications to be made. Where permission to deal is given, require the relevant person to notify the company in writing of the dealing and the date of the dealing once it has taken place.
Identify designated person. Identify a designated director or the company secretary for clearance purposes and ensure that all of the relevant people know who he is.
Identify a contact person/team. Identify a contact person/team with detailed knowledge of the Model Code to answer questions from directors, other PDMRs and their connected persons. This is likely to be either the company secretary or a member of the company secretariat or compliance teams.
Identify connected persons. Identify the connected persons of the directors and other PDMRs and periodically update and review the list of them and remind directors and other PDMRs that they are required to take steps to prevent dealings by them during prohibited periods and to ensure that their dealings are disclosed to the company under the DTRs.
Maintain records. Ensure that clear written records are maintained of all applications for dealing and their outcome.

Section 3: Disclosure of dealings by directors and senior executives: Overview and frequently asked questions

3.1 Overview

DTR 3 requires the following persons to notify the company of any dealing on their account in shares of the company (or related securities):

Directors.
Other PDMRs.
Each of their connected persons.

This requirement is in addition to the requirement under DTR 5 for investors to notify significant voting interests in the company. The company must release an announcement through a Regulatory Information Service (RIS) as soon as possible after it is notified of a dealing under DTR 3 or DTR 5.

The relevant provisions of DTR 3 are DTR 3.1.2R and DTR 3.1.4R. Further guidance is set out in the Appendix.

3.2 Who is a PDMR?

A PDMR is:

A director of the relevant issuer.
A senior executive of such issuer who has:
- regular access to inside information relating, directly or indirectly, to the issuer; and
- power to make managerial decisions affecting the future development and business prospects of the issuer.

(Section 96B(1), FSMA.)

This is the same as the definition of PDMR for the purposes of the Model Code. For guidance on this definition, see section 1.3 Who is a PDMR? and the Appendix.

3.3 Who is a connected person of a director or other PDMR?

The definition of a connected person includes:

The spouse, civil partner, child or step-child of a director or other PDMR. For these purposes, the definition of child includes only those under the age of 18 years.
A relative of a director or other PDMR, who, on the date of the transaction in question, has shared the same household as that person for at least 12 months.
A body corporate with which the director or other PDMR is associated. A director or other PDMR is associated with a body corporate if (i) the PDMR or any person connected with him, is a director or other senior executive who has the power to make management decisions affecting the future development and business prospects of that body corporate; or (ii) he and persons connected with him, together are interested in shares comprised in the equity share capital of that body corporate of a nominal value equal to at least one fifth of that share capital (excluding treasury shares), or are entitled to exercise or control the exercise of more than one fifth of the voting power at any general meeting of that body (excluding any voting rights attached to any shares in the company held as treasury shares).
A person acting in his capacity as trustee of any trust (excluding an employees' share scheme or a pension scheme), of which the beneficiaries or potential beneficiaries include: the director, other PDMR or any of the persons connected with him by virtue of the first three paragraphs above.
Any person acting in his capacity as trustee of a trust (excluding an employees' share scheme or a pension scheme) whose terms confer a power on the trustees that may be exercised for the benefit of the director or other PDMR, or any of the persons connected with him by virtue of the first three paragraphs above.
A person acting in his capacity as partner of the director or other PDMR or of any person who by virtue of any of the paragraphs above is connected with the director or other PDMR.
A firm that is a legal person in which: (i) the director or other PDMR is a partner; (ii) any of the persons connected with the director or PDMR by virtue of the first five paragraphs above, is a partner; or (iii) a partner is a firm in which the director or PDMR or any of the persons connected with the director or PDMR by virtue of the first five paragraphs above is a partner.

(Section 96B(1), FSMA as contained in Schedule 11B to FSMA.)

3.4 How does the "common directorship" category of connected person work in practice?

The FCA has published informal guidance in its Market Watch newsletter (Issue No.12) (MW12) that makes it clear that a company is only to be treated as connected with a director or other PDMR by virtue of a common directorship (or by being a PDMR of the other company) if the director or PDMR concerned (or a person connected to them on some other basis) is either a:

Sole director of that other company.
Director or PDMR of that other company with personal control over its management decisions.

(Answer to Q24 of MW12: FAQs: Transactions by PDMRs and their connected persons.)

This is a much more restricted category than was initially thought.

Although MW12 refers to the old definition of connected persons (taken from section 346 of the Companies Act 1985), the guidance remains valid.

3.5 Which dealings need to be disclosed?

Directors and other PDMRs must notify the issuer in writing of "all transactions conducted on their own account in the shares of the issuer, or derivatives or any other financial instruments relating to those shares" (DTR 3.1.2R).

