Last February, the European Council and the European Parliament reached a final compromise on an EU Listing Act.[1] The act aims to make listings in the EU – and raising capital through the stock market – more attractive by simplifying and harmonizing the listing rules. It will, among other things, amend the duty of EU listed companies to publicly disclose inside information – offering a striking example of transatlantic convergence in capital markets law.
The Current Duty to Disclose Inside Information
Article 17(1) of the Market Abuse Regulation[2] (MAR) requires an issuer to publicly disclose any inside information that directly concerns that issuer as soon as possible. This continuous disclosure obligation exists in addition to the periodic disclosure obligations applying to EU listed companies. Inside information is defined in Article 7(1) MAR as information that is “of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers (…), and which, if it were made public, would be likely to have a significant effect on the prices of [the] financial instruments (…) [issued by that issuer].”
The rationale for the continuous disclosure obligation is twofold. The main purpose is to prevent insider dealing. The idea is that the timely disclosure of inside information puts investors on an equal footing and, hence, reduces the risk that investors will engage in insider dealing. So, the sooner inside information is publicly disclosed, the less likely it is that insiders will exploit it and trade upon it (and thereby infringe the ban on insider dealing of Article 14(a) MAR).
The second rationale is to increase market transparency and, ultimately, the efficiency of the price-formation process. To better understand market transparency and market efficiency, consider the financial-economic concept of the Efficient Capital Market Hypothesis, which boils down to the idea that all publicly available information is immediately absorbed by the markets into stock prices. The idea is that, the more information about a listed company is publicly available, the more efficient the price-formation process is, and the more accurate the available stock prices are. An “accurate” stock price in this context means that the price is as close as possible to its fundamental value. This also explains the second rationale of the disclosure duty: It results in stock prices being more efficient and thus coming closer to their fundamental value, which will ultimately lead to a more efficient allocation of resources.
The New Duty to Disclose Inside Information
A significant amendment made by the EU Listing Act is the curtailment of the disclosure duty under Article 17(1) MAR:
An issuer shall inform the public as soon as possible of inside information which directly concerns that issuer. That requirement shall not apply to inside information related to intermediate steps in a protracted process as referred to in Article 7(2) and (3) [MAR] where those steps are connected with bringing about particular circumstances or an event. In a protracted process, only the final circumstances or event shall be disclosed as soon as possible after they have occurred.
According to this provision, the disclosure obligation no longer applies to intermediate steps in a protracted process. It is only the outcome of the protracted process that must be publicly disclosed. This is a significant amendment to the disclosure obligation, because, in practical terms, inside information almost always involves protracted processes. The definition of inside information in Article 7 MAR remains, however, largely unchanged under the new regime. For inside information relating to a protracted process, this means that the ban on insider dealing (Article 14(a) MAR) and the ban on its unlawful disclosure to third parties (Article 14(c) MAR) remain unchanged.
The New Article 17(1) MAR Raises Several Questions
A significant question relates to the concept of a “protracted process,” as referred to in the new Article 17(1) MAR. Under the new EU regime, whether a protracted process has occurred is crucial to determining when the disclosure obligation arises. But what is a protracted process? The preamble to the EU Listing Act sheds some light on the question:
(…) [I]n a protracted process, disclosure should not cover announcements of mere intentions, ongoing negotiations or, depending on the circumstances, progresses of negotiations (such as, a meeting between the companies’ representatives). The issuer should only disclose the information related to the particular circumstances or the particular event that the protracted process intends to bring about or results in (final event), as soon as possible after such circumstances or event have occurred. For instance, in the case of a merger, disclosure should be made as soon as possible after the management has taken the decision to sign off on the merger agreement, once the core elements of the merger have been agreed upon. In general, for contractual agreements the event should be deemed to have occurred when the core conditions of that agreement have been agreed upon. In the case of non-protracted processes related to a one-off event or set of circumstances, notably when the occurrence of that event or set of circumstances does not depend on the issuer, the disclosure should take place as soon as the issuer becomes aware of that event or set of circumstances.
First, under the preamble, as under the current MAR,[3] a “protracted process” includes negotiations concerning a merger or acquisition or other significant transaction (i.e. capital market transactions such as the placement of financial instruments). As long as negotiations continue, and final agreement on the terms of the transaction has not been reached, the protracted process exists, and the disclosure obligation has not been triggered.
Second, under the preamble, singular events beyond the control of the issuer are not protracted processes. One could, for instance, think of external events that cause production at a company to suddenly stop or a major customer to suddenly cancel its contract. Although the preamble thus gives some guidance, the interpretation of “protracted process” will inevitably lead to questions being referred to the Court of Justice of the EU. In the meantime, we must hope for the European Securities and Markets Authority (ESMA) to give further guidance.
Another question relates to the exception of Article 17(4) MAR that allows an issuer to delay the public disclosure of inside information if certain strict conditions are met. With the new disclosure obligation of Article 17(1) MAR, the question arises, what, in practical terms, is the remaining relevance of the exception in Article 17(4) MAR? After all, under the current EU regime, the exception to lawfully delay the disclosure of inside information is mainly used in cases of protracted processes.[4] If, under the new EU regime, the disclosure obligation will no longer apply to “intermediate steps in a protracted process,” issuers will no longer need the exception of Article 17(4) MAR with respect to information about those intermediate steps. Under the new regime, however, issuers may still need the exception, though for a very short time, in the final stage of internal decision-making (i.e. the approval of a management board resolution by the supervisory board). That, at least, is how I interpret recital 58 of the preamble to the EU Listing Act.[5]
A third question concerns the limitation of the disclosure obligation in relation to the objective of that obligation. Under the current MAR, the main purpose of the disclosure obligation is to prevent insider dealing. And a secondary objective is to increase market transparency and market efficiency. Under the EU Listing Act, however, the secondary objective has become primary. This follows again from the recital 58 of the preamble to the EU Listing Act, which states that “[t]he requirement to disclose inside information aims primarily, to enable investors to take well-informed decisions” (italics added). I find it difficult to reconcile this newly primary objective with the new disclosure obligation. Curtailing the disclosure obligation undermines the objective of promoting market transparency and market efficiency. After all, inside information that is not published and whose confidentiality is ensured is not incorporated into the stock price. Not having to publish inside information over a certain period thus leads – at least in theory – to more market inefficiency.
The New Article 17(12) MAR
In addition to the limitation of the disclosure obligation in Article 17(1) MAR, a new paragraph 12 will be added to Article 17 MAR. Subsection (a) of this new Article 17(12) reads:
The [European] Commission shall be empowered to adopt a delegated act to set out and review, where necessary, a non-exhaustive list (…) of final events in protracted processes and, for each event, the moment when it is deemed to have occurred and shall be disclosed pursuant to [Article 17(1) MAR].
This delegated act will thus contain a non-exhaustive list of inside-information events, and for each event the act will stipulate when the issuer must publicly disclose the relevant information. It remains to be seen what the delegated act would look like, but this development seems an evolution from a more principle-based approach of the disclosure obligation under the current EU regime to a more rule-based approach under the new EU regime.
Comparison With U.S. Securities Law
This more rule-based approach suggests that the EU regime is becoming more like the U.S. federal regime. After all, one of the most important and striking differences between the current EU regime and the U.S. regime is that, in the United States, listed companies do not have an independent duty to publicly disclose inside information. Under the Securities Exchange Act 1934, companies are, however, required to disclose certain material events through Form 8-K.[6] The relevant rules specify which events are to be disclosed and when those events are to be disclosed. In that respect, it is important to note that the list of events (so-called “Items”) to be published through Form 8-K has been growing.
The upshot is that EU and U.S. securities laws are gradually converging. With the EU Listing Act, Europe is moving towards a curtailed disclosure obligation for inside information. This disclosure obligation 2.0 would be accompanied by a delegated act that would contain a non-exhaustive list of inside-information events, indicating for each event the moment that the issuer must publicly disclose the relevant information. At the same time, In the United States, the list of events to be disclosed through Form 8-K has been growing. This is a clear example of transatlantic convergence in capital markets law.
ENDNOTES
[1] This article is based on the text of the final compromise, which is available at: <https://data.consilium.europa.eu/doc/document/ST-6249-2024-INIT/en/pdf>.
[2] Regulation (EU) No 596/2014 (OJ 2014, L 173/1).
[3] See in this respect recital 16 and 17 of the preamble to the current MAR.
[4] See also the current Article 17(4), second subparagraph, MAR: ‘In the case of a protracted process that occurs in stages and that is intended to bring about, or that results in, a particular circumstance or a particular event, an issuer (…) may on its own responsibility delay the public disclosure of inside information relating to this process, subject to points (a), (b) and (c) of the first subparagraph.’
[5] See in this respect also recital 50 of the preamble to the current MAR on the so-called ‘legitimate interests’ in the sense of Article 17(4) MAR.
[6] See https://www.sec.gov/files/form8-k.pdf.
This post comes to us from Arnoud Pijls, associate professor of corporate and capital markets law at Erasmus School of Law and adviser at Clifford Chance LLP. A version of the post appeared on the Oxford Business Law Blog.