Quoted companies and their directors and advisers are well aware of the requirement to announce price sensitive information promptly to the market, and that no dealings should be carried out on the basis of that inside information before it is made public. But if there is a protracted process leading up to a price sensitive event or situation, does the question of inside information arise only in relation to the end result of the process or also to the intermediate steps?
This issue was addressed in a recent case in the Court of Justice of the European Union. In the UK, the Court's decision may affect the interpretation of the Disclosure and Transparency Rules and the AIM Rules in relation to the disclosure of price sensitive information, the market abuse regime and the offence of insider dealing.
The case arose out of the early departure of Mr Schrempp from his position as Chairman of the Board of Management of Daimler AG. His appointment was due to expire in 2008 but, following a general meeting of the company in April 2005, he started to think about tendering his resignation.
On 17 May 2005, he discussed his intentions with the Chairman of Daimler's Supervisory Board. On 18 July, Mr Schrempp and another Board member agreed to propose Mr Schrempp's early departure, and the appointment of his successor, at a meeting of the Supervisory Board to be held on 28 July. The day before that meeting, the Presidential Committee of the Supervisory Board met and decided to recommend the proposal to the Supervisory Board. At the Supervisory Board meeting, it was decided that Mr Schrempp would step down at the end of the year.
Following the announcement of that decision, Daimler's share price rose sharply. A case was brought against Daimler in the German courts by Mr Geltl, who had sold Daimler shares before the announcement was made. He claimed the news of Mr Schrempp's early departure should have been made public at an earlier stage.
The German court took the view that the decisive price-relevant event was the Supervisory Board's decision of 28 July 2005. Once the Presidential Committee had decided, on the day before, to recommend that decision to the Supervisory Board, it could reasonably be expected that Mr Schrempp would step down early. Therefore, there was inside information as from 27 July 2005.
Mr Geltl appealed on the basis that an announcement should have been made at a yet earlier stage. The German appeal court made a reference to the Court of Justice, asking whether intermediate steps in a protracted process could give rise to inside information.
The Court decided that they could.
To be price sensitive, information must be precise. This means it must refer to a set of circumstances which exists, or may reasonably be expected to come into existence, or an event which has occurred, or may reasonably be expected to occur. An intermediate step in a protracted process may in itself constitute a set of circumstances or an event within the normal meaning of those terms.
The Court did not want to rule out the possibility that information relating to an intermediate step may need to be disclosed as price sensitive information. To do so would have risked undermining the integrity of the EU financial markets and investor confidence.
The German appeal court also asked the Court of Justice to give guidance in relation to information about situations and events (and intermediate steps) which have not yet arisen or occurred, but "may reasonably be expected" to arise or occur. The Court confirmed this applies where it appears, on the basis of an overall assessment of the factors existing at the relevant time, that there is a realistic prospect that the situation or event will arise or occur.
It will now be for the German courts to decide whether an announcement should have been made once information was available in relation to any of the steps leading up to the decision of the Daimler Supervisory Board - for example, when Mr Schrempp first alerted the Chairman of his intentions; and when the decision was taken by Mr Schrempp and the other Board member to propose Mr Schrempp's early departure and the appointment of his successor.
In relation to the disclosure of price sensitive information by listed companies, the decision of the Court of Justice is applicable to the interpretation of the Disclosure and Transparency Rules. It is likely that a similar approach would be taken in relation to the requirement to disclose price sensitive information under the AIM Rules.
The decision is also directly relevant in relation to the market abuse regime under Part VIII of the Financial Services and Markets Act 2000, which applies to both listed and AIM companies, and may be taken into account in the interpretation of the criminal offence of insider dealing under the Criminal Justice Act 1993.
Quoted companies should therefore bear in mind the need to consider whether inside information exists at each step in any process which might have an impact on their share price, not just in relation to the final outcome of the process. And inside information can relate not only to existing situations and events which have already occurred, but also to events and situations which have a realistic prospect of occurring or arising.
Click here for the ECJ press release.
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