Revised duty of disclosure
Exception to principle of reality
Grey area cases
Until recently, the principal rule regarding the duty of disclosure for listed companies (issuers) in regard to the leaking of internal knowledge was that there was no duty to publish internal knowledge about matters that were not yet a reality, regardless of whether the internal knowledge had been leaked to a third party. This is known as the principle of reality. From January 1 2011, issuers have a duty to publish internal knowledge as soon as possible if such knowledge can no longer be considered confidential, irrespective of whether the internal knowledge concerns matters that are uncertain (eg, information about ongoing negotiations which might not become a reality).
The new rules aggravate the issuer's duty to disclose and place heavier demands on the issuer's assessment of whether internal knowledge has been leaked or whether it is simply rumour and speculation in the market. The explanatory notes offer no guidance in the interpretation thereof.
In April 2007, in the wake of the so-called TDC/Bité case, the Financial Supervisory Authority (FSA) revised its interpretation of issuers' duty of disclosure to the market. The new interpretation meant that an issuer was obliged to disclose internal non-published information (internal knowledge) if the information was correct and had been made accessible to the market by a third party (see Section 27 of the Securities Trading Act).
This interpretation of the duty of disclosure resulted in a duty for listed companies to comment on rumours in the media as soon as possible (eg, in connection with ongoing negotiations regarding a takeover or merger), even though such rumours are often speculation and not based on published internal knowledge, and even if they concern matters which are not yet a reality. Therefore, the interpretation implemented a new exception from the principle of reality, on which Section 27 of the act and the EU Market Abuse Directive (2003/6/EC) are based.
However, on September 11 2008 in TDC/Bité the Company Appeals Board overruled the FSA's interpretation of Section 27 of the act. In its ruling the board maintained the principle of reality as the principal rule and emphasised that in cases where information that is available to the market can be characterised as rumour concerning non-conclusively occurred events or situations, and is not based on published internal knowledge, the previous interpretation of Section 27(1) of the act applies. Therefore, the duty of disclosure comes into force only when applied to internal knowledge about a final decision (ie, when a matter becomes a reality).
In the aftermath of the Company Appeals Board's ruling in TDC/Bité, the FSA stated that the authority would examine the possibilities of changing existing legislation so that the FSA's interpretation would continue to apply. These changes were implemented by Act 1556/2010 concerning changes to the Securities Trading Act and others, which came into force on January 1 2011.
Exception to principle of reality
The new duty of disclosure is specified in Section 27(2) of the act. Item 3 specifies that two conditions must be met in order for the duty of disclosure to apply. It must objectively be established that:
- the internal knowledge is no longer confidential; and
- the issuer knows or can be expected to know that the internal knowledge is no longer confidential.
The duty of disclosure applies irrespective of whether the matters concerned by the internal knowledge are a reality (ie, a conclusively occurred event); therefore, the rule constitutes an essential exception to the principle of reality.
As described above, the issuer's duty of disclosure occurs if the conditions are met, irrespective of whether the internal knowledge concerns matters which are uncertain and not yet a reality. The issuer is obliged to publish the internal knowledge as soon as possible through an announcement from the company to the market.
From the explanatory notes, it is clear that the duty of disclosure does not apply if the information published is so vague and imprecise that the information cannot be regarded as internal knowledge in relation to Sections 34(1) and (2) of the act, but can be regarded as solely speculation and conjecture in the market. However, the explanatory notes offer no guidance on how precise or imprecise the information must be in order for it to be considered internal knowledge leaked to a third party.
Thus, the new rule maintains the general conclusions of the Company Appeals Board ruling in TDC/Bité that issuers are not obliged to comment on information in the market that can be characterised as rumour concerning non-conclusively occurred events or situations and which is not based on published internal knowledge.
However, the new rule results in aggravated demands on how issuers interpret information occurring in the market. Subsequently, in order for issuers to comply with the duty of disclosure, it is vital that they interpret correctly whether the information must be characterised as internal knowledge which has been leaked or whether it is merely a matter of speculation and conjecture. The explanatory notes offer no help to issuers in this regard.
For further information on this topic please contact Pia Just at Philip Law Firm by telephone (+45 33 13 11 12), fax (+45 33 32 80 45) or email ([email protected]).