Listing Act: Inside information disclosure in a protracted process

On 24 April 2024, the European Parliament 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 has yet to be adopted by the European Council and is expected to come into force in the next few months. This article is the second 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. 

Current disclosure requirements for intermediate steps

Inside information is non-public information of a precise nature regarding an issuer or its financial instruments (such as shares) which, if made public, is likely to have a significant effect on the price of those financial instruments. Once information constitutes inside information, various prohibitions and obligations are triggered. Among other things, the issuer must publicly disclose inside information as soon as possible, unless it can delay disclosure in accordance with certain requirements.

The Market Abuse Regulation (MAR) provides that an intermediate step in a protracted process can also constitute inside information in and of itself, if that step meets the criteria for inside information.

Recital 58 of the Listing Act refers to a contemplated merger as an example of a protracted process. A merger process typically involves a number of intermediate steps, including initial discussions, the signing of an NDA, potentially a letter of intent, further negotiations, and the signing of a merger agreement. Assuming that the merger is sufficiently material for the issuer to likely have a significant effect on the share price if it were made public (one of the criteria for inside information), at some point during the process the information about the potential merger will become sufficiently concrete to constitute inside information (another criterion for inside information). A key factor in determining when information has become sufficiently concrete to constitute inside information is at what point in the process there is a realistic prospect that the final event or circumstance will materialise or occur. In the case of a merger, there is a realistic prospect that the merger will take place once the core elements of the merger have been agreed.

Under the current regime, once an intermediate step constitutes inside information, it must be disclosed immediately. However, an issuer may decide to delay disclosure if the following three requirements are met: (1) immediate disclosure is likely to prejudice the issuer’s legitimate interests; (2) delaying disclosure is not likely to mislead the public1 ; and (3) the issuer must be able to ensure the confidentiality of the information. When delaying disclosure of inside information, the issuer must comply with various administrative requirements, such as keeping a detailed record of the delay.

In practice, issuers often opt to delay disclosure when a disclosure obligation arises during a protracted process, such as a merger. Disclosure at an early stage in the process could not only damage the issuer's position during negotiations, but also compromise the quality of the issuer's market communications by providing investors with information prematurely.

Listing Act removes the disclosure obligation for intermediate steps 

The Listing Act will remove the obligation of immediate disclosure of an intermediate step that qualifies as inside information. Whereas an intermediate step continues to constitute inside information if it meets the criteria, the disclosure obligation will no longer apply. Only the final event or circumstance in a protracted process must be disclosed as soon as possible on its occurrence. The issuer must still ensure that the confidentiality of the inside information is guaranteed at all times, meaning that the information must be disclosed immediately once confidentiality has been compromised or can no longer be ensured, even if it constitutes an intermediate step.

With the removal of the immediate disclosure requirement for intermediate steps, it will no longer be necessary to delay disclosure of any such intermediate step. This will reduce the administrative burden for issuers. However, it is important to note that the prohibitions of insider trading and unlawful disclosure of inside information outside the normal exercise of duties continue to apply to any type of inside information, including intermediate steps. In addition, the issuer is still required to keep an insider list in respect of the inside information, even if it concerns an intermediate step. Issuers will therefore still need to monitor at what moment during a protracted process information evolves into inside information – even if there is no obligation of immediate disclosure.

Intermediate step or final event?

The removal of the immediate disclosure obligation for an intermediate step makes it all the more important for an issuer to determine whether it is dealing with a protracted process, and whether a particular situation within that process is an intermediate step or a final event. In practice, however, it can be challenging to make this distinction. Take the example of a CEO informing the supervisory board of his or her intention to resign. Is this a final event in and of itself, or is it merely an intermediate step towards the final event of the issuer finding a suitable replacement?

To aid issuers in making this distinction, the European Commission has been empowered to establish a non-exhaustive list of final events in protracted processes, indicating for each final event when it is deemed to have occurred and should be disclosed. It will be interesting to see what types of inside information events the Commission will consider to involve a protracted process, and how it will distinguish between an intermediate step in such a process and the final event.

Concluding remarks

In conclusion, the Listing Act will remove the obligation of immediate disclosure of an intermediate step in a protracted process that qualifies as inside information. This will reduce the administrative burden for issuers.

The practical implications of this amendment are expected to depend to a large extent on the additional qualification by the European Commission of what constitutes a final step in a protracted process. In the context of a transaction, such as a merger or acquisition, it is to be expected that agreement between the parties on the core elements of the transaction will be considered as the final – and therefore disclosable – step in the process.

This amendment will apply 18 months after the Listing Act enters into force – the timing of which is not yet known. 

• 1The second requirement will be amended by the Listing Act to "the inside information that the issuer intends to delay is not in contrast with the latest public announcement or other type of communication by the issuer on the same matter to which the inside information refers."