11.8 Selective disclosure of (price-sensitive) information

Chapter 8 is concerned with the subject of selective contacts that issuers use to maintain with various market parties such as investment analysts and institutional investors. The phenomenon of selective contacts seems to have become so widespread and those contacts are maintained by issuers on such a large scale that they can now justifiably be considered to be an established market practice. Even so, such contacts in my view require special attention, because a fundamental principle of the statutory framework governing the information which issuers must provide to the securities market is that the same information must be disclosed simultaneously to the entire securities market. How should this development be viewed in light of this principle?

Before this question was answered, the first part of Chapter 8 was dedicated to a further analysis of the statutory framework for selective disclosure of price-sensitive information. Following closely in the footsteps of Regulation Fair Disclosure (FD), which is part of the U.S. federal securities legislation, Article 6(3) of the Market Abuse Directive and Article 5:25i(5) of the Wft include special provisions in the event of the issuer disclosing price-sensitive information selectively to a third party. In that case, a special disclosure duty still arises for the issuer, the contents of which have been made dependent on the way in which the information was or is being provided to the relevant third party: either intentionally or unintentionally. The disclosure of selectively provided information must be effected simultaneously if the information is provided intentionally to a third party and must be effected without delay thereafter if the issuer provides the price-sensitive information unintentionally to the third party. Article 5:25i(6) of the Wft further provides that this special disclosure duty of issuers does not apply if the person to whom the information is communicated is under a duty of confidentiality regarding that information.

An analysis of the legislative history has revealed that Regulation FD has a special background. In order to combat the practice of selective disclosure of material non-public information, which practice was deemed undesirable, it was necessary for the SEC to develop a `novel and bold idea'. The reason was that the U.S. federal securities legislation was based on a general rule of nondisclosure. Moreover, the U.S. legislation on insider trading was unlikely to offer any room for acting against this market practice. The SEC's solution was to create a special disclosure duty in the event that an issuer provided price-sensitive information selectively to one or more market parties. That special disclosure duty was incorporated in Regulation FD and subsequently served as an example for the European legislature to design the Market Abuse Directive. As stated, the result of that conversion can be found in Article 5:25i(5) and (6) of the Wft.

If provisions originating from foreign legislation are adopted one-on-one in our national legislation without consideration being given to the special background of those provisions, a real risk arises that the provisions turn out differently than originally intended or that they may even become incomprehensible. That risk turns out to have indeed materialised in Article 5:25i(5) of the Wft. For example, it is not readily understandable why it was necessary to create a special disclosure duty in Article 5:25i(5) of the Wft in the event of the issuer providing price-sensitive information selectively if Article 5:25i(2) of the Wft already provides for a general disclosure duty for price-sensitive information. Is such a disclosure duty not superfluous in our legal system? After all, under Article 5:25i(2) of the Wft, the issuer is already obliged, subject to applicability of the delay rule, to disclose information without delay if and insofar as that information satisfies the elements of inside information within the meaning of Article 5:53(1) of the Wft and is directly related to the issuer. It seems difficult to reconcile the nature of such a permanent general disclosure duty with the issuer having the ability to delay disclosure until it itself decides to selectively disclose that price-sensitive information.

In view of the statutory system, I am therefore of the opinion that the first sentence of Article 5:25i(5) of the Wft, which requires simultaneous general disclosure in the event of an intentional selective disclosure of price-sensitive information, is not different in meaning from the duty laid down in Article 5:25i(2) of the Wft that price-sensitive information must be disclosed without delay. The legislature has copied that first sentence blindly from Regulation FD without taking into consideration that the disclosure duty had to be created in the federal securities legislation of the USA only in view of the principle of a general rule of nondisclosure, which is radically different from our legislation. In my view, the first sentence of Article 5:25i(5) of the Wft may be deleted without any objection.

In the statutory system, the second sentence of Article 5:25i(5) of the Wft has a special function. According to the second sentence, a prompt disclosure duty arises for the issuer after it first provided price-sensitive information to a third party unintentionally. In the first place, the issuer can only derive protection from that special disclosure obligation insofar as the relevant information is not already covered by the general disclosure duty. The background of that restriction is the primacy that should be granted to the general disclosure duty of Article 5:25i(2) of the Wft. In our legal system, an issuer is not permitted to delay compliance with the disclosure duty on its own initiative until the moment at which it provides pricesensitive information selectively to a third party. Secondly, with regard to the special situation that the issuer unintentionally selectively disclosed that price-sensitive information — which was not subject earlier to any disclosure duty — the second sentence of Article 5:25i(5) offers the issuer a second opportunity to avoid a breach of Article 5:25i(2) of the Wft. Although in the case of an unintentional selective disclosure of price-sensitive information, the issuer breaches Article 5:25i(2) of the Wft, the related consequences will not set in if the issuer still properly fulfils its obligations of disclosure without delay pursuant to the second sentence of Article 5:25i(5) of the Wft. Incidentally, it cannot be inferred from the legislative history that the legislature was aware of the special function of the second sentence of Article 5:25i(5) of the Wft. The second sentence of Article 5:25i(5) of the Wft has in any event nothing to do with restricting the selective disclosure of price-sensitive information, which according to the legislative history was the legislature's intention. Paradoxically, acting effectively against the selective disclosure of pricesensitive information would therefore in this case only be served if the second sentence of Article 5:25i(5) of the Wft is also deleted.

