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Verdict: Price-sensitive information is sufficiently precise… or is it?
Date:July 15, 2022
Periodically, one of our legal consultants briefly discusses a relevant supervisory decision of the Dutch Authority for the Financial Markets (AFM), the Dutch Central Bank (DNB) or the Dutch Data Protection Authority (AP). This is always done by asking the same three questions and in plain language so that the issue is easily understood by the non-lawyers among us.
This time, we reflect on a ruling by the District Court of Rotterdam issued on 21 June 2022. This ruling was in response to an administrative fine of €2 million imposed by the AFM for violation of Section 6 of the Market Abuse Directive (2003/39/EC, previously Section 5:25i of the Financial Supervision Act). This ruling was published on 23 June 2022.
Table of Contents
What was going on here?
SBM Offshore N.V. (SBM) is a listed company and, as such, is required to immediately (“without delay”) disclose any price-sensitive information (abbreviated as KGI in Dutch) related to its business. On 28 March 2019, the AFM imposed an administrative fine of €2 million on SBM because it had allegedly failed to disclose such information without delay — on no fewer than four occasions — from 27 March 2012 to 12 November 2014.
The company appealed against this fine to the AFM, but the objection was declared to be unfounded. SBM then lodged an appeal with the District Court of Rotterdam.
SBM uses commercial agents when conducting business abroad. On 31 January 2012, one of SBM’s customers notified it that a commercial agent may have given goods of value to government officials in Equatorial Guinea. This prompted SBM to launch an internal investigation into possible irregularities concerning its commercial agents. SBM set up a compliance task force team to investigate payments to commercial agents and, pending the investigation, stopped all payments to its global commercial agents.
On 6 April 2012, SBM informed the Dutch Public Prosecutor and the United States authorities (Department of Justice) of this internal investigation. SBM also issued a press release about the investigation on 10 April 2012. A second press release, on the investigation’s progress, followed on 28 March 2013, with another press release on 2 April 2014 announcing the finalisation of the investigation and its results.
More than six months later, on 12 November 2014, SBM accepted the Dutch Public Prosecutor’s proposed settlement of almost $2.5 million related to unauthorised payments to commercial agents and government officials in Equatorial Guinea, Angola and Brazil from 2007 to 2011. SBM issued a press release about this as well and subsequently also reached settlements in the United States and Brazil that partly pertained to its activities in Brazil.
The AFM argued that SBM had violated Section 5:25i(2) of the Financial Supervision Act, as it read at that time, four times between 27 March 2012 and 12 November 2014. The AFM accused SBM of failing to immediately make the following price-sensitive information publicly available.
- From 27 March 2012, SBM had inside information that its sales practices in Brazil may have been unlawful. Wrongfully, this inside information was not published until 2 April 2014.
- From 27 May 2014, SBM again possessed inside information that its sales practices in Brazil may have been unlawful. Wrongfully, this inside information was not published until 12 November 2014.
- From 24 May 2014, SBM had inside information that the Brazilian oil company Petrobras excluded SBM from participating in two tenders (termed the “Exclusion”). Wrongfully, this inside information was not published until 28 May 2014.
- From 5 June 2014, SBM had inside information that (after an appeal by SBM) Petrobras had upheld the Exclusion (termed the “Final Exclusion”). Wrongfully, this inside information was not published until 12 June 2014.
The court ruled that the AFM had wrongfully argued that inside information already existed on the stated dates.
What was the court’s verdict?
With regard to the first two violations, the court ruled that the AFM had wrongfully argued that inside information already existed on the stated dates. The court reasoned as follows.
The definition of “inside information” constitutes four essential criteria, specifically that the relevant information:
- is of a precise nature;
- has not been made public;
- directly or indirectly relates to one or more issuers of financial instruments or to one or more financial instruments; and
- 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.
As set out in Section 1, paragraph 1, of the European Implementing Directive on Market Abuse, information is deemed to be of a precise nature if two cumulative conditions have been met. First, this information must relate 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 occur.
Second, the information must be specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or that event on the prices of financial instruments or related derivate financial instruments. As the terms “set of circumstances” and “event” are not defined in the directive, they should be interpreted according to their usual meanings.
In order to determine whether it is reasonable to assume a set of circumstances will come into existence or an event will occur, the available information must be considered in its entirety. According to the Chief Public Prosecutor, in view of the wording “which may reasonably be excepted”, Section 1 refers to future circumstances and events that, based on an overall assessment of the information known, can be realistically expected to arise or occur. This means that vague or general information from which no conclusions can be drawn as to its possible effect on the prices of the related financial instruments is not considered inside information.
Vague or general information from which no conclusions can be drawn as to its possible effect on the prices of the related financial instruments is not considered inside information.
Guidance from the European regulator ESMA (at the time, CESR) observes the following regarding interpreting the term “precise nature”:
‘CESR considers that in determining whether a set of circumstances exists, or an event has occurred, a key issue is whether there is firm and objective evidence for this as opposed to rumours or speculation, i.e. if it can be proved to have happened or to exist. (…)
When considering what may reasonably be expected to come into existence, the key issue is whether it is reasonable to draw this conclusion based on the ex-ante information available at the time.’
The AFM believed that SBM, on 27 March 2012 and again on 27 May 2014, should have reasonably expected that bribery would be detected in Brazil in the future. Proof was not required for this expectation; according to the AFM, a substantial likelihood of this situation occurring was sufficient. The court, however, was not swayed; it found this explanation went too far. The consequence of using the AFM’s criterion is that many existing circumstances can be redefined as future circumstances, for which a different (read: lighter) assessment criterion applies (“may reasonably be expected to come into existence“ instead of ‘firm and objective evidence (…), i.e. if it can be proved to have happened or to exist’). The court deemed that such a redefinition was not in line with the Market Abuse Directive and the previously mentioned guidance. The court therefore dismissed the first two violations, leaving just the last two.
Moreover, to the extent that the interpretation used by the AFM is correct, the court agreed with SBM that this interpretation of the standard was not reasonably foreseeable for SBM (and other market parties) at the time of the violations. This means that issuing a fine is in violation of the so-called “lex certa” principle, which holds that the acts or omissions incurring criminal liability and the corresponding punishment must be clear to everyone.
The decision to impose a fine was nullified by the court, which took care of the matter by halving the fine to €1 million. Since the parties have six weeks to lodge an appeal, the AFM or SBM may still submit the dispute to the Trade and Industry Appeals Tribunal. This ruling is therefore not final.
What does this teach us?
To this day, the cumulative conditions for inside information (KGI) appear to be open to debate. When is the nature of the information sufficiently precise? And when must it be published? While a listed company does not want to disclose information too soon, the regulator — which has the interest of investors and market transparency in mind — may prefer that the information is available earlier. However, it is primarily the company’s decision to always make reasoned decisions and provide justification if asked. That this remains highly case-specific and depends on the assessment of the specific facts and circumstances is clear. But this ruling — which may still receive a response — provides a bit more direction on how to deal with such a situation, both for listed companies as well as for the AFM.
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