Disclosure of Inside Information Flashcards
Overarching principles
- Overarching all the rules and regulations are the Listing Principles and Premium Listing Principles, which aim to ensure that companies listed on the Official List pay due regard to the fundamental role they themselves play in maintaining market confidence and ensuring fair and orderly markets.
- Two principles particularly relevant to a Listed Co’s disclosure obligations
- LP 1: “A listed company must take reasonable steps to establish and maintain adequate procedures, systems and controls to enable it to comply with its obligations.
- PLP 6: “A listed company must communicate information to holders and potential holders of its listed equity shares in such a way as to avoid the creation or continuation of a false market in those listed equity shares.”
- So those are the underlying LP/PLP
- Then have MAR, and most important for disclosure is the general duty of disclosure under Article 17(1) MAR
Summary of whether exam structure for disclosure
- General duty of disclosure: Article 17(1) MAR
- Is there ‘inside information’?
- Delay – would publication prejudice the issuer’s legitimate interests under Art 17(4)
- Announcement – the process for making disclosures
- Consequences of non-compliance
- General Duty of Disclosure
- Article 17(1) MAR: An issuer shall inform the public as soon as possible of inside information which directly concerns that issuer
• Art. 17(1) provides that the information concerned must not be combined with the marketing of the issuer’s activities.
- Is there ‘inside information’? Art 7(1) MAR
- Under Art. 7(1)(a), inside information is information which:-
i) is precise;
ii) has not been made public;
iii) relates directly or indirectly to one or more issuers or one or more financial instruments; and
iv) if made public, would be likely to have a significant effect on prices of those financial instruments (or related derivatives). - DTR 2.7.3G: False rumours are NOT inside info and therefore unlikely to require an announcement to be made to correct it.
• Note: however, where market rumour is largely accurate, then the issuer can no longer delay and should disclose: DTR 2.7.2G. - Arts. 7(2) MAR – two-pronged test information is ‘precise’ 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 which may reasonably be expected to occur)
Where the information is sufficiently specific to enable a conclusion to be drawn as to the possible effect of the circumstances or event on the price of the financial instruments - Art. 7(4) MAR – information which would have ‘significant effect’ on price of financial instruments is information which a reasonable investor would be likely to use as part of the basis of their investment decisions (reasonable investor test)
• DTR 2.2.5G: for factors to take into account when considering reasonable investor test - DTR 2.2.7G - ultimately, issuer and its advisers are best placed to make an initial assessment of whether particular information amounts to inside information.
- If the company determines the information is not inside information, it need not make an announcement
- Delaying disclosure - – would publication prejudice the issuer’s legitimate interests - Art 17(4)?
- Obligation is for disclosure ASAP, but may end up requiring issuer to disclose all sorts of info about transactions/developments that may never be completed
- DTR 2.2.9G(2) – unexpected and significant event
• If there is an unexpected and significant event, short delay may be acceptable if necessary to clarify the situation.
• However, if there is rumour in the market or danger of information leaking, then it should consult with the FCA as to whether a holding announcement is necessary (DTR 2.2.9G(4)) – DOUBLE CHECK THIS - Art 17(4) – Legitimate Interests
- Provides exception to absolute rule, allows issuer to delay disclosure provided that:
i) Immediate disclosure is likely to prejudice the legitimate interests of the issuer
ii) Delay is not likely to mislead the public; and
iii) The issuer is able to ensure the confidentiality of the information - - ESMA Guidelines (set out in additional permitted material booklet and expected to be mentioned in exam) include guidelines on meaning of legitimate interests and misleading the public:
• Non-exhaustive list of circumstances, so allowing room for additional situations to be included.
• Key importance for issuer: where issuer is conducting negotiations e.g. acquiring another company, and the outcome of those negotiations would likely be jeopardized by immediate public disclosure, then the guidelines provide that such disclosure is likely to prejudice the issuer’s legitimate interest i.e. can delay.
• However, by way of illustration, if the inside info relating to negotiations is materially different from most recent public announcement made by issuer on that subject matter, e.g. if announced that do not intend to make any acquisitions that year, then guidelines tell us that delay is likely to mislead the public, so in that case Art 17(4) could not be relied on to delay announcement.
