ESMA has published a consultation paper [ESMA/2016/162] this week on draft guidelines clarifying the implementation of the Market Abuse Regulation (MAR).

MAR entered into force on 2 July 2014 and will take direct effect from 3 July 2016. MAR repealed the Market Abuse Directive (MAD) and strengthens the existing market abuse framework by extending its scope to new markets, platforms and trading behaviours. It contains prohibitions for insider dealing and market manipulation and provisions to prevent and detect these.

MAR requires ESMA to draft guidelines regarding:

  1. the factors and steps that persons are to take into account when information is disclosed to them as part of a market sounding in order for them to assess whether the information amounts to inside information (Article11(1)); and

  2. the legitimate interests of issuers to delay inside information and situations in which the delay of disclosure is likely to mislead the public (Article 17(11)).

Market sounding

MAR describes a ‘market sounding’ as a communication of information, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it, such as its potential size or pricing, to one or more potential investors.

Legitimate interests

ESMA has listed six cases where the immediate disclosure of inside information is likely to prejudice the issuers' legitimate interests, but notes that this list is not exhaustive and there may be other situations where it is legitimate to delay the disclosure of inside information:

  1. the issuer is conducting negotiations, where the outcome of such negotiations would likely be jeopardised by immediate public disclosure of that information - merger and acquisition transactions are generally considered to fall within this case;

  2. 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, jeopardising the conclusion of the negotiations aimed at ensuring the financial recovery of the issuer – this does not refer to the possibility of delaying public disclosure of information related to the issuer's temporary liquidity in order to preserve the stability of the financial system under Article 17(5) of MAR;

  3. where decisions taken or contracts entered into by the management body of an issuer which need the approval of another body of the issuer in order to become effective – this relates to two-tier issuers where management board decisions have to be approved by a supervisory board in order to take effect;

  4. where the issuer has developed a product or an invention and the immediate public disclosure of such information may jeopardise the rights of the issuer - ESMA notes that it will be in the issuer's interest to patent the product or otherwise protect its rights as soon as possible;

  5. 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 – this differs from the first example in that it covers situations where a plan has already been decided but negotiations have not commenced yet; and

  6. where a transaction previously announced is subject to a public authority’s approval, and such approval is conditional upon additional requirements, where the 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 - this does not relate to the disclosure of the transaction announcement itself but the actual conditions public authorities may impose further to such deal announcements.

Likely to mislead the public

The proposed guidelines also provide for three situations where the delay of disclosure is likely to mislead the public. These are:

  1. the inside information, whose disclosure the issuer intends to delay, is materially different from a previous public announcement of the issuer on the matter to which the inside information refers to;

  2. the inside information, whose disclosure the issuer intends to delay, regards the fact that the issuer’s financial objectives are likely not to be met, where such objectives were previously publicly announced; and

  3. the inside information, whose disclosure the issuer intends to delay, is in contrast with the market’s expectations, where such expectations are based on signals that the issuer has previously set.

Next Steps

Comments are invited by 31 March 2016 and ESMA will consider the feedback to this consultation with a view to finalising the two sets of guidelines and publishing a final report by the third quarter of 2016. ESMA is still preparing a consultation paper on a third set of guidelines required under MAR and relating to the information expected or required to be published in relation to commodity derivatives.