Primary Market Bulletin 52

Article 7.1(a) of MAR defines inside information as:
...information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments;

Article 7.2 defines ‘precise’ information as follows:
…information shall be deemed to be of a precise nature if it indicates a set of circumstances which exists or which may reasonably be expected to come into existence, or an event which has occurred or which may reasonably be expected to occur, where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of the financial instruments or the related derivative financial instrument…
When assessing whether information is of a ‘precise nature’ the ECJ ruled, in Markus Geltl v Daimler AG (Case C-19/11) [2012], that information must have a realistic prospect of coming into existence or occurring to be considered precise. In relation to Hannam v FCA [2014] UKUT 0233 (TCC), the Tribunal decision cited the ‘realistic prospect’ test as the law to be applied.

Article 7.4 defines ‘a significant effect on the price’ as:
… information a reasonable investor would be likely to use as part of the basis of his or her investment decisions.

Listed or traded companies that have received an offer for all or part of the company will need to carefully consider whether such an event is inside information. This is particularly important given this information is likely to be known to a number of parties as a result of the offer being prepared and made.

During an offer process, it is not uncommon for companies to receive a series of formal offers from the same party, significantly and increasingly above the prevailing share price. We have seen cases where advice has been provided by the company’s advisers that inside information crystallised only when a final offer was accepted by the company’s directors. This was because the likelihood of the transaction taking place before acceptance was not deemed certain.

Whether the receipt of an offer is inside information should be assessed on a case-by-case basis. Relevant factors to take into account could include the identity of the bidder, the nature and quantum of the offer and the likelihood that the offer will be recommended by the board of the listed or traded target company. In this regard, we remind issuers that under MAR, information is precise if it indicates a set of circumstances which exist or which may reasonably be expected to come into existence. In Hannam v FCA [2014] UKUT 0233 (TCC), the Tribunal held that this includes where there must be a more than fanciful chance of the future event or circumstances coming into existence or occurring, but that the threshold was lower than the event or circumstances being ‘more likely than not’.  On this basis, it’s possible that the receipt of an offer could be inside information before it has been formally considered and recommended by the board.

An issuer may want to give particular consideration to press speculation or rumours that may arise during an offer process. While there is no obligation for an issuer to correct a false rumour, the Disclosure Guidance and Transparency Rules (DTR) 2.7.1 R sets out that an issuer should assess whether a disclosure obligation arises under Article 17(1) of MAR. Where the issuer considers that the speculation or rumour amounts to inside information and is delaying disclosure of that information under Article 17(4) then the issuer may need to make public the information as soon as possible given it is no longer able to ensure the confidentiality of that information.

Where an issuer has delayed disclosure of the inside information and the information ceases to be inside information because it loses its price sensitivity as a result of the offer falling away, the issuer is not obliged to disclose that information. However, the issuer must still comply with its obligations to draw up insider lists given the information was inside information for a period of time. If the issuer carried out market soundings under Article 11 of MAR then it will need to also update any market sounding recipients who the issuer had disclosed the inside information to.

We also remind issuers that where an offer is in scope of the Takeover Code, there may be circumstances where a matter is not required to be made public under the Takeover Code but which nonetheless triggers a disclosure obligation under MAR. 

We have previously provided guidance in Technical Note 506.2 to companies on the classification of periodic financial information. In that guidance, we emphasise that issuers should assess on an ongoing and case-by-case basis whether the information they hold is inside information beginning from the assumption that information relating to financial results could constitute inside information.

We have seen cases where finance packs presented to the board weeks before a scheduled earnings statement is published which showed revenues did not meet internal forecasts by the company and external consensus estimates by analysts.  In some cases, issuers have chosen not to disclose performance that is significantly behind internal forecasts and external consensus on the basis that below-forecast performance will be compensated by significant over-performance later in the year. Where this has not happened, in some cases, the subsequent publication of the financial statements caused the share price to fall between 40% and 50%. We have seen similar effects from the loss of major contracts, an event which again may take time to become certain.

