A flood of disclosures is expected from directors who pledged shares in their companies as security for financial transactions after the City watchdog set a two-week deadline for them to come clean without facing punishment.
The Financial Services Authority yesterday admitted that rules on disclosure of share pledges were unclear and said it would not take action against companies or directors who had not informed the market as long as they did so by 23 January.
The regulator's stance means David Ross, former deputy chairman of Carphone Warehouse, is likely to avoid any action against him after being forced to resign from the phone retailer and step down at other companies. Mr Ross belatedly told Carphone Warehouse last month that he had used his shares in the company as collateral against commercial property investments.
The FSA insisted the listing rules were clear that directors needed approval from their company to use shares as security and that there was "no basis on which a director could legitimately avoid seeking clearance where his or her shares are to be used as collateral for a financing transaction".
But the watchdog said there had been uncertainty over whether pledges should then be declared to the market because the rule was based on a European Union directive that was applied less stringently in other countries.
Jeffrey Sultoon, a partner at Ashurst, said that from the number of inquiries his law firm had received on the subject there could be hundreds of disclosures before the deadline, particularly by smaller companies with large founding shareholders.
"We would expect to see a flood of announcements just before 23 January, plus some directors trying to get the FSA to agree they need not disclose if they unwind the pledge by that date," Mr Sultoon said. Short sellers may also target companies in anticipation of a share price fall on the day of an announcement, he added.
The European directive on which the rules were based was vaguely worded and did not make it clear which transactions were covered. "As a result, there are different practices in different European markets in respect of the disclosure of granting of security over shares," the FSA said. "We acknowledge this has led to a degree of uncertainty among market practitioners in London about the exact requirements."
The watchdog said it was trying to reach a common position with other European regulators over how share pledges should be treated. "This is another example of us British bending over backwards to follow the rules even though the rule book hasn't been written when other jurisdictions appear to have adopted a far more relaxed approach," Mr Sultoon said.
As well as quitting Carphone Warehouse, Mr Ross stepped down from the boards of National Express, the bus and train operator, and the storage business Big Yellow. He resigned as chairman of Cosalt, the marine safety equipment maker, but remains a director.