SO NOTE: EVEN IF PUBLICATION WOULD PREJUDICE THE ISSUER’S LEGITIMATE INTERESTS, IF DELAY IN DISCLOSURE IS LIKELY TO MISLEAD THE PUBLIC, MUST NOTIFY RIS ASAP UNDER ART 17(1) – SO NEED TO SHOW THAT DELAY WOULD NOT MISLEAD PUBLIC
♣ N.B. see p. 7-8 in lecture notes for highlighting
♣ If you do satisfy these limbs, can delay as long as keep the information confidential to satisfy the third limb of the test.
- Procedural Requirements when delaying disclosure
• Art. 17(4) MAR: Once the announcement has ultimately been made, the FCA must be informed of the delay in its release
- Selective Disclosure/Leaks and Rumours
a) Selective Disclosure
- Will often need to make selective disclosure e.g. if want legal advice as to whether can delay announcement, discussion with lenders for transaction etc.
- Arts. 10(1) and 14(c) MAR together make it an offence to disclose inside information other than in the normal exercise of an employment, a profession or duties.
- Selective disclosure to a third party can be made provided that it is:
i) In the normal exercise of employment, profession or duties: Arts. 10(1) and 14(c) MAR together; and
ii) Made to someone who owes a duty of confidentiality to the issuer: Art. 17(8) MAR
- DTR 2.5.7G - provides some guidance on the circumstances in which an issuer may be justified in selectively disclosing inside information to certain categories of recipient, provided that they also owe the issuer a duty of confidentiality. These categories include the issuer’s advisers, persons with whom the issuer is negotiating, and their advisers. Disclosure to these types of people should therefore be within the normal course of an employment, profession or duties for the purposes of MAR.
- Art. 11 MAR ‘Market Sounding’: communicating info prior to announcement of transaction to SH/potential investors prior to embarking on transactions in order to gauge interest is permissible.
• Art. 11(4) MAR – if market sounding is carried out, disclosure of inside information as part of the sounding shall be deemed to be made in the normal exercise of a person’s employment, profession or duties
• Arts. 11(3) and (5) MAR: must also comply with these requirements
b) Leaks and Rumours
- Art. 17(7) MAR - If disclosure has been delayed in accordance with Art 17(4), but confidentiality can no longer be ensured disclosure must be made as soon as possible.
- Art. 17(7) MAR – also explicitly provides that disclosure must be made where rumour explicitly relates to that inside information, if the rumour is sufficiently accurate to indicate that the confidentiality of the inside information is no longer ensured.
- DTR 2.6.3G: the issuer must therefore prepare a “leak announcement” ready for issue.
- Announcement – the process for making disclosures
- Art. 17(1) MAR – announcement to RIS ASAP
- Consequences of non-compliance
- s. 122A and s. 122 FSMA: FCA can request information on breach of MAR
- s. 123 FSMAFCA can impose a fine or statement of censure on any person who has contravened or been knowingly involved in contravention of breach of MAR.
- ss. 122G and 122H FSMA - FCA may require an issuer to publish information, or may publish the information itself if the issuer fails to do so
- s. 122I FSMA: FCA can also suspend trading
Market soundings in more detail
- It is possible to contact Target SH confidentially to assess their support for a possible takeover, without committing market abuse.
- Art. 11(2) MAR = provided the safeguards in Art.11 are followed, a person who intends to make a takeover bid for the securities of a company (or a merger with the company) can disclose inside information (e.g. that offeror is contemplating making a takeover offer to offeree) to holders of the target company’s securities, provided that:
i) the information is necessary to enable the holders of the securities to form an opinion on their willingness to offer their securities to the potential purchaser; and
ii) the willingness of the holders of the company’s securities to offer their securities is reasonably required to enable the potential purchaser to decide whether to make the takeover bid (or merger). - The offeror would need to take the steps under Art. 11(3) and (5) MAR before disclosing inside information to offeree shareholders (e.g. obtaining the offeree shareholder’s consent to receiving the inside information and requiring them to keep the information confidential and making them aware that they must not deal in Goal shares on the basis of it).