On 9 January 2009, the FCA clarified that grants of security over shares (by the creation of a security interest such as a pledge, mortgage or charge) are covered by the disclosure requirement in DTR 3 (see FSA statement on disclosure and model code obligations in respect of the use of shareholdings as security). Directors and other PDMRs must therefore inform their companies of any grant of security over their shareholdings.

3.6 What is a financial instrument for the purpose of DTR 3?

The definition of "financial instrument" in the DTRs includes:

Transferable securities (for example, shares, bonds, convertible securities and warrants).
Units in collective investment undertakings (for example, unit trusts).
Financial futures contracts, including equivalent cash-settled instruments.
Equity swaps.
Options to acquire or dispose of any instrument falling into these categories.

The financial instruments which are the subject of the dealing do not themselves need to be listed securities but, if the dealing does not involve shares of the issuer, the security must "relate" to those shares to be caught by DTR 3. For example, a spread bet would be a relevant dealing, although it does not involve the shares directly.

3.7 What transactions will be considered to be conducted on a person's own account?

The DTRs do not provide any general guidance on what transactions will be considered to be conducted on a person's own account. However, although not formal guidance, in its technical note, UKLA technical note: Disclosure and Transparency Rules, the UKLA thinks the following indicators suggest that a transaction by a PDMR is "on own account":

A transaction which is the result of an action taken by a PDMR or otherwise undertaken with their consent.
A transaction whose beneficiaries are mainly PDMRs.
Transactions having a material impact on a PDMR's interest in an issuer.

The FCA has also stated that the grant or acceptance of options relating to the securities of the issuer (or any other right or obligation to acquire or dispose of any securities of the issuer) and the acquisition, disposal, exercise of or dealings in such options, rights and obligations are transactions which are captured by the disclosure requirements in DTR 3. Consequently, share options will need to be disclosed by directors and other PDMRs upon their grant and exercise.

Further guidance on the meaning of "own account" is contained in Appendix: Notification of transactions by PDMRs.

3.8 Do dealings in beneficial and non-beneficial interests need to be disclosed?

The disclosure obligations under DTR 3 do not apply to a dealing in a non-beneficial interest as such a dealing cannot be regarded as being for the account of the director or other PDMR. However, a dealing by the trustees of a trust of which the director or other PDMR is a beneficiary may have to be disclosed. The FCA has not produced definitive guidance on this but the following approach is generally accepted:

Where the individual concerned is a beneficiary as a member of a relatively small class (for example, a beneficiary of a family trust) a dealing by the trust should be disclosed.
Where the individual concerned is a beneficiary as a member of a relatively large class (for example, a beneficiary of a pension scheme with many members or a holder of units in a widely held unit trust) a dealing by the trust is not required to be disclosed.
Where a PDMR is a beneficiary and instructs the trust to deal, that dealing should be disclosed.

3.9 Do gifts need to be disclosed?

Gifts of shares and other relevant financial instruments to or from a director or other PDMR require disclosure. This includes gifts between connected persons (for example, between husband and wife).

3.10 When must the disclosure be made?

The disclosure must be made by the director or other PDMR or connected person within four business days of the day on which the transaction occurred (DTR 3.1.2R). Where the dealing is also caught by DTR 5, for example the director's holding has increased through 3% of the issued share capital, the disclosure must be made to the company and the FCA within four trading days in the case of a non-UK issuer and two trading days in all other cases (DTR 5.8.3R).

The issuer must notify an RIS of information disclosed to it under DTR 3 as soon as possible and no later than the end of the business day following receipt of the information (DTR 3.1.4R(2)). The issuer must also place this RIS announcement on its website by the close of the business day following the RIS announcement if the information contained in it amounts to inside information (DTR 2.3.2R).

3.11 What penalties can the FCA impose for breach?

Penalties for breach of the DTRs are the same as for the breach of the Model Code. The FCA may impose either a fine or a public censure on the company concerned, on a PDMR, or on a connected person (DTR 1.5.3G). For more details, see section 1.9, What penalties can the FCA impose for breach?.

For examples of final notices issued by the FCA for breaches of the DTRs, see Practice note, FCA and FSA final notices regarding breaches of the DTR and LR.

