In Geltl v Daimler AG the European Court of Justice ruled on 28 June 2012 on an important case for the interpretation of the UK market abuse regime. The ECJ ruling emphasises that very careful thought is required when determining at what point in an ongoing process information becomes “inside information” and potentially announceable to the market.
The UK market abuse regime is contained in Part VIII of the Financial Services and Markets Act 2000, and in its current form reflects two EU directives (2003/6 and 2003/124). The ECJ judgment is here and the accompanying press release is here.
Mr Geltl’s case
The case arose from the sale of shares by Mr Geltl, a Daimler shareholder. Mr Geltl argued that he had incurred a loss in selling Daimler shares due to late public disclosure by Daimler about the resignation of its chairman, Mr Schrempp. When Mr Schrempp’s departure from Daimler was announced on 28 July 2005 the Daimler share price rose sharply; Mr Geltl had sold shortly before that announcement at a lower price.
Mr Schrempp’s resignation had been discussed amongst various senior members of Daimler’s management from 17 May 2005 onwards. Mr Geltl maintained that, given the increasing certainty of Mr Schrempp leaving as those discussions went on, the resignation should have been announced earlier – and so Mr Geltl would have sold at higher price as the news would have been in the market at the time of his share sale.
The ECJ ruling
The ECJ was asked to rule on whether, where there is a protracted process intended to bring about a particular event, the intermediate steps in that process may themselves be sufficiently precise in nature so as to fall within the definition of “inside information”.
The definition, as contained in the directives (and in turn reflected in section 118C(2) of the FSMA2000), is:
‘Inside information’ is defined as information which (i) is of a precise nature, (ii) has not been made public, (iii) relates, directly or indirectly, to one or more financial instruments or their issuers and (iv) 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.
The court agreed with Mr Geltl that such intermediate steps could be information of a “precise nature”. From the press release:
“…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, but also the intermediate steps of that process which are connected with bringing about that future circumstance or event”.
And the court continued:
“To rule out the possibility that information relating to an intermediate step in a protracted process may be of a precise nature would remove the obligation to disclose that information, even if it were quite specific and even though the other elements making up inside information were also present. In such a situation, certain parties who possessed inside information could be in an advantageous position vis-à-vis other investors and be able to profit from that information, to the detriment of those who are unaware of it.”
As to when information “indicates circumstances that exist or may reasonably be expected to come into existence or an event that has occurred or may reasonably be expected to occur” (see section 118C(5) of FSMA 2000), the court said that the test is whether ”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”.
Those circumstances do not need to be “highly probable”, and the magnitude of the information’s impact on the relevant financial instruments is irrelevant.