Public Companies Update October 2004

1 INFORMATION AND CONSULTATION OF EMPLOYEES REGULATIONS 2004 AND PRICE SENSITIVE INFORMATION

The final consultation period on the Information and Consultation of Employees Regulations 2004 ("ICER"), which implement the Information and Consultation Directive (2002/14), has now concluded and the regulations are due to come into force from 6 April 2005. This article does not attempt to summarise in any detail the provisions of ICER but in essence ICER's aim is to provide a minimum standard for employers in providing information to and consulting with their employees, or representatives thereof, on key matters affecting their business. In the UK, where the use of works councils or equivalent bodies has been fairly rare to date, ICER will inevitably mean significant additional obligations for many employers in managing their industrial relations.

Under ICER, applicable employers must either negotiate an information and consultation ("I&C") agreement with employees or a default model will apply. The obligation is not automatic but can be triggered by a request by only 10% of employees. Under the default model, employers must arrange for the election of an I&C representative for every 50 employees, subject to a minimum of two per organisation and a maximum of 25. I&C representatives must then be kept informed and consulted - although this does not mean seeking their approval - about developments in a number of prescribed areas: including the likely development of the undertakings' activities, probable development of employment within the undertaking, in particular any possible threat to employment, and decisions likely to lead to substantial changes in work organisation.

ICER will apply to both public and private companies - and indeed to any undertaking which has over a certain number of employees and which carries out an economic activity in the UK. Implementation is to be phased, so that where the undertaking concerned employs 150 or more people ICER will become effective from 6 April 2005, where 100 or more from 6 April 2007 and where 50 or more from 6 April 2008. This is obviously becoming an important issue for larger public companies as, if they have more than 150 employees, they will be caught by the regulations in only six months time.

1.1 Price-sensitive Information
The disclosure requirements placed on employers by ICER clearly have particular implications for listed companies who are subject to stringent regulations - under the Listing Rules or the AIM Rules (as appropriate), and also the City Code on Takeovers and Mergers - over the way in which they can disclose information deemed to be price sensitive.

Under Listing Rules 9.1 & 9.2 a fully listed company must notify a Regulatory Information Service without delay of any major new developments in its sphere of activity and all relevant information in relation to its financial condition, performance or expectation of performance which are not public knowledge and which if made public would be likely to lead to substantial movement in the price of the company's listed securities. For AIM companies, the wording is ostensibly the same in the equivalent AIM Rule (Rule 10).

Selective disclosure of price sensitive information i.e. disclosure to selected groups of individuals ahead of disclosure to the market as a whole, as outlined above, is prohibited and is an area being policed vigorously by the Financial Services Authority ("FSA") - particularly in relation to analysts, for example with the recent suspension of two Merrill Lynch analysts reporting on Sainsbury's.

However, there is an exemption at Listing Rule 9.4 (which is mirrored in the note to Rule 10 in the AIM Rules) which allows companies to disclose price sensitive information, provided it is done in confidence, about impending developments or matters under negotiation to the selected groups set out in Rule 9.5. These include representatives of employees or trade unions acting on their behalf. If a company suspects a breach of that confidence has occurred, which is likely to lead to a substantial movement in the share price, then it should issue a warning announcement at least to a Regulatory Information Service. This means the selective disclosure to employees is not without risk.

1.2 ICER Regulation 25
This issue of the disclosure of price sensitive information by listed companies has been considered by the DTI in its final consultation paper on ICER - available at www.dti.gov.uk/er/consultation/draftguidance.doc.

The relevant ICER provisions are Regulations 25 and 26. Under Regulation 25, employers are entitled to impose a confidentiality restriction on any information they provide to I&C representatives provided it is in the legitimate interests of the undertaking to do so. It is up to the employer in these circumstances to make clear to the representative the terms under which he is to keep the information confidential i.e. the duration of any confidentiality restrictions and whether and if so to whom the representative may pass on any confidential information - for example to other named employees or to advisers. It is also for the employer to make clear to the representative that any person to whom he may pass confidential information must themselves keep the information confidential.

The DTI guidance published in its latest consultation paper states that price-sensitive information provided by listed companies is the sort of information that could justifiably be placed under a confidentiality restriction. This is on the basis that, in the DTI's assessment, the Listing Rules, and the City Code, do not prevent the release of price sensitive information to employee representatives bound by an obligation of confidentiality but may have the effect of limiting the number of the individuals to whom such information is provided - for example whilst disclosure to a list of named employees would be acceptable it would not be if to the workforce as a whole.

It should also be noted that under Regulation 25 an employee provided with information subject to a confidentiality restriction has the option in each individual case of appealing to the Central Arbitration Committee for a ruling on whether the restriction is reasonable - and if found not to be so then it will not be regarded as valid. Accordingly the employer would then have to disclose the information to a Regulatory Information Service without delay.

Conversely, an employer would have the right to seek redress in the courts should I&C representatives disclose price sensitive information in breach of their confidentiality restrictions, although it should be noted that the "whistle-blower" protection at Part IVA of the Employment Rights Act 1996 offers a valid defence to this.

1.3 Regulation 26
Under Regulation 26, employers may withhold information altogether from I&C representatives if the release of this information could, according to objective criteria, seriously harm the function of the undertaking or be prejudicial to it.

The DTI guidance here, using similar rationale to that outlined above, offers the following interpretation in relation to price-sensitive information. It is anticipated that where the I&C agreement the employer has in place provides for consultation directly with all employees then the employer may be able to rely on this provision to prevent disclosure of price-sensitive information, although it would obviously always need to be considered on a case-by-case basis. However, where the employer's I&C agreement provides for consultation with employees via representatives - as is the case with the default model - then the exemption at Regulation 26 would rarely be available, as in these circumstances employers would have the option of providing the information to representatives on a restricted basis in accordance with Regulation 25.

1.4 Conclusion
ICER will have an impact on companies listed on the Official List or AIM and where an I&C arrangement is in place add an additional layer of considerations to be taken account of when deciding what information is price sensitive. What is clear is that companies will rarely, if at all, be able to use the listing rules and AIM Rules as a reason not to inform and consent under ICER.

Employers of 150 people or more which are listed on the Official List or AIM should consider negotiating an I&C agreement rather than relying on the default model if, for example, they want greater control over how price sensitive information is released.
We would also recommend that such employers make employee representatives aware of and sign up to the company's share dealing code to minimise issues of Market Abuse and Insider Dealing.

If you require further information on any matter covered in this note, please contact your principal contact at Charles Russell or Simon Gilbert, Katy Knight, Clive Hopewell or Alexander Keepin (London), Francis Rundall or Richard Norton (Cheltenham) or Catherine Drew or Geoff Sparks (Guildford) on 0207 203 5000.

Details of Charles Russell's Employment and Pensions Service Group and more guidance on the ICER can be found at:

http://www.cr-law.co.uk/services/employment_pensions/information_consultation.asp

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Please note that the summaries above are a general indicative guide only. They are not exhaustive. This information has been prepared by the firm as a service to our clients. As it is a general guide, we recommend that you seek professional advice before taking action. No liability can be accepted by the firm for any action taken or not taken as a result of this information. The firm is not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services to clients because we are members of the Law Society. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide.