Listing Act: Expanded exemptions for managers to trade during closed periods
The Listing Act will expand the exemptions to the prohibition of 'persons discharging managerial responsibilities' carrying out transactions during a closed period. In this article, we address the implications of this change.
On 8 October 2024, the European Council adopted the Listing Act, a legislative package that includes changes to the Prospectus Regulation, the Market Abuse Regulation, MiFID II and MIFIR. The package aims to make the EU's public capital markets more attractive. The Listing Act is expected to come into force later this year. This article is the third in a series of articles on some of the key changes the Listing Act is set to bring. The first article covered the expanded prospectus exemptions and the second article covered the changes to inside information disclosure in a protracted process.
The Listing Act will expand the exemptions to the prohibition of 'persons discharging managerial responsibilities' (PDMRs) carrying out transactions during a closed period. In addition to the existing exemptions as currently set out in the Market Abuse Regulation (MAR), PDMRs will also be allowed to trade during closed periods provided that the trade does not involve an active investment decision by the PDMR.
A quick recap on the relevant legal concepts:
PDMRs: Persons at a listed company who have the power to take managerial decisions affecting the future development and business prospects of the company, and persons that have regular access to inside information relating to the company. PDMRs are in any event the members of the management board and supervisory board of the company.
Closed periods: The 30 calendar-day period before the publication of an interim financial report or a year-end report that the company is obliged to make public pursuant to applicable law.
During a closed period, a PDMR is not allowed to trade in any securities of the company, regardless of whether such PDMR actually possesses inside information at the time of the trade. The purpose of this prohibition is to avoid insider trading by PDMRs, or the appearance thereof, and to provide additional safeguards on top of the general prohibition of insider trading.
However, in certain circumstances, the company may choose to allow a PDMR to trade during a closed period. Currently, these allowing circumstances are very limited:
in exceptional circumstances, e.g. the PDMR experiencing severe financial difficulty and needs to sell shares; or
transactions related to – most noteworthy – an employee share scheme, or transactions where the beneficial interest in the relevant security does not change.
These exemptions are often considered to be too restrictive. Trades that depend exclusively on external factors or that do not involve any active investment decision by the PDMR do not pose a risk of insider trading. A PDMR should therefore be allowed to do such trades during a closed period.
As an example, consider a PDMR signing all documentation for a share sale outside of a closed period, with completion of the transaction being subject to certain external conditions outside the control of the PDMR. Under the current regime of the MAR, the completion of such share sale in a closed period is prohibited.
The EU Listing Act will expand the trading exemptions for PDMRs during a closed period. Under the new regime, companies are required to also allow a PDMR to trade during a closed period provided that the transaction:
does not involve an active investment decision by the PDMR;
results exclusively from external factors or actions of third parties; or
is based on predetermined terms.
The expanded exemption may cover, for example, a discretionary asset management mandate executed by an independent third party, irrevocable arrangements entered into outside of a closed period, an 'automatic' completion of an earlier agreed transaction, or the acceptance of inheritance, gifts and donations. Any such trade activities and transactions do not involve an active investment decision by a PDMR at the time of the transaction is completed.
This is a welcome and useful expansion of the PDMR trading exemptions, since transactions during a closed period without an active investment decision by the PDMR are not in breach of the protection that the MAR seeks to provide to investors.
This amendment will apply once the Listing Act enters into force – which is expected for later this year.
