The issuers of financial instruments are obliged to reveal inside information to the public even if they are unsure as to how such information will precisely influence the price of financial instruments issued, the Court of Justice of the European Union (CJEU) recently asserted. Otherwise, such persons will, in terms of EU law, be found guilty of insider dealing.
Insider dealing refers to the trading of a public company’s stock or other securities such as bonds or stock options by persons who have access to non-public information about the company. Such individuals may include the directors of a company, shareholders, executive officers and others.
EU law specifically prohibits insider dealing and requires issuers of financial instruments to inform the public of precise inside information which directly concerns them. Information must, in terms of EU law, be regarded as precise if it makes it possible to assess whether certain circumstances or a particular event is likely to have an effect on the price of the financial instruments concerned.
The facts of this particular case which came before the European Court were briefly as follows. Between 2006 and 2007, the Wendel company concluded total return swap agreements with four banks for a total of 85 million shares in Saint-Gobain, a company which manufactures construction material. It later went on to convert such financial exposure to Saint-Gobain into actual possession of share certificates. It, in fact, acquired more than 66 million shares in Saint-Gobain, amounting to 17.6 per cent of the share capital of the latter company.
In the course of an inquiry into the circumstances surrounding the increase in Saint-Gobain’s capital, the relevant French authority found that Wendel had intended from the outset to acquire a significant shareholding in Saint-Gobain’s capital. The authority accused Wendel of failing to make public the principal characteristics of such a financial operation as well as the inside information relating to the implementation of such an operation.
Wendel’s representatives maintained that there was no legal obligation to make such information public since the information in question was not precise enough to indicate as to whether the financial operation would result in a rise or a fall in the price of Wendel’s shares. The authority retorted that for information to be regarded as precise, there was no need to be able to predict whether a financial operation is likely to bring about an increase or a decrease in the relevant price. What was important was the fact that the price of the shares was expected to change. The French Court seized of the case filed a preliminary reference before the CJEU requesting guidance from the latter Court on this issue.
The CJEU observed that the EU directives regulating insider dealing do not specifically state that ‘precise’ information refers only to that information which makes it possible to determine the likely direction of a change in the prices of the financial instruments concerned. On the other hand, what can be considered to be imprecise information is that information which is vague or general and from which it is impossible to draw a conclusion with regard to the possible effect on the prices of the financial instruments concerned. The Court pointed out that a reasonable investor may well base his decision to invest on information which does not necessarily make it possible to determine the movement in a given direction of the prices of the financial instruments concerned. Indeed, the Court maintained, the increased complexity of the financial markets makes it particularly difficult to identify accurately the direction of a potential change in the prices of financial instruments. The Court concluded that ‘precise’ information cannot be considered to be only that which makes it possible for a potential investor to anticipate the direction of a change in the prices of the instruments concerned. If this were the case, an insider could use any uncertainty in this regard as a pretext for refraining from making certain information public and thus profit from such information to the detriment of other investors.
The objective of EU laws on insider dealing is clearly that of ensuring the integrity of European financial markets while at the same time increasing investor confidence. Economic operators in all member states are thus guaranteed a level playing field. The European Court, through its interpretation of EU laws, plays its own role in ensuring that these objectives are reached and curbs any efforts to thwart the achievement of these objectives.
mariosa@vellacardona.com
Mariosa Vella Cardona is a freelance legal consultant specialising in European law, competition law, consumer law and intellectual property law.