Section 4: Practical guidance on disclosure of dealings

Companies should consider undertaking the following steps:

Implement a written policy. Review and implement a written policy on the disclosure of dealings under DTR 3, including details of a contact person or team for any query.
Organise training. The company:
- must take reasonable, pro-active steps to enable its directors and PDMRs to understand their obligations and responsibilities as directors/PDMRs;
- should arrange regular training for the directors and other PDMRs to inform them of their disclosure obligations and provide them with a copy of the written policy. It is not sufficient for a company to rely on the experience and knowledge of its directors and other PDMRs. If any director fails to disclose dealings in a company's securities to the company due to a lack of understanding of his duties, the company may be held responsible by the FCA for breach of Premium Listing Principles 1 and 2 as well as the individual director being liable for failure to make the disclosure; and
- should consider requiring each director and PDMR to acknowledge in writing that he is aware of and understands his disclosure obligations and has received a copy of the company's written policy. Where acknowledgements are in writing, ensure that the company receives all such written acknowledgements. The company should also consider the need for refresher training.
Identify a contact person/team. Identify a contact person/team with detailed knowledge of the DTR disclosure regime to answer questions from directors, other PDMRs and their connected persons. The person/team should be, or include, a member of the company secretarial department if it is involved in the clearance procedure for the Model Code.
Identify PDMRs. Identify the PDMRs and periodically review and update the list of them.
Identify connected persons and ensure they are aware of obligations. Identify the connected persons of the directors and other PDMRs and periodically update and review the list of them. Require that the directors and other PDMRs inform their connected persons of their disclosure obligations and provide such persons with a copy of the written policy.
Produce form for notifications. Create and provide a form for use by directors, other PDMRs and their connected persons which: (i) is in the same form as the company will use to disclose to the market via an RIS; and (ii) includes details of their name, the name of the company, the reason for the responsibility to notify, a description of the financial instrument, the nature of the transaction, the date and place of the transaction, and the price and number of securities involved.
Ensure procedures are in place for announcements and disclosure on website. Review procedures for announcing the dealing information to the market via an RIS by the end of the business day after receipt of the notification and for ensuring that such announcements comply with the requirements of DTR 3. Ensure that arrangements are in place for any RIS dealings disclosure announcement to be placed on the company's website by the close of the business day following the RIS announcement if the relevant information amounts to inside information.

For a summary of the key considerations for a premium listed company where a PDMR wishes to deal in its shares, see Dealing by a PDMR of a premium listed company: checklist.

Appendix: Extracts from the UKLA's technical note relating to PDMRs and MW12

UKLA technical note: Transactions by PDMRs and their connected persons

The UKLA technical note Transactions by persons discharging managerial responsibilities and their connected persons (UKLA/TN/540.2), the first version of which was published in December 2012 to coincide with the launch of the UKLA Knowledge Base, substantially reproduces items that were previously covered by UKLA technical note: Disclosure and Transparency Rules and by the UKLA's newsletter List!. The technical note on PDMRs constitutes formal FCA guidance on:

Scope of DTR 3 (see Scope of DTR 3).
General FAQs regarding PDMRs (see General FAQs regarding PDMRs).
Notification of transactions by PDMRs (see Notification of transactions by PDMRs).

Scope of DTR 3

DTR 3 obliges PDMRs and their connected persons to notify an issuer of all dealings conducted on their own account in its shares and other instruments. The issuer is then required to notify an RIS of this information. The introduction in DTR 1 makes it clear that DTR 3 applies to issuers incorporated in the UK whose financial instruments are admitted to trading on a regulated market. DTR 3 also applies to non-EEA issuers whose home state is the UK. Essentially, this latter category would consist of non-EEA issuers with shares admitted to trading in the UK where the UK has been chosen as the home member state.

DTR 3.1.8R extends the scope of DTR 3 to cover issuers that have financial instruments admitted to trading in the UK, but which do not fall within the categories outlined above. Issuers falling into this category could be either:

An EEA incorporated issuer (non-UK) which has shares admitted to trading in its home member state and also in the UK.
A non-EEA issuer with shares admitted on its domestic market, the UK and another EEA jurisdiction where the other EEA jurisdiction has been chosen as the home member state.

This rule aims to ensure that information equivalent to that which the issuer is required to disclose in the country of its primary listing, or in the jurisdiction of its home member state, is also made available in the UK. The UKLA does not require such an issuer to publish more information in the UK than it does in its country of primary listing/home member state.

General FAQs regarding PDMRs

Who are PDMRs?

In deciding who is a PDMR, companies should look at the definition set out in section 96B(1) of FSMA. Companies should look beyond any job title to consider the substance of the role. Clearly, those with the power to make managerial decisions that affect the future development and business prospects of the issuer, such as board members, are PDMRs. On the other hand, those that offer analysis or information to enable others to ultimately make a managerial decision may not be PDMRs, even where they give informed recommendations.

Where the classification is not clear-cut, companies must consider how much influence or responsibility a person has in managerial decision-making. For example, company secretaries who only deal with administration, and general counsel who offer their company legal advice only are usually not classified as PDMRs.

How many PDMRs should a company have?

It is impossible to indicate how many PDMRs there should be across the wide range of listed companies. Some companies will not have any PDMRs outside the board. Companies should consider the functions and responsibilities of employees in relation to the definition of PDMR.

Who is a PDMR when decisions are taken collectively?

