Inside information and its impact on listed companies
A company that goes public and lists its shares on a regulated market (stock exchange – e.g. Nasdaq Stockholm and NGM Main Regulated) or a multilateral trading facility (MTF) (e.g. Spotlight Stock Market, Nasdaq First North Growth Market and NGM Nordic MTF) stands before a number of formal tasks. One major task, and perhaps the most important one, is the correct handling of inside information. Inside information is an expression that shareholders in listed companies often encounter, but what does it actually mean and how should a listed company handle such information?
EU's Market Abuse Regulation (MAR) contains the main provisions on the definition of inside information and the principles on how listed companies shall communicate with its shareholders and the market. MAR was adopted a couple of years ago with the main objective to increase market integrity and investor protection.
The specific purpose of the inside information regulation in MAR is to avoid a situation in which price-sensitive information is only available to a limited number of people, who may then use it for insider trading.
Definition of inside information
According to MAR, inside information is 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. To somewhat simplify, it is usually said that inside information is something that a reasonable investor would be likely to use as part of the basis an investment decision.
The definition of inside information may vary from company to company depending on a wide range of circumstances. For a small listed company a minor deal could be a game changer while a transaction involving significant values may not be considered inside information in the larger listed companies. In practise, this means that it is usually harder for smaller listed companies to evaluate whether a circumstance constitutes inside information or not. This especially if the company’s share is volatile and if the company’s size and business may imply that even minor news may be of significant importance for a reasonable investor. An assessment of what is considered inside information must therefore always be made in each individual case.
Disclosure of inside information
As a strong main rule, a listed company shall inform the public as soon as possible of inside information which directly concerns the company. This forces listed companies to always be prepared to release relevant information to the public with minimal notice, as even a slight delay may be considered a breach of MAR. However, under circumstances, there is the potential for a listed company to delay disclosure of inside information. The following conditions shall be met in order for the company to be permitted to delay the disclosure of inside information. If any of the conditions are not met, the information must be disclosed as soon as possible (this also applies when the circumstances change, for example when the conditions are no longer met).
Disclosure may be delayed if:
- immediate disclosure is likely to prejudice the legitimate interests of the issuer
- delay of disclosure is not likely to mislead the public
- the issuer is able to ensure the confidentiality of that information.
The conditions for delaying disclosure are not to be taken lightly and also in these cases the company needs to do a thorough assessment in each separate situation in order to ensure that the disclosure of inside information is not incorrectly delayed.
In a perfect world all inside information is always disclosed to the public without delay. However, if disclosure for some reason is delayed it would mean that one or several persons have access to inside information. In such cases, a so called insider list shall be kept by the listed company. Issuers on a regulated market or a MTF shall continually maintain an insider list of persons who have access to inside information. The purpose of the provisions regarding insider lists is, on the one hand, to facilitate investigations into prohibited insider trading and, on the other hand, to prevent persons with access to inside information from using it for their own gain or that of another.
The insider list is also a way for the company to gain control over which persons hold a specific piece of inside information. The company is also obliged to inform those concerned that they are included on an insider list. This makes a person aware that they have information the issuer believes constitutes inside information, which may reduce the risk of insider trading.
To summarize, the correct handling of inside information is one of the most central tasks put on a listed company. Correct handling ensures a fair market where all investors base their investment decisions on the same information. In order to handle insider information correct, a listed company must closely assess what is happening in its day-to-day business and always be prepared to disclose information with very short notice. It is not an easy task but a task vital to a well-functioning market as well as for the trust of the shareholders and potential investors.
/MAQS law firm 2021-04-08