EU Listing Act – Increasing the attractiveness of the capital market (Part 2: Effects on the disclosure requirements for insider information)

published on 23 September 2024 | reading time approx. 6 minutes

The EU Listing Act is intended to increase the attractiveness of the European capital market by facilitating access to the capital market and the post-admission obligations. In addition to the simplifications in prospectus law, which were presented in Part 1 of this series of articles, the insider trading law of the Market Abuse Regulation (MAR) is also to be adapted.

In this Part 2 of the article series, we will first explain the definition of insider information. In practice, intermediate steps that take place in a protracted process cause great difficulties – we will illustrate this using a company acquisition as an example. Furthermore, we then explain the simplifications to be expected with the EU Listing Act.

With the introduction of the Market Abuse Regulation (MAR) in 2016, the European legislator created a uniform European legal framework for insider trading law. The linchpin of insider trading law is the concept of insider information, the existence of which triggers a series of obligations and prohibitions. The aim of insider trading law is to prevent unjustified information advantages, their exploitation and to enable equal access to relevant information for all market participants. This is intended to create equal information opportunities for investors, thereby strengthening confidence in the capital markets and ensuring their proper functioning.

In practice, it is therefore crucial to determine which facts constitute insider information, at what time an information is considered an insider information and when it must be published.

The term insider information is legally defined in art. 7 MAR and is characterized by the following four components:

What is an insider information?

The term insider information is legally defined in art. 7 MAR and is characterized by the following four components:

it is a precise information,
which is not publicly known,
it is directly or indirectly related to the issuer or its financial instruments and
has significant potential to influence the share price.

The criterion of significant potential to influence the price is generally the decisive factor. This is based on the view of a reasonable investor as to whether he would sell or purchase financial instruments of the issuer on the basis of this information.

The definition of insider information is to remain unchanged by the EU Listing Act.

Of particular relevance in practice is the existence of so-called intermediate steps in the context of a protracted process and the possibility of postponing the publication of intermediate steps if these themselves constitute insider information.

Intermediate steps as insider information

The EU Listing Act is not intended to change the definition of the intermediate step as insider information. Rather, what is relevant in this context is an amendment with the associated disclosure obligation.

A classic case of an intermediate step as insider information is the case law of the ECJ in the Geltl proceedings from 2012. The subject of this legal dispute was that the resignation of the chairman of the board of Daimler AG at the end of the year was only made public by the publication of the supervisory board, although the chairman of the board had already announced his intention to resign two months earlier to the chairman of the supervisory board and the other members of the board of management. As a result of the announcement by the supervisory board, the share price rose sharply. This caused damage to all shareholders who had sold their shares shortly beforehand. In its decision, the ECJ came to the conclusion that in the case of a protracted process in which a certain circumstance is to be realized or a certain event is to be brought about, not only the circumstance or the event itself can constitute an insider information, but also an intermediate step realized on the way to it. This means that in this specific case the information provided by the chairman of the management board to the supervisory board about his intention to resign from office already constituted insider information that was subject to a disclosure obligation.

Example: Company acquisition

Protracted processes occur very frequently in practice. Another classic example is the acquisition of a company. This process is divided into several steps over time - from the initial discussions, the conclusion of an LOI, the performance of due diligence and its conclusion, the conclusion of the SPA and finally the closing of the transaction.

The tension arises from the fact that the parties do not want to publish the planned transaction too early in order not to raise false expectations and jeopardize the success of the negotiations.

It is generally recognized that the conclusion of the SPA is the point in time at which the transaction must be published as insider information in accordance with Art. 7 MAR and that a delay in publication is generally no longer justified. The steps prior to the signing of the SPA are more problematic. If it is a purely internal decision (e.g. to enter into preliminary talks with a potential target company) or an organizational measure (e.g. review and preparatory actions, first-time appointment of advisors) without additional circumstances, it is generally not considered to be an intermediate step relevant under insider trading law due to the lack of potential to influence the share price, as the probability of the transaction itself is not considered certain enough. The same applies to the conclusion of a non-disclosure agreement between the bidder and the seller. Rather, these are preparatory acts at a stage at which it is still unclear whether contract negotiations will take place at all.

However, the conclusion of a LOI may be assessed differently in individual cases. In this case, it depends on whether the parties have already agreed on essential contractual points in a binding manner. It is therefore advisable to regularly check from the stage of signing the LOI whether the following intermediate steps constitute insider information.

Due to the large number of possible steps in M&A transactions, it is not possible to classify schematically when an intermediate step constitutes possible insider information. The occurrence of insider information does not depend on the terminology of the completed intermediate step but must be assessed on the basis of the state of affairs from a substantive point of view and in the context of an overall view of all circumstances of the specific case.

Changes in the area of ad hoc publicity

The principle in art. 17 MAR that an issuer must disclose insider information to the public without delay if it is directly affected by such information will initially remain in place. The insider trading law review of intermediate steps must also be retained in future, as these will continue to be subject to insider trading and disclosure bans.

No ad hoc obligation of intermediate steps in protracted processes

A new feature of the EU Listing Act is that, in future, intermediate steps in a protracted process will no longer be subject to ad hoc disclosure requirements, but only the final result will have to be published. This means that in future a distinction will be made between insider information that merely justifies the prohibition of insider trading and that which triggers the ad hoc disclosure obligation.

According to art. 17 para. 7 MAR (new version), however, an interim step must be published as insider information before the final result is achieved if (e.g. due to rumors) the confidentiality of the insider information can no longer be guaranteed. On the one hand, this prohibits the disclosure of intermediate insider information. On the other hand, issuers are obliged to guarantee confidentiality, which in turn requires corresponding organizational measures with regard to internal company structures and processes.

The EU Listing Act empowers the European Commission to define by delegated act a non-exhaustive list of “relevant information” which the issuer may reasonably be expected to disclose. This should make it easier for companies to determine the publication date and increase legal certainty.

Impact on practice

As a result, the planned amendment will not have any far-reaching impact on issuers. In practice, the disclosure of the interim step pursuant to Art. 17 para. 4 MAR has so far been postponed in the event of a corporate transaction in order to avoid premature disclosure of the final result. An actual simplification will therefore not be significantly noticeable.

Deferral pursuant to Art. 17 para. 4 MAR

The current legal situation allows the publication of insider information to be postponed if:

the issuer has a legitimate interest,
the postponement is not likely to mislead the public and
the issuer ensures the confidentiality of this information.

This regulation on self-exemption will be specified in future. To this end, all of the case groups currently contained in the ESMA guidelines are to be taken up and incorporated directly into the MAR. In particular, the criterion of the possibility of misleading information is to be replaced by specific requirements. Accordingly, the insider information must not contradict the last public announcement or any other type of communication by the issuer on the same matter. In addition, the insider information to be delayed must relate to the fact that the issuer's financial targets are unlikely to be met. Finally, the insider information must contradict the issuer's market expectations (e.g. based on previous interviews and roadshows).

Conclusion

The proposed amendments to MAR are aimed at simplifying insider trading law and are therefore to be welcomed in principle. The difficult distinction between an early publication obligation of an intermediate step information due to a sufficient probability of the final result and the separate publication obligation of the intermediate step will no longer apply in future and will “merely” be replaced by the obligation to maintain the confidentiality of the intermediate step. What appears to be a relief at first glance may pose further difficulties in practice, particularly in the area of M&A transactions. In complex and protracted processes, it is often unclear what constitutes the relevant “last event” and how it is defined. In addition, market participants are to receive more assistance in the future through exemplary lists and more specific requirements in handling the regulations. It re-mains to be seen to what extent the planned changes will be implemented by the European Commission.