Can Fluctuations in Prices or Volumes of a Security Trigger a Duty for Listed Companies to Disclose Inside Information?

The European market abuse rules require issuers to disclose inside information which directly concerns them as soon as possible. Delaying disclosure is possible under strict conditions, one of them being that confidentiality of the information is ensured. In a recent paper (Can Fluctuations in Prices or Volumes of a Security Trigger a Duty for Listed Companies to Disclose Inside Information?, forthcoming in the European Business Organization Law Review and available here), I analyse the question whether the duty to disclose can be reactivated in the event of considerable fluctuations in the price and/or volume of the traded securities, as confidentiality may no longer be ensured. In the case VEB/SdB, a Dutch Court of Appeal held that an issuer failed to disclose in a timely fashion in the presence of abnormal market movements, and that this constituted a tort, giving rise to a claim for investors. My paper analyses this case, the questions it raises, and its relevance for European jurisdictions.

According to the Dutch court, the relevant criterion for deciding on liability is whether there are developments in the market that deviate significantly from the usual patterns without there being an alternative (convincing) explanation. Experts in this case used the statistical event study methodology and technical analysis to analyse this issue. Although the court accepted both methodologies, it is submitted in the paper that the statistical methodology is to be preferred over technical analysis, as the latter methodology is less objective than the former and leads to more legal uncertainty for issuers. The paper further discusses several legal issues that arise when statistical tools are used to assess the issuer’s liability.

The paper also discusses possible alternative explanations for anomalous market patterns. In VEB/SdB, the issuer failed to convince the court that there was such an alternative explanation. It is especially interesting to note the extent to which arguments from ‘behavioural economics’, such as herding behaviour by investors, can provide adequate explanations. It is submitted in the paper that investor irrationality can, under some circumstances, provide an alternative explanation. However, courts should be wary of accepting behavioural arguments. Issuers will in most cases be able to come up with some kind of behavioural explanation for anomalous patterns, but there is some variation in the credibility and possibility of generalisation of such explanations.

Finally, it is submitted in the paper that the case VEB/SdB is relevant for all European jurisdictions, given that, no matter whether they allow damages claims by investors for untimely disclosure of inside information, administrative and/or criminal provisions apply everywhere for such violations, pursuant to EU market abuse legislation. An important lesson from the Dutch case is that issuers would be wise to monitor the development of prices and volumes carefully when they delay disclosure of inside information which directly concerns them, as failure to do so can result in civil liability or penalties.

Bas de Jong is Professor of Capital Markets Law at Radboud University Nijmegen.