European ruling casts doubt on Hannam interpretation of inside information

The Court of Justice of the European Union has issued a judgement which redefines what it means for information to be precise for the purposes of the definition of inside information. The Court found that it was not necessary to be able to determine the direction of possible price movement. This is in direct contrast to the findings of the Upper Tribunal in Hannam and further muddies the waters, making it even more challenging for market participants and issuers to determine whether they have inside information or not.

What happened?

The French financial markets authority requested a ruling from the CJEU on the interpretation of the definition of inside information in Article 1 of the Market Abuse Directive (which is enacted in the UK by Section 118C of the Financial Services and Markets Act 2000). The request arose in the context of an action concerning an investor who had economic exposure to an investment via a series of total return swaps and was intending to convert that into a significant shareholding. The question was whether that fact was inside information which should have been disclosed to the market.

Specific enough to enable a conclusion to be drawn as to possible effect on price

In order for information to be inside information it must be precise (see Market Abuse reminder below). In order for it be precise it must be specific enough to enable a conclusion to be drawn as to possible effect on price. The Upper Tribunal in Hannam v the Financial Conduct Authority [2014] UKUT 0233 (TCC) considered that the information must indicate the direction of movement in the price which would or might occur if the information were made public.

The question referred to the CJEU by the French authorities in this instance was on that exact point: whether the requirement for information to be specific enough to enable a conclusion to be drawn as to possible effect on price must “be interpreted as meaning that only information in respect of which it may be determined, with a sufficient degree of probability, that, once it is made public, its potential effect on the prices of the financial instruments concerned will be in a particular direction may constitute inside information.”

No need to determine direction of price movement

The Court found that it was not necessary to be able to determine the direction of price movement. It found that it is enough that the information be sufficiently exact or specific to constitute a basis on which to assess whether the set of circumstances or the event in question is likely to have a significant effect on the price of the financial instruments to which it relates. The only information excluded from the concept of ‘inside information’ by virtue of that provision is information that is vague or general, from which it is impossible to draw a conclusion as regards its possible effect on the prices of the financial instruments concerned.

Mr Lafonta argued that only information which indicates the direction of price movement would enable the holder to determine whether a particular financial instrument should be bought or sold and, as a result, gives the holder of that information an advantage over other market participants. The Court disagreed.

It found that the increased complexity of the financial markets makes it particularly difficult to assess the direction of a change in price. If information were to be regarded as precise only if it made it possible to anticipate the direction of a change in the prices of the instruments concerned, any uncertainty in that regard could be used as a reason for not making that information public. This would allow the holder of the information to profit from it to the detriment of the rest of the market.

The CJEU’s ruling will have to be taken into account by the UK Financial Conduct Authority in its interpretation of inside information.

Comment

This finding potentially lowers the threshold for what can constitute inside information even further. It also introduces uncertainty into a question of interpretation that has been reasonably settled since the Hannam decision. This makes it difficult for issuers to determine when they have inside information such that they need to make an announcement and for investors to assess when the information they have prevents them from dealing.

See Jean-Bernard Lafonta v Autorité des marchés financiers (Case C-628/13)

Market Abuse reminder - what is inside information?

Inside information is defined in the Market Abuse Directive and in Section 118C FSMA as "information of a precise nature which

  • is not generally available,
  • relates, directly or indirectly, to one or more issuers of the qualifying investments or to one or more of the qualifying investments, and
  • would, if generally available, be likely to have a significant effect on the price of the qualifying investments or on the price of related instruments."

Section 118C(5) provides that "information is precise if it:

  • indicates circumstances that exist or may reasonably be expected to come into existence or an event that has occurred or may reasonably be expected to occur, and
  • is specific enough to enable a conclusion to be drawn as to the possible effect of those circumstances or that event on the price of qualifying investments or related investments."