ESMA publishes final guidelines on delaying disclosure of inside information and market soundings recipients

The European Securities and Markets Authority has finalised two pieces of guidance under the EU Market Abuse Regulation: one relating to when a company can delay disclosure of inside information to the market and the other for recipients of market soundings. The guidelines include a list of scenarios in which delaying disclosure might be justified to protect the issuer's legitimate interests, and where delay would be likely to mislead the public. The guidelines also suggest some procedures that recipients of market soundings should adopt in order to protect themselves from any suggestions of insider dealing or unlawful disclosure.

Changes from consultation paper

The main changes to the version of the guidelines that ESMA consulted on in January 2016 are as follows:

  • recipients of market soundings will not be required to inform the disclosing market participant if they disagree with their assessment of whether information disclosed amounts to inside information;
  • delaying disclosure of inside information where the financial viability of the issuer is in danger is not limited to situations where there are ongoing negotiations aimed at ensuring the long term financial recovery of the issuer – delay is also permitted if the negotiations are aimed at short term financial recovery; and
  • the removal of tight conditions which were proposed in order for an issuer to delay disclosing inside information where the approval of a supervisory board was needed.

Disclosure of inside information to the market

Under Article 17 of MAR, issuers must disclose inside information to the market as soon as possible, unless they can satisfy three criteria:

  • immediate disclosure is likely to prejudice the issuer's legitimate interests;
  • delay of disclosure is not likely to mislead the public; and
  • the issuer is able to ensure the confidentiality of the information.

The guidelines address the first two criteria.

Legitimate interests

The guidelines include a non-exhaustive list of situations where the legitimate interests of the issuer are likely to be prejudiced by immediate disclosure of inside information. ESMA stresses that each situation must be assessed on a case-by-case basis and that the ability to delay is the "exception to the rule" so should be narrowly interpreted.

  • The issuer is conducting negotiations, where the outcome of such negotiations would likely be jeopardised by immediate public disclosure of that information. The guidelines include a non-exhaustive list of examples, such as mergers and acquisitions, restructurings and reorganisations.
  • The financial viability of the issuer is in grave and imminent danger, although not within the scope of the applicable insolvency law, and immediate public disclosure of the inside information would seriously prejudice the interests of existing and potential shareholders, by jeopardising negotiations aimed at ensuring the financial recovery of the issuer. This may be either the long term or short term financial recovery (the consultation had referred only to long term recovery). Note that Article 17(5) MAR separately allows disclosure to be delayed, with the prior consent of the regulator, in cases where disclosure would undermine the stability of the issuer and the financial system.
  • Where decisions taken or contracts entered into by the management body of an issuer need to be approved by another body of the issuer in order to become effective. Strict conditions proposed in ESMA's consultation have been removed and this is now subject to only two requirements – immediate disclosure would jeopardise the correct assessment of the information by the public and the issuer must arrange for the definitive decision of the other body to be taken as soon as possible.
  • Where the issuer has developed a product or an invention and the immediate public disclosure of such information may jeopardise the intellectual property rights of the issuer.
  • Where the issuer is planning to buy or sell a major holding in another entity and the disclosure of such information would jeopardise the conclusion of the transaction (i.e. negotiations have not started so it cannot be delayed under the ongoing negotiations limb).
  • Where a transaction previously announced is subject to a public authority's (e.g. anti-trust) approval, and such approval is conditional upon additional requirements, where the issuer can justify that immediate disclosure of those requirements will likely affect the ability for the issuer to meet them and therefore prevent the final success of the deal or transaction.

For UK issuers this is a longer list than exists under the previous regime, where in practice disclosure could only be delayed so as not to prejudice ongoing negotiations. The Financial Conduct Authority had previously deferred a consultation on amending DTR 2 (which now takes the form of guidance only) to clarify that the non-exhaustive list of scenarios really is non-exhaustive. See here for more details. We can expect the FCA to re-open this discussion now that the final ESMA guidelines have been published.

When will delay mislead the public?

The guidelines include a non-exhaustive list of when delay would mislead the public (and therefore disclosure may not be delayed). This includes where the inside information the issuer is proposing to delay disclosing:

  • is materially different from a previous public announcement of the issuer on the matter to which the inside information refers to;
  • relates to the fact that the issuer's financial objectives are likely not to be met (in the event that objectives were previously publicly announced);
  • is in contrast with the market's expectations (based on signals that the issuer has previously set).

Recipients of market soundings

Article 11 MAR introduces a new safe harbour from the offence of unlawful disclosure of inside information in relation to market soundings (communications by or on behalf of an issuer to potential investors prior to an announcement or by or on behalf of a potential bidder to target shareholders), if certain conditions are met. These include various procedural requirements set out in technical standards.

ESMA's guidelines are for the recipients of market soundings and are intended to set out:

  • the factors they should take into account when information is disclosed to them as part of a market sounding in order for them to assess whether they are in possession of inside information as a result (as Article 11(7) MAR requires them to do);
  • the steps they should take when information is disclosed to them so that they don't commit the offences of insider dealing or unlawful disclosure of inside information; and
  • the records they should maintain to demonstrate that they have not committed such offences.

Compliance with the guidelines does not, however, constitute a safe harbour. Although the guidelines are not mandatory, regulated persons are likely to be expected to comply.

Readers of the guidelines will need to acquaint themselves with two new acronyms: DMP for "disclosing market participant" and MSR for "market sounding recipient". This term can include both regulated and non-regulated entities who expect to be in receipt of market soundings.

Under the guidelines, MSRs should:

  • designate a central contact point for receipt of market soundings and make that information available to the DMP, e.g. through relationship management or on its website;
  • notify a DMP if they do not wish to receive certain/any market soundings;
  • consider for themselves whether the information received is inside information. An MSR could have inside information as a result of the combination of information it already holds and information received from a DMP. The proposed requirement for the MSR to inform the DMP if it disagreed with its assessment of inside information has been dropped, as this created a risk of further disclosure of inside information;
  • where the MSR has considered that it does have inside information, consider which instruments and issuers they believe that information may relate to;
  • establish and maintain procedures to ensure internal disclosure of inside information is made through pre-determined channels and on a need-to-know basis only, including appropriate training;
  • keep a list of persons within the MSR in possession of the information disclosed in the market sounding, in chronological order for each sounding;
  • if the sounding was not recorded, sign the agreed minutes of the sounding which DMPs are required to keep and provide to them, or else provide a signed copy of their own notes within 5 business days of receiving the draft minutes from the DMP;
  • keep records of all procedures and soundings received for five years.

Next steps

Each competent authority now has to confirm within two months whether or not it intends to comply with the guidelines and, if not, why not. ESMA will publish a list of which competent authorities will comply and which will not.

Click here for the ESMA guidelines.