Introduction
Notification requirements under EU Market Abuse Regulation
Closed periods
Exceptions
Penalties under Market Abuse Law
Comment
Introduction
On October 14 2016 the government enacted the Market Abuse Law (102(I)/2016), which implemented the EU Market Abuse Regulation (596/2016) and abolished the previous legislation. The EU Market Abuse Regulation has strengthened the EU market abuse regime, incorporating a wider range of tougher penalties. A provision of the regulation which has generated much discussion relates to persons discharging managerial responsibilities (PDMRs) and the obligations of persons closely associated with them (PCAs) regarding transactions conducted on their own account concerning the issuer's shares, debt instruments, derivatives or other linked financial instruments.
The EU Market Abuse Regulation applies to:
- financial instruments admitted to trading on a regulated market;
- financial instruments traded on a multilateral trading facility or organised trading facilities; and
- transactions and behaviour relating to such instruments.
The Cyprus Securities and Exchange Commission (CySec) is the regulatory authority for matters relating to the EU Market Abuse Regulation.
Notification requirements under of EU Market Abuse Regulation
A 'PDMR' is defined in the EU Market Abuse Regulation as:
- a member of the administrative, management or supervisory body of an issuer; or
- a senior executive who is not a member of the administrative, management or supervisory body of an issuer, but has regular access to inside information relating directly or indirectly to the issuer and the power to take managerial decisions affecting the future developments and business prospects of the issuer.
A 'PCA' is defined as:
- a spouse or partner considered to be equivalent to a spouse in accordance with national law;
- a dependent child, in accordance with national law;
- a relative who has shared the same household for at least one year on the date of the transaction concerned; or
- a legal person, trust or partnership, the managerial responsibilities of which are discharged by a PDMR or a person referred to in the bullet points above, which is directly or indirectly controlled by such a person or is set up for the benefit of such a person, or whose economic interests are substantially equivalent to those of such a person.
The issuer must draw up a list of all PDMRs and PCAs and notify the PDMRs in writing of their obligations under Article 19. PDMRs in turn must notify their PCAs in writing of their obligations under Article 19 and keep a copy of such notification.
PDMRs and their PCAs are required to notify the issuer and CySec of transactions conducted on their own account concerning the issuer's shares, debt instruments, derivatives or other linked financial instruments. In turn, the issuer must promptly make the information public (in any case, no later than three business days after the transaction).
A de minimis notification exception applies (ie, for transactions totalling up to €5,000 in one calendar year). The notification obligation applies only to subsequent transactions once a total amount of €5,000 has been reached. The threshold of €5,000 is calculated by adding (without netting) all transactions referred to above.
A PDMR cannot, directly or indirectly, conduct any transactions on its own account or for the account of a third party relating to the shares or debt instruments of the issuer or to derivatives or other financial instruments linked to them during a closed period. The restriction applies only to PDMRs.
A 'closed period' is 30 calendar days before the announcement of an interim financial report or year-end report, which the issuer must make public according to the rules of the trading venue where its shares are admitted to trading or national law. According to the Transparency Law 190(I)/2007 (as amended), an issuer whose home member state is Cyprus must publish an annual financial report and a half-yearly financial report. A stock exchange where such an issuer has securities admitted to trading may require additional financial reports to be published.
Under a strict interpretation of the EU Market Abuse Regulation – in cases where the issuer elects to publish voluntarily its quarterly financial results (rather than where such publication is mandatory) – there is no requirement to implement a closed period for such voluntary quarterly results. However, many companies will likely choose to implement a closed period before such announcements.
The announcement is the public statement whereby the issuer announces the information included in an interim or year-end financial report and the date of the announcement marks the end of the 30-day closed period.
In general, a Cypriot issuer may publish preliminary financial results in advance of the publication of the final year-end report. In such case, difficulties may occur in determining the closed period for the year-end reporting. The European Securities and Markets Authority has clarified that the announcement of preliminary financial results may be considered to be the announcement of the year-end report for the purposes of the closed period, provided that it contains all key information relating to the financial figures expected to be included in the year-end report. Another closed period is not triggered if the information changes after its publication.
An issuer may allow a PDMR to trade on its own account or for the account of a third party during a closed period:
- on a case-by-case basis, due to the existence of exceptional circumstances, such as severe financial difficulties which require the immediate sale of shares (ie, the exceptional circumstances exception); or
- due to the characteristics of the trading involved for transactions made under, or relating to, an employee share or saving scheme, qualification or entitlement of shares or transactions where the beneficial interest in the relevant security does not change (ie, the characteristics of trading exception).
The exceptions are further explained in the EU Commission Delegated Regulation (2016/522), which clarifies that a PDMR has the right to conduct trading during a closed period provided that:
- one of the circumstances referred to above applies; or
- the PDMR can demonstrate that the particular transaction can be executed only during the closed period.
Exceptional circumstances exception
As regards the exceptional circumstances exception, before any trading during the closed period, the PDMR must provide a reasoned written request to the issuer to obtain its permission to proceed with the immediate sale of the issuer's shares during the closed period.
When deciding whether to grant permission to proceed with the immediate sale of its shares during a closed period, an issuer must conduct a case-by-case assessment of a PDMR written request. The issuer can permit the immediate sale of shares only when the circumstances for such transactions are exceptional.
Circumstances are considered exceptional when they are extremely urgent, unforeseen or compelling or where their cause is external to the PDMR and the PDMR has no control over them.
When examining whether the circumstances described in the written request are exceptional, the issuer must consider, among other indicators, whether and the extent to which the PDMR:
- is (at the moment of submitting its request) facing a legally enforceable financial commitment or claim; and
- must fulfil or is in a situation entered into before the beginning of the closed period that requires the payment of a sum to a third party, including for tax liability, and cannot reasonably satisfy a financial commitment or claim by means other than the immediate sale of shares.
Characteristics of trading exception
The EU Commission Delegated Regulation clarifies the circumstances under which the issuer has the right to permit a PDMR to trade within a closed period on the basis of the characteristic of the trading exception. Broadly, this covers employee scheme options or the acquisition of an entitlement to shares which, by virtue of the issuers' by-laws, could not be acquired outside the closed period.
Penalties under Market Abuse Law
CySec can impose the following administrative penalties for breaches of Article 19 of the EU Market Abuse Regulation:
- an order requiring the person responsible for the infringement to cease its conduct and desist from a repetition thereof;
- the disgorgement of the profits gained or losses avoided due to the infringement insofar as they can be determined;
- a public warning which indicates the person responsible for the infringement and the nature of the infringement;
- maximum administrative pecuniary penalties of at least three times the amount of the profits gained or losses avoided because of the infringement, where they can be determined;
- in respect of a natural person, maximum administrative pecuniary penalties of at least €500,000; and
- in respect of legal persons, maximum administrative pecuniary penalties of at least €1 million.
Although there are still areas of ambiguity regarding Article 19, the EU Market Abuse Regulation has successfully introduced an updated market abuse regime. In practice, Cypriot issuers must familiarise themselves with the timing, electronic forms and submission processes that CySec will require for the reporting of PDMR transactions, which may be more onerous than their existing practices.
For further information on this topic please contact Nancy Erotocritou or Demetris Nicolaou at Harneys Aristodemou Loizides Yiolitis LLC by telephone (+357 2582 0020) or email ([email protected] or [email protected]). The Harneys website can be accessed at www.harneys.com.