Where a person or persons are involved in a collective decision it is important to consider the substance of their role when assessing if they are a PDMR. If a managerial decision that affects issuers' future development and business prospects is ratified by board members, non-board members that recommended the action may nevertheless still be PDMRs. However, in cases where the decision is clearly made by the board members and not senior management, a non-board member is unlikely to be a PDMR.

Notification of transactions by PDMRs

DTR 3.1.2R requires PDMRs and their connected persons to notify an issuer of transactions conducted on their own account in shares of the issuer, or derivatives or any other financial instrument relating to those shares. The UKLA has received several queries asking what is meant by "on own account". The following paragraphs set out its views on this issue and the UKLA hopes this will help issuers interpret this rule.

The UKLA expects most transactions of the following types would require notification under DTR 3.1.2R:

Acquisitions of shares.
Disposals of shares.
Acceptance of awards.
Accepting or receiving an option or gifts from the issuer or a third party and the exercise of options by a PDMR.
The placing of a spread bet related to the share price of an issuer.

Transactions unlikely to be considered "on own account" could be transactions for which the PDMR has not given any instruction, consent or otherwise had any control over. An example would be the automatic vesting of an option. Similarly, in the case of an employee share scheme administered by an employee benefit trust (EBT) in which PDMRs are participants, dealings by an EBT for the benefit of all participants would not require notification by PDMRs under DTR 3.1.2R. Only when the EBT's transaction is in line with the instruction of a PDMR, for example, an instruction to liquidate their interest on leaving the scheme, would a transaction require notification.

It is impossible to set out a definitive "on own account" test that would be applicable to all transactions that a PDMR may conduct. Each transaction by a PDMR ought to be considered on its own facts to assess if it was conducted "on own account".

PDMRs cannot delegate the responsibility to notify. PDMRs sometimes enter into arrangements with third parties in which the third party agrees to make the required notification to the issuer on the PDMR's behalf. The UKLA's view is that, notwithstanding any such delegation, the PDMR is responsible for satisfying the requirement and remains liable if the notification is not made. DTR 3.1.2R is expressed in absolute terms, that is, it does not say that PDMRs have to take reasonable steps to ensure notification happens, it says PDMRs "must notify".

MW12: FAQs: Transactions by PDMRs and their connected persons

MW12 was published in June 2005 and, although not formal guidance, provides useful commentary on the FCA's thoughts on transactions by PDMRs and their connected persons.

Who has to notify an issuer of transactions made in the issuer's shares? (Q21)

The spirit of the rules relating to disclosure of transactions by PDMRs, is to require the announcement of dealings by, in addition to directors, senior executives of issuers who operate just below board level who have regular access to inside information and make managerial decisions affecting the future development and business prospects of the issuer.

Under DTR 3.1.2R, PDMRs within an issuer and their connected persons (as defined in section 96B of FSMA) must notify the issuer in writing of transactions conducted on their own account in the shares of the issuer, or derivatives or any other financial instruments relating to those shares. The FCA envisages that PDMRs are likely to include those senior employees who sit on the executive committee of an issuer even if they are not also board members.

Can directors or other senior executives at subsidiary companies within an issuer's group be considered PDMRs under the DTRs? (Q22)

Yes. PDMRs can be employed by any company within the issuer's group and not just by the issuer itself. There may be instances where only employees of the issuer are PDMRs, for example where all executive functions of a group are contained within the issuer itself. However, this will not always be the case as issuers often have complex corporate structures which must be looked through when identifying PDMRs within an issuer's group. Directors or senior executives at subsidiaries who regularly have access to inside information and make decisions affecting the development and business prospects of the issuer are PDMRs.

I am a director of a company, A, whose shares are traded on a regulated market. I am also a PDMR in another company, B. Is B one of my "connected persons" so that B must notify A of transactions conducted on its own account in A's shares under the DTRs? Do I need to advise B of A's close periods and seek to prohibit B from dealing in those close periods under the Model Code? (Q24)

On the basis that the test for connected persons set out in section 346 of the Companies Act 1985 (note that this has since been replaced by section 96B(2) and Schedule 11B to FSMA) is not met, B will only be treated as a "connected person" for the purposes of FSMA if the director is either:

The sole director of B.
A director (or senior executive) that personally has the control over B's management decisions affecting B's future development and business prospects.

Under the Listing Rules, Model Code provisions 21 and 22 apply to "connected persons". Accordingly, these provisions will apply to B only if the director of A is the sole director of B or is a director (or senior executive) that has the personal control over B's management decisions as described above.

All rights reserved to GC100. You must obtain the prior written permission of GC100 for the republication or redistribution of this content, including by framing or similar means. If you would like permission to use any content published by GC100 please contact Mary [email protected].

GC100: Listing Rules Guidelines Part III: Guidelines on obligations to notify dealings and Model Code compliance | Practical Law