The EU Listing Act Shows How EU and U.S. Law Are Converging on the Duty to Disclose Inside Information. Part 1

Last February, the European Council and the European Parliament reached a final compromise on an EU Listing Act. 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 (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.

Sourced from CLS Blue Sky.