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Where a lender is contemplating taking security over the shares or debt instruments in a UK listed company from one of its directors (or other persons discharging managerial responsibilities in the issuer ("PDMRs")), it needs to be aware of certain provisions of the EU Market Abuse Regulation (Regulation 596/2014) ("MAR"). MAR came into force in July 2016 and, amongst other things, repealed and replaced the Model Code and provisions in the Disclosure Guidance and Transparency Rules of the UK Listing Authority (the "DTRs") concerning dealings by PDMRs.
The first point to note is that the granting of security by the PDMR over listed financial instruments (e.g. shares and debt instruments and derivatives or other financial instruments linked to them) will constitute "dealing" in those securities. The consequence of this is that the PDMR may at the relevant time be prohibited from granting security. Firstly, by virtue of Article 14 of MAR, the PDMR will not be able to grant security over his or her securities whilst they are in possession of "inside information" in relation to the issuer. Furthermore, under Article 19(11) of MAR, a PDMR is prohibited from conducting transactions in the financial instruments of the issuer during a "closed period" (namely, the period of 30 calendar days prior to the announcement by the relevant issuer of its full year or interim financial results).
While MAR led to the repeal of the Model Code, most UK listed companies will have adopted some form of share dealing code with provisions equivalent to the Model Code. Typically this will necessitate the PDMR requesting and receiving clearance from the company to deal prior to granting security over the relevant financial instruments.
MAR has also replaced the provisions in the DTRs concerning the notification of PDMR dealings. Article 19(7) of MAR requires that where a PDMR (and any "persons closely associated" with a PDMR) enters into a transaction conducted on their own account relating to financial instruments of the issuer (including pledging or lending those financial instruments), the PDMR must notify both the issuer and the Financial Conduct Authority ("FCA") within three business days following the relevant transaction. The issuer must make this notification public by way of a regulatory announcement. Persons closely associated to a PDMR for these purposes include (but are not limited to) spouses, dependent children and trusts the management responsibilities of which are discharged by or for the benefit of such persons.
We recommend that lenders take the following steps when taking security over listed financial instruments held by a PDMR (or persons closely associated with a PDMR):
• establish as soon as possible prior to documenting lending and security documentation whether the PDMR is in possession of inside information or the finalising of the documentation is likely to take place during a close period;
• include representations from the PDMR in the lending documentation that he or she is not in possession of inside information, that the issuer is not in a closed period and that he or she has received clearance to deal under the issuer's dealing code;
• include an undertaking from the PDMR that he or she will notify the dealing to the issuer and the FCA in accordance with MAR; and
• consider requiring the issuer to provide confirmation that it is aware of the dealing and that clearance to deal has been provided under the issuer's dealing code.
It should be noted that a failure of a PDMR to comply with his or her obligations under MAR will not affect the validity of the security granted to the lender over the financial instruments, although a lender would not wish to be associated with a breach of MAR. Also, where a lender wishes to enforce its security, it can do so notwithstanding the issuer being in a closed period on the basis that the PDMR has no influence on when the financial instruments are transferred.