There is an exception to the special disclosure duty of Article 5:25i(5) of the Wft if the issuer discloses price-sensitive information as part of its normal operations, profession or position, to a third party and that third party is under a duty of confidentiality regarding that information (Article 5:25i(6) of the Wft). That provision makes it possible for the issuer to exchange price-sensitive information in special situations, for example, with certain (majority) shareholders with a view to concluding a major transaction or the adoption of a drastic strategic decision. In my view, it is arguable that a confidentiality agreement can also be concluded after the relevant information has been provided to a third party.

It is in my view incorrect that Article 5:25i(6) of the Wft provides that only the first sentence of Article 5:25i(5) of the Wft — i.e. the situation in which the issuer intentionally discloses price-sensitive information to a third party — does not apply if the person to whom the price-sensitive information is disclosed is under a duty of confidentiality in respect of that information. Pursuant to to Article 6(3), second paragraph of the Market Abuse Directive, there is an exception to the special disclosure duty both in the event of an intentional and of an unintentional selective disclosure of price-sensitive information if a confidentiality agreement is concluded. This a legislative mishap.

Against the background of the equality principle that applies to the disclosure of information by issuers, the second part of Chapter 8 focused on contacts that issuers use to maintain with investment analysts and institutional investors.

For example, an attempt was made to formulate a number of guidelines which issuers should take into account in their contacts with investment analysts in order to prevent unauthorised exchange of price-sensitive information. Successively, the following subjects were addressed: screening discussion items on price-sensitiveness, the permissibility of providing guidance to investment analysts, giving an explanation or in-depth elaboration on a press release and the theory which is known as the mosaic theory. That theory assumes that an investment analyst is allowed to use information that comes from various sources and that the investment analyst may also rely on information disclosed by the issuer as long as that information is immaterial. It is even considered permissible for the investment analyst to use information provided by the issuer to create a mosaic which in its entirety ultimately constitutes material non-public information.

As the Corporate Governance Code has formulated the principle that the executive board of the issuer must handle and structure its contacts with the investment analysts carefully, the underlying premise is that maintaining such contacts is permitted and that the equality principle is no barrier, at least not necessarily. The principle of careful handling and structuring selective contacts with investment analysts was subsequently detailed in the Code in four best-practice provisions. First and foremost it is best practice for the issuer to try and achieve a certain transparency as regards the selective contacts which it maintains; analyst meetings and presentations must be announced beforehand on the issuer's website and in press releases. In addition, all shareholders should be able to follow those meetings and presentations simultaneously by means of webcasting, telephone lines or other means, and the presentations given should be posted on the issuer's web site after the meeting has been concluded. A subsequent best practice provision is that analysts' reports and valuations should not be reviewed, commented on or otherwise corrected in advance by the issuer, except for factual issues. The possibility of correcting factual issues is related to the fact that the issuer carries a certain responsibility for the accuracy of information which is released regarding the issuer. Another best practice provision is that the issuer shall not make any payments to parties for conducting research for the purpose of analysts' reports or for the preparation or publication of analysts' reports (with the exception of credit rating agencies). On the basis of the fourth and last best-practice provision, analyst meetings and presentations should obviously not take place in the period shortly before the publication of periodic financial information (known as the quiet period).

As a fmal principle, the Code sets forth a prohibition for the executive board of the issuer to be involved in actions that affect the independence of investment analysts towards the issuer and the other way round. For example, it is not allowed to use pricesensitive information as a means of exchange in order to placate analysts or to deny critical investment analysts access to analyst meetings or presentations or the right to speak.

With regard to the selective contacts that issuers use to maintain with institutional investors an attempt has also been made to formulate guidelines for handling pricesensitive information. The reason is that is has been found that institutional investors are regularly given explanations on the periodic financial information allowing them a better understanding of the performance and prospects of issuers. It seems to have become common market practice to carry on a continuing and constructive dialogue on price-sensitive topics, such as the strategy or dividend policies outside the scope of the general meeting of shareholders. The downside of those selective contacts is in my view still not given enough attention. What are the consequences of this practice for the confidence of market parties which are excluded from such explanations or dialogue and which are given little or no information on their contents or progress? Does it not draw heavily (too heavily) on the confidence of market parties in an honest course of events as regards maintaining selective contacts? A situation should be prevented whereby issuers pay only lip service to the fundamental principle of equal treatment of shareholders when they provide information. Therefore, a number of rules have been identified and critically reviewed, such as that issuers should draw up the main features of its policy on selective contacts, should offer transparency and be accountable for the selective contacts that they maintain as well as improve the quality of the provision of information following selective contacts they maintained. There is every reason for drafting and complying with this kind of rules, because the exception to the principle of equality suddenly seems to have become the main rule as far as the exchange of information by issuers is concerned.