11.5 Price-sensitive information

In Chapter 5, the component parts of the concept 'inside information' have been given a closer look. The concept of 'inside information' (voorwetenschap) as described in Article 5:53(1) of the Wft was used as the basis not only of the disclosure duty of issuers, but also of the insider trading and tipoff ban (Article 5:56 and Article 5:57 of the Wft, respectively). It was, therefore, analysed whether the concept corresponds sufficiently to the requirements that should be set for the disclosure duty of issuers. The purpose of the disclosure duty is after all to ensure that investors are given up-to-date, complete and reliable information on the performance of and the developments with the issuer. This allows investors to be well informed and to take well considered investment decisions. That aim is completely different from the aims of the insider trading and tipoff ban. Those prohibitive provisions aim to prevent insiders from using their informational advantage on the securities markets for transactions in financial instruments and to prevent insiders from sharing their informational advantage with others without that being justified by their normal duties. Insiders can obtain such an informational advantage because they are privy to information due to a special capacity, such as managing director or staff officer of an issuer. Given the essentially different rationale, it is not obvious to set too strict requirements for the scope of that informational advantage. After all, the purpose will have been to create a threshold for insiders to perform transactions in financial instruments if and as soon as an informational advantage gives them (or others whom such insiders have tipped off) the opportunity to transact whilst having more knowledge.

The research that was conducted into the use of one and the same concept 'inside information' in the rules for both the disclosure duty of issuers and the insider trading and tipoff ban also had another reason. The reason was that this alignment meant a trend break from the direction taken in the past in European Directives, without the European legislature giving any motives for that break, let alone any sound ones.

The research conducted into the component parts of the concept 'inside information' has more than once made it evident that this concept is unusable for the purpose of compliance with the disclosure duty of issuers, at least if the use of that concept is also aimed at pursuing the generally recognised objectives of the disclosure duty. The use of this concept could obligate issuers, for example, to disclose information at an early (too early) stage. Information may well be sufficiently precise for an insider to be used in transactions in financial instruments, but may still be insufficiently precise to justify a duty for issuers to disclose that information. The problem identified is aptly illustrated in the examples that CESR has given of the concept of `precise information'. On the one hand, CESR mentioned a case of information being precise enough to allow a reasonably acting investor to adopt an investment decision almost without risk on the basis of that information. With a view to compliance with the disclosure duty, this example is definitely useful and is also in keeping with the wanner in which the pricesensitivity requirement is described in an implementing directive of the Market Abuse Directive. However, where on the other hand CESR mentioned a case in which the information was sufficiently precise to be readily used on the securities market, it took a dangerous path. In such case, the information will not be sufficiently precise for a reasonably acting investor to adopt an investment decision (almost) without risk, but will be sufficiently precise to be readily used by professional market parties employing certain financial instruments or trading strategies. Although this example is useful in respect of the use that is made of the concept of 'inside information' in connection with the insider trading and tipoff ban, it is useless in the context of compliance with the duty to disclose pricesensitive information. The reason is that if a choice should be made between two equivalent standards, both of which may be decisive for the compliance with the disclosure duty, the choice will necessarily be in favour of the standard that can be complied with first, which is the standard that must be used in the second example given by CESR. However, such a choice would be at odds with the standard of a reasonably acting investor that was adopted in an implementation directive of the Market Abuse Directive.

Another example of the impracticability of applying one and the same concept `inside information' is that price-sensitive information could be made public (for example by the issuer through an unauthorised disclosure method, such as an announcement at a general meeting or in a newspaper interview) and can thus no longer be the basis for applying, for example, the ban on insider trading, while the issuer is still required to fulfil its disclosure duty in the prescribed marmer.

This study has paid particular attention to the price-sensitivity requirement which is a prominent part of the concept 'inside information'. It is required that disclosure of the information by the issuer "could have a substantial effect on the price of the financial instruments or on the price of related derivative financial instruments" (Article 5:53(1) of the Frft). It has been found that in defining the price-sensitivity requirement, the legislature deliberately did not seek alignment with the wording of the Market Abuse Directive, which refers to "substantial effect", but sought alignment with the wording of an implementing directive. That implementing directive introduced the concept of the reasonably acting investor. According to that implementing directive, information is price-sensitive when a reasonably acting investor is likely to use it to partly base its investment decisions on. The legislature assumed that this description of the concept reflected the directive's requirement completely, and that it was no longer necessary to also establish that disclosure of that specific information could have a "substantial effect" on the price of the financial instruments issued by the issuer. Whether that assumption is reconcilable with the intention of the European legislature cannot be established due to the Jack of clear explanatory notes to the Market Abuse Directive. In the meantime the doctrine, CESR and the Court of Justice of the European Union have given mixed messages on how to answer this interesting question.

My own view is that the European legislature has taken an unfortunate route by linking the disclosure duty of issuers to the possible effect that disclosure of the information would likely have on the market price of the issuer's fmancial instruments. The market price has not always proven to be a reliable compass in establishing the `value' that should be attributed to certain information regarding an issuer. The disclosure duty should first and foremost be about providing up-to-date, complete and reliable information that investors are likely to fmd relevant in taking investment decisions. If that objective is kept in mind, a description of the price-sensitivity requirement should certainly not focus exclusively on the price of the fmancial instruments issued by that issuer. By contrast, the phenomenon of the reasonably acting investor is a reliable compass to determine what information is price-sensitive and should be made public and when that must be done, even if the marmer in which that phenomenon is defined in the implementing directive is surrounded by various uncertainties that are caused by the use of vague characterisations such as `likely' and 'in part'.

