Inside information: the disclosure of intermediate steps
28 September 2012
The European Court of Justice ("
ECJ") has provided
useful clarification in a recent case,
Geltl v Daimler AG
(C-19/11), as to whether information regarding the
intermediate steps leading to a future uncertain event may
potentially amount to inside information which is required to be
disclosed immediately to the market.
Factual background
In brief terms, the case (arising in Germany)
related to the resignation of the chairman of Daimler's Board of
Management, Mr Schrempp, in 2005. The company announced to the
market, following a meeting of the Supervisory Board on 28 July
2005, that he intended to step down at the end of that year before
the expiry of his term. Consequently, the company's share price
rose sharply and a number of investors - who had sold Daimler
shares prior to the announcement at a lower price - sued the
company, arguing that the information should have been disclosed
earlier as the event was sufficiently likely to occur.
The steps leading up to the announcement were as follows. Mr
Schrempp first considered his resignation in early April 2005,
following which he informed his wife (an employee of the company),
then discussed his intentions with the Chairman of the company's
Supervisory Board on 17 May 2005 and subsequently informed other
members of the Supervisory Board. On 10 July 2005, the head of
communications, with Mrs Schrempp and the head of the secretariat,
began to prepare a press release, a public statement and a letter
to the company's employees. On 18 July 2005, the Chairman of the
Supervisory Board agreed to propose Mr Schrempp’s early retirement
and the appointment of his successor at the meeting of the
Supervisory Board on 28 July 2005.
Legal issues
Under the Market Abuse Directive (2003/6/EC)
("
MAD"), member states are required to "ensure
that issuers of financial instruments inform the public as soon as
possible of inside information which directly concerns the said
issuers". This requirement is implemented in the UK under chapter 2
of the Disclosure Rules and Transparency Rules, with the primary
disclosure obligation being set out in
DTR
2.2.1R (subject to DTR 2.5.1R which allows for the
disclosure of inside information to be delayed in certain
circumstances).
The first question to be determined in any situation involving a
potential disclosure obligation is whether the issuer has inside
information. The definition of "Inside information" in MAD requires
the information to be "of a precise nature". Under Directive
2003/124, "information shall be deemed to be of a precise nature if
it indicates a set of circumstances which exists or may reasonably
be expected to come into existence or an event which has occurred
or may reasonably be expected to do so and if it is specific enough
to enable a conclusion to be drawn as to the possible effect of
that set of circumstances or event on the prices of financial
instruments or related derivative financial instruments."
The case was ultimately referred to the ECJ to determine:
(1) whether the taking of
intermediate steps connected with a future set of circumstances or
future event may constitute information of a precise nature;
and
(2) does the
expression "may reasonably be expected" in Directive 2003/124
require that the probability be assessed as predominant or high, or
does it imply that the
requisite degree of probability
depends on the extent of the effects on the issuer and that, where
prices are highly likely to be affected, it is sufficient if the
occurrence of the future circumstance or event is uncertain but not
improbable?
The decision
(1) Intermediate steps
On question (1), the ECJ confirmed that information on intermediate
steps in a protracted process could constitute information of a
precise nature.
The terms "set of circumstances" and "event" (which are not defined
in the directives) should be given the meaning normally attributed
to them, which could include intermediate steps, and not having
regard to such intermediate steps risked undermining the objectives
of protecting the integrity of the markets and enhancing investor
confidence.
This conclusion was supported by another provision of Directive
2003/124 which gives examples of inside information where
disclosure may legitimately be delayed. The examples include
intermediate steps in a protracted process, such as negotiations in
course, and decisions taken or contracts made by the management
body of an issuer which need the approval of another body of the
issuer in order to become effective.
(2) Degree of probability
Question (2) was somewhat complicated by the fact that
the German text refers to "sufficient probability" rather than a
“reasonable expectation” in the English version. However, the court
considered the necessary level of probability to refer to "future
circumstances or events from which it appears, on the basis of an
overall assessment of the factors existing at the relevant time,
that there is a realistic prospect that they will come into
existence or occur." Accordingly, this did not require proof to a
high level of probability, but excluded matters which were
implausible.
The court went on to hold that the level of
probability and the effect on the price of the issuer's financial
instruments were not co-dependent. It was not the case that the
greater the possible effect on the share price, the lower the
probability required for the information to be held to be
precise.
Conclusion
The court's decision means that information
about intermediate steps may
have to be disclosed, including steps which may be reasonably
expected to come into existence or occur, even if they have not
already.
The outcome of the case is not unexpected and
is consistent with the Disclosure Rules and Transparency Rules,
which anticipate that information relating to a protracted process
can be inside information.
As the ECJ was only ruling on points of
interpretation, the German court will now have to address the more
difficult question as to which specific step triggered the
disclosure requirement.
Caroline
Nicholls is an Associate in the Corporate
Group of Field Fisher
Waterhouse LLP in London.