MAR: A Balanced Approach to the Market Sounding Regime’s Applicability in Capital Markets Transactions

Few aspects of the Market Abuse Regulation (‘MAR’) have generated as much angst and uncertainty among market participants planning capital markets transactions as the market sounding provisions of Article 11. Even today, more than one year after MAR came into effect, key questions on the reach and applicability of the new regime remain unresolved.

MAR defines a ‘market sounding’ as comprising:

• any communication of information to one or more potential investors;
• by the issuer, secondary offerors in certain cases and third parties ‘acting on behalf of’ or ‘on the account of’ either of the foregoing;
• prior to the announcement of a transaction;
• in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it, such as its potential size or pricing (ie, in general, its terms),

Where pre-marketing contacts meet the above definition, MAR in general requires both those disclosing information in the market sounding and potential investors that receive it to adhere to various (fairly burdensome) procedural requirements, including, notably, the requirement that market soundings be recorded.

Despite its seeming breadth, however, it may in appropriate instances be possible for market participants to reasonably conclude that the Article 11 regime does not apply as part of a purposive, proportionate and risk-based approach to the regime.  These instances may include pre-marketing:

• in offerings by ‘true’ debut issuers (that is, issuers that neither have, nor are part of corporate groups that have, securities already admitted to EU trading venues);
• where (i) the new transaction (if completed), with all its potential terms, conditions and features and (ii) any non-deal-specific information intended to be disclosed are not expected to affect the price of those already-admitted financial instruments;
• where investor contacts can credibly be viewed as not intended to ‘gauge…interest…in a possible transaction and the conditions relating to it’; and
• following an announcement of the transaction that ensures a substantive alignment between information in the public domain and information to be disclosed selectively to potential investors.

In addition, where the nexus with the EU is so low that a regulator is unlikely to take an interest, it may also be reasonable for market participants to choose not to apply the regime. 

Our memorandum, available here, discusses these issues at length, considering the appropriate reach and applicability of the new regime in capital markets transactions and offering thoughts on how market practice in this area might continue to develop amidst the regime’s lingering interpretive uncertainties.

This post is based on a memorandum prepared by Cleary Gottlieb.