In situations like the above, where the information could be of a precise nature such that it constitutes inside information at an early stage of the process, an issuer will have to disclose the information in their scheduled results announcement as soon as possible. An issuer may be able to delay disclosure of the inside information under Article 17(4) of MAR but only in a limited set of circumstances where immediate disclosure of the inside information is likely to prejudice the legitimate interests of an issuer and where delay of disclosure is not likely to mislead the public. Technical Note 506.2 gives further background on when these two conditions may be satisfied in the context of the preparation of financial information. Of particular relevance will be where the issuer has previously stated financial objectives or targets which are now unlikely to be met.

In addition, DTR 2.5.4 G guides that an issuer should not delay disclosure of the fact that it is in financial difficulty or that its financial condition is worsening although it may be able to delay disclosure of the fact or substance of negotiations to deal with such a situation.  

Our expectation is that where an issuer is not able to meet the conditions of Article 17(4), it should prepare and release an announcement that discloses the inside information as soon as possible and in a manner that enables the public to correctly assess the inside information. 

We remind issuers that, as per the guidance in Technical Note 521.3, justifying non-disclosure of information by offsetting negative and positive news is not acceptable.

We have seen cases where press speculation arises that an incumbent CEO is standing down, a shortlist of successors identified and a replacement will shortly be appointed. In those cases, the issuer has classified the resignation of the CEO and the appointment of their successor as inside information and has delayed disclosure of that information. 

We are conscious that issuers are likely to want to manage as smoothly and concurrently as possible the disclosure of their CEO’s resignation and the appointment of a replacement. However, it is important that issuers have regard to the timely identification and disclosure of inside information concerning both the resignation of the existing CEO and the appointment of their successor. This is especially the case where the information leaks or there is press speculation during the succession process.

Issuers will need to carefully and continually assess the point at which developments concerning the succession process constitute inside information. We are aware that the process for starting the recruitment of a successor can have a long lead time. The assessment of whether the developments during this process constitute inside information should be carried out continuously and on a case-by-case basis. 

Separate assessments should be carried out for developments in both the resignation and appointment given these are two separate pieces of information which may on their own constitute inside information at different points in time. It is possible that events during this process could be inside information at an early stage and before the formal resignation of the existing CEO and/or appointment of their replacement. This could include where the CEO has signalled their intention to resign and/or the board has started discussions to appoint potential successors. 

The test of whether the information is precise is most relevant here. Issuers should also consider Articles 7(2) and 7(3) of MAR that concludes that an intermediate step in a protracted process shall be deemed to be inside information if, by itself, it satisfied the criteria of inside information.

Other factors issuers may want to consider when assessing the price sensitivity of the resignation and appointment could include the length of service of the existing CEO and therefore the market’s expectation of their retirement as CEO, the expectation that a ‘natural’ successor exists or the reasons behind the CEO’s resignation.

Where an issuer has decided to delay disclosure of either the resignation or appointment and that information leaks, under Article 17(7) the issuer will no longer be able to ensure the confidentiality of the information and should disclose the information to the public as soon as possible. 

If there is continuous press speculation on the succession then the issuer may need to carefully consider whether this constitutes a leak. Technical Note 520.2 – delaying disclosure/dealing with leaks and rumours – may be useful. Factors to consider could include the accuracy of the speculation with respect to both the identity and number of potential successors and the stage at which the identification and appointment of the new CEO has progressed. Issuers should take particular care to control inside information during the recruitment process especially where it has appointed an external search consultancy. 

Issuers with a listing of equity shares in the equity shares (commercial companies) category should also ensure compliance with the notification requirements in UKLR 6.4.6 R. This requires the company to notify a Regulatory Information Service (RIS)  of any change to the board including appointments and resignations of directors as soon as possible and, in any event, by the end of the business day following the decision or receipt of notice about the change by the company.