Markus Geltl v Daimler AG (Case C-19/11)
The recent case of Markus Geltl v Daimler AG has provided clarification on whether information relating to intermediate steps of protracted decision processes can constitute 'inside information' under the Market Abuse Directive.
To ensure the integrity of financial markets in the EU and maintain investor confidence in those markets, the Market Abuse Directive ("MAD") prohibits insider dealing and requires issuers of financial instruments to disclose inside information as soon as possible.
"Inside information" is defined as information which: (i) is precise in nature; (ii) is not public; (iii) relates, directly or indirectly, to one or more financial instruments or their issuers; and (iv) if it were made public, would likely have a significant effect on the prices of those financial instruments or of related derivative financial instruments.
Article 1 of Directive 2003/124 further defines "precise information"; the information must refer to 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 it must be specific enough to enable a conclusion to be drawn as to the possible effect on the prices of the financial instrument concerned.
In this case, Mr Geltl claimed for loss suffered as a result of allegedly late public disclosure of inside information by Daimler AG ("Daimler"). The information related to the early departure of the Chairman of the board of management of Daimler (the "Chairman"). He first gave some thought to the idea of resigning in April 2005, discussed those thoughts with the chairman of the supervisory board and, subsequently, other members of the supervisory board and the management board, over the course of several months. Final approval of the resignation was given by the supervisory board on 28 July 2005, which the company announced immediately. Following the announcement, the company's share price rose sharply and Mr Geltl, who had sold Daimler shares before that announcement, claimed for the loss suffered due to the fact that he had not been informed.
Having worked its way through the courts in Germany, the Federal Court of Justice decided to refer a question to the ECJ - just when could it be said that Daimler ought to have disclosed the information? When did it hold "precise information" within the meaning of MAD?
The ECJ held that information relating to intermediate steps in a protracted process could amount to "precise information" and therefore "inside information". It further held that to fall within the requirement of "reasonable expectation" that the event would occur (under Directive 2003/124) there need only be a realistic prospect, and not a high probability, that it will occur. Finally, the court rejected the suggestion that the standard of proof to establish a "reasonable expectation" could vary depending on the magnitude of the effect of the information on share price.
The decision of the ECJ has been welcomed, as any other interpretation risked undermining the objectives of the Market Abuse Directive; to protect the integrity of and enhance investor confidence in the EU financial markets. To rule out the possibility that information relating to an intermediate step may be "precise" in nature would remove the obligation to disclose that information, even if it were quite specific and other elements of inside information were present.
Issuers will therefore need to keep a close eye on developing situations, analysing at each stage whether a delay in making an announcement could mean that the market is being misled.
In terms of UK regulation and practice, the ECJ ruling is broadly consistent with the FSA's Disclosure and Transparency Rules. This decision of the ECJ will no doubt give rise to difficult calls of judgement as to what information should be disclosed and when. The ECJ's rejection of the idea that the standard of proof to establish a "reasonable expectation" could vary depending on the magnitude of the effect of the information on share price does, however, negate the need to disclose information relating to events or circumstances that may have a high impact but low probability of occurrence.
It will be interesting to see the impact this case may have on the ongoing reforms to the European Market Abuse regime