The timely disclosure of inside information, in practical terms, means that publicly listed firms need to subject themselves to intense public scrutiny and incorporate costly set-ups through which price sensitive information is continuously disclosed. The lack of compliance can result in harsh, and potentially, criminal sanctions.  Thus, if it is the case that the costs emerging from public listing outweigh the benefits, public issuers may go private.  In order for the regulation to properly serve its purposes of ensuring fair and efficient economic growth through an effective securities market, it is imperative that the right balance is struck between the different implicated interests of the issuers and those of the investors. 

Inside information is defined in the Market Abuse Regulation (MAR) as ‘information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, 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 two components of the information are thus its non-public, monopolistic nature and its probability to affect market prices.  As a general rule, information must be disclosed to the public ‘as soon as possible’ ‘in a manner which enables fast access and complete, correct and timely assessment of the information by the public’ once it qualifies as inside information.  Disclosure may be delayed if it would hurt the legitimate interests of the issuer or mislead the public.

This requirement of timely disclosure is what can give rise to a mismatch between the somewhat competing interests, and may lead to companies not going public.  The ideal situation would be that the ban on insider dealing takes effect only when it emerges that the information may affect the price of information, i.e. when it becomes possible to abuse the market from the monopoly over the information.  Nevertheless, the disclosure obligation may give rise to situations where information is issued based on future and uncertain circumstances or events.  If the circumstance or event does not materialise, investors who based their decisions on the disclosure will have been misled.  Furthermore, such events and circumstances develop over a long time; how should one determine the exact point in time when they have to be disclosed to the public?

Pursuant to the MAR, determining whether information is inside information is done by testing whether the information would be taken from all the information available (including past experience about similar scenarios) to reasonable investors, and incorporated into their consideration as part of the decision to invest.  If the information concerns a lengthy process occurring in stages, the test must take into account the special circumstances of the process and whether the process has a realistic prospect of ever affecting the pricing of the security, which implies an assessment of the likelihood that each of the remaining stages will happen.  The prospect of a significant effect on the pricing of the security may justify qualifying the stage in a process as inside information even if the likelihood of this outcome is slim, as long as it is realistic and not improbable.

Nevertheless, the eventuality that the information may be certain enough to trade on does not mean that it will not mislead the public if disclosed, because the threshold required is placed rather low in order to prevent insider dealing.  Although it is possible for issuers to delay disclosure, it must be recorded, justified in a report and informed to the national competent authority.

Issuers are also simultaneously obliged to register insiders on insider lists.  This may be deemed to be too onerous but it may serve to ensure that disclosure is not unnecessarily delayed or delayed beyond what is reasonable and insider lists may assist national authorities in their investigation of insider dealing.  However, it can be argued that prosecutors can and may not base their investigation on the insider lists.  It is also not immediately clear that the reporting of delays is really necessary; the authorities may respond by their own initiative if their usual surveillance of the markets leads them to suspect that disclosure has been made too late.  Given the substantial compliance costs connected with these reports, it may be said that their benefits are not proportional.  If the EU legislator wants to lessen the issuer’s burden, this is perhaps one area that could be revisited.

Since the need to prevent insider dealing requires a rather low threshold for information to be deemed as inside information, it is crucial that the national authorities evaluate the concerns expressed by issuers who opt to delay the disclosure of uncertain inside information such as ongoing processes.  Delay of uncertain inside information is rarely detrimental to the market provided it is kept confidential.  The prohibition on insider dealing already serves as sufficient deterrent to prevent abuse of the undisclosed inside information. 

Adrian Cordina, Camilleri Cassar Advocates.