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The nature of inside information

On June 28 2012 the Court of Justice of the European Union, requested by the German Federal Court of Justice, ruled on the definition of inside information

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By partner Luca Mastromatteo and senior associate Niccolò Landi at Gianni Origoni Grippo Cappelli & Partners

In its judgment on June 28 2012 in Case C-19/11, Markus Geltl v Daimler AG, the Court of Justice of the European Union (Court), requested by the Bundesgerichtshof (the German Federal Court of Justice), ruled on the definition of inside information. In particular, it ruled on the requirement for information to be “precise”. This is as provided for in: Directive 2003/6/EC of the European Parliament and Council of January 28 2003 on insider dealing; and, market manipulation, and in the Commission Directive 2003/124/EC of December 22 2003 implementing Directive 2003/6/EC of the European Parliament and Council regarding the definition and public disclosure of inside information and the definition of market manipulation.

The findings of the Court

Point 1 of Article 1 of Directive 2003/6 defines inside information as:

information of a precise nature which has not been made public, relating, directly or indirectly, to one or more issuers of financial instruments or to one or more financial instruments and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments”.

Article 1(1) of Directive 2003/124 – which expands on this definition of inside information – provides:

For the purposes of applying point 1 of Article 1 of Directive 2003/6/EC, information shall be deemed to be of a precise nature if it indicates a set of circumstances which exists or may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to do so and if it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of financial instruments or related derivative financial instruments’.

By its first question, the Bundesgerichtshof asked whether point 1 of Article 1 of Directive 2003/6, and Article 1(1) of Directive 2003/124, must be interpreted as meaning that, in the case of a protracted process intended to bring about a particular circumstance or to generate a particular event, not only may that future circumstance or future event be regarded as precise information within the meaning of those provisions, but also the intermediate steps of that process which already exist or have already occurred and which are connected with bringing about the future circumstance or event.

The Court considered that (i) the prompt and fair disclosure of information to the public is an essential element to preserve the EU market integrity and the investor confidence; and (ii) an intermediate step which is part of a protracted process may be precise information. In light of these, it stated:

‘in the case of a protracted process intended to bring about a particular circumstance or to generate a particular event, not only may that future circumstance or future event be regarded as precise information within the meaning of those provisions, but also the intermediate steps of that process which are connected with bringing about that future circumstance or event’ (point 38).

By its second question, the Bundesgerichtshof asked the Court to consider Article 1(1) of Directive 2003/124, and the notion of ‘a set of circumstances which exists or may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to do so’. It asked if this refers only to circumstances or events, the occurrence of which may be considered to be preponderant or highly probable, or whether it implies that the magnitude of the effect of that set of circumstances or event on the prices of the financial instruments concerned must be taken into consideration.

In this respect, the Court pointed out that there are divergences between the various language versions of Article 1(1) of Directive 2003/124. In particular, the Court considered it necessary to give a uniform interpretation to the adverb ‘reasonably’ (not present in the German version of the said provision). Therefore, the Court found that:

in using the terms ‘may reasonably be expected’, Article 1(1) of Directive 2003/124 refers to future circumstances or events from which it appears, on the basis of an overall assessment of the factors existing at the relevant time, that there is a realistic prospect that they will come into existence or occur’ (point 49).

As a consequence, according to the Court, the magnitude of the potential impacts of these circumstances or events on the prices of the financial instruments concerned shall be considered immaterial in the interpretation of this definition.

Looking forward

In the Daimler’s case, for the first time, the Court of Justice of the European Union has ruled on the definition of inside information. The importance of this judgment with reference to the integrity of the EU financial markets and to the investors confidence in those markets is proven by the simple fact that the Italian, Portuguese, Estonian, Belgian, Czech and UK governments and the European Commission have lodged written observation in the case at hand.

This judgment will have a great impact on the national legislations which have enacted the Directives 2003/6/EC and 2003/124/EC as it shall be taken into account each time the notion of an inside information has to be interpreted.

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