Sometimes, contradictions are less substantial than they appear at a first glance or are represented to be. It is very much the question whether the contradiction between the substance given to the price-sensitivity requirement along the lines of the phenomenon of the reasonably acting investor or the impact on the market price of financial instruments is being made on good grounds. Is it not rather true that the determination that certain information could be relevant for the adoption of investment decisions by the average investor should also lead to the conclusion that disclosure of that information could have an effect on the price of the financial instruments issued by the issuer? In other words: Are we not actually faced with two sides of one and the same coin?

My choice for the phenomenon of the reasonably acting investor as standard for assessing the price-sensitivity requirement has also been substantiated with a legislative systematic argument. The rules governing the prospectus and the offering document lead to the view that, more or less, that same reasonably acting investor should be taken as a standard when compiling those documents. It is difficult to understand why the standard for disclosure of price-sensitive information should suddenly be entirely different and be focussed singularly on the market price of securities.

In view of the special way in which the disclosure duty of Article 5:25i of the Wft has been given substance and shape, I have argued in favour of issuers being permitted a certain discretion. Discretion in this context means that issuers should have a certain degree of freedom to determine whether certain information does or does not fulfil the elements of price-sensitive information as referred to in Article 5:25i(2) in conjunction with Article 5:53(1) of the Wft. Such discretion would also imply that the supervision of compliance and the enforcement of the disclosure duty should be exercised with restraint.

Chapter 5 also addressed the delay rule. In exceptional cases, the issuer is allowed to delay the disclosure of price-sensitive information. A delay is allowed on the following conditions: (i) the delay serves a legitimate interest of the issuer, (ii) the delay would not be likely to mislead the public and (iii) the issuer is able to ensure the confidentiality of that information (Article 5:25i(3) of the Wft). The precise meaning of each of those conditions was determined in more detail and the function of the three conditions was reviewed under a critical light. In my view, these three conditions cannot be explained independently from one another, but must always be considered in their mutual correlation. Thus, the condition that the delay should not involve the risk of the public being misled should add substance and `colour' to the first condition, that the issuer should have a legitimate interest in the delay. Thereby, some interests will not even qualify as legitimate interests, and said condition could play a role in other cases in which a delay was initially legitimately decided upon, in order to determine how long the delay is allowed to continue. It was further argued that the first condition of the delay rule involves more than a balancing of interests in the sense that the interest of the issuer in temporarily withholding certain information should be weighed against the interest of investors in timely becoming aware of that information. In order to be eligible for the delay rule, an issuer must have a precise and legitimate interest in delaying the disclosure. That interest must carry sufficient weight to set aside the primacy of the statutory disclosure duty of Article 5:25i of the Frft. The mere fact that it does not suit the issuer to disclose negative business information at a certain point is in my view not a legitimate interest.

Although the Market Abuse Directive provides for an option for Member States to require that a delay in disclosure by an issuer is notified to the competent authority, the Dutch legislature has not (yet) done so. As a result, the AFM (the Dutch Financial Markets Authority) is able to assess whether the issuer was right to invoke the delay rule in retrospect only and discovering breach has become a matter of chance. This study argued in favour of making such notification a requirement after all, because notification of a decision by an issuer to delay disclosure could be a useful instrument for the AFM to exercise supervision, proactively if needed, on whether the issuer complies with the conditions for delaying disclosure. The AFM will be `on the alert' and be able to intervene on time. Without any notification from the issuer, it will at any rate be difficult for the AFM to adequately assess developments on the stock exchange such as sales volume and price development. Moreover, if the AFM should at any time receive signals that the conditions of the delay rule are not observed, the prior notification would cause that no time would be unnecessarily lost with the inquiry that the AFM still has to conduct.

Sine this study has found that there are strong objections against using the concept 'inside information' for the purpose of compliance with the disclosure duty, the conclusion of Chapter 5 concerns the question how those objections can be redressed. One solution could be to replace the concept of 'inside information' by another concept that is used within the context of compliance with the disclosure duty. A return could be considered to the wording used in the Listing Directive, with a preference for the English language version of it ("any major new developments") (see § 10.3). I would prefer that solution, but since the Market Abuse Directive adheres to full harmonisation as a matter of principle, it requires the European legislature to adopt legislation for that purpose first. Alternatively, an implementing directive could be helpful at the second level of the Lamfalussy procedure to offer an explanation that is more specifically oriented towards the disclosure duty of issuers with regard to the element of `specific information' that is part of the concept of 'inside information'. Another solution could be to expand the use that issuers can make of the delay rule. The use of the delay rule could be expanded to express that the delay decided upon by the issuer may, in special circumstances, serve a greater interest than overly hasty compliance with the disclosure duty, just in order not to run the risk of breaching the disclosure duty, because it is linked to the concept of `inside information'. A drawback of that solution, however, is that it might deprive the first condition of the delay rule, that the issuer must have a legitimate interest in delaying the disclosure, too much of its meaning. Another drawback is that the concept of 'inside information' risks being denatured as a basis for compliance with the disclosure duty in an artificial manner. As stated, I prefer to adopt the first solution, by formulating a definition that is more closely adjusted to the disclosure duty of issuers either at the first level or at the second level of the Lamfalussy procedure.