Say When: When Must an Issuer Disclose Inside Information?

One of the most important provisions for ensuring effective securities markets is the mandated, continuous disclosure of inside information. Yet this disclosure obligation is also onerous for issuers, involving high compliance costs and subjecting them to the public scrutiny that private companies avoid. If regulated markets are going to serve their purpose as mechanisms for resource allocation in the EU, it is important to ensure a proper balance between the interests of the issuers and of the investors.

In EU law, the concept of inside information has been used in the design of two different but related measures: to prevent insider dealing, and to mandate public disclosure. Consequently, how inside information is defined matters significantly to both measures.

My paper tries to define what constitutes inside information, and to answer the question of when an issuer must disclose such information according to the Market Abuse Regulation (‘MAR’) that is effective from 3 July 2016. It does so by analysing the recent cases of Gelt and Lafonta adjudicated by the European Court of Justice of the EU (‘ECJEU’) and by examining the negotiation of the MAR.

Its main findings are that the definition of inside information basically depends on two criteria: that the information is non-public (monopolistic, not generally available) and material (price-relevant). Although the ECJEU appears to mandate a separate test of the criteria placed in Directive 2003/6 and Commission Directive 2004/123, determining materiality is essentially a combined test of whether the information may affect the pricing of the security in question, ie whether reasonable investors would pick up the information among the total mix of information available and use it as part of their investment decision. The probability/magnitude test may be used, but the lower threshold is implausibility.

This may be a low threshold, which makes the ban on insider dealing efficient. However, such a low threshold is detrimental to the reasonable application of the disclosure obligation. It is demonstrated that although the member states have been applying different approaches, there is a consensus that an issuer should not disclose inside information if that information is uncertain and thus likely to mislead the public (which would be contrary to the stated purpose of the disclosure obligation). Various solutions to reach this result were explored during the negotiation of MAR, and were affected by the outcome of Gelt. The end result in Art 17 MAR is to make available an extra option of delaying a process that occurs in stages, which supplements the pre-existing and narrower option to delay that was carried over from Art 6(2) MAD. MAR therefore expands the circumstances in which the disclosure of uncertain inside information may be delayed in order to avoid misleading the public.

Jesper Lau Hansen is a Professor at the University of Copenhagen’s Faculty of Law.