Dismantling the EU insider dealing regime: the Supreme Court of Greece's muddled interpretation of “inside information”

Abstract

In Case 317/2014, the Supreme Court of Greece ruled that information contained in a domestic bank's (non-binding and binding) offer for the acquisition of a Turkish bank was not precise enough to qualify as inside information. The article argues that the Court's line of reasoning is misguided in at least three core respects: first, it neglects the Committee of European Securities Regulators advice and guidance as well as the relevant EU Court of Justice case law; second, it fails to incorporate the interpretative assistance offered by empirical research on the market effects of M&As and the price impact of relevant pre-announcement information; and third, it has a contagious, distortive effect on the effective implementation of the insider dealing prohibition. As a result, the Supreme Court's ruling fails to interpret the national law in light of the wording and purpose of the EU insider dealing regime so as to achieve the objectives and result sought by Directive 2003/6/EC.

Notes

1 Directive 2003/6/EC [2003] OJ L96/16 (hereinafter “MAD”).

2 MAD, Recitals 2 and 12 of the Preamble.

3 Commission Directive 2003/124/EC [2003] OJ L339/70; Commission Directive 2003/125/EC [2003] OJ L339/73; Commission Directive 2004/72/EC [2004] OJ L162/70; Commission Regulation (EC) No 2273/2003 [2003] OJ L336/33.

4 See Committee of European Securities Regulators, CESR's Advice on Level 2 Implementing Measures for the Proposed Market Abuse Directive (CESR/02-089d, December 2002); Committee of European Securities Regulators, Advice on the Second Set of Level 2 Implementing Measures for the Market Abuse Directive (CESR/03-212c, August 2003).

5 Committee of European Securities Regulators, Market Abuse Directive: Level 3 – First Set of CESR Guidance and Information on the Common Operation of the Directive (CESR/04-505b, May 2005); Committee of European Securities Regulators, Market Abuse Directive: Level 3 – Second Set of CESR Guidance and Information on the Common Operation of the Directive (CESR/06-562b, July 2007); Committee of European Securities Regulators, Market Abuse Directive: Level 3 – Third Set of CESR Guidance and Information on the Common Operation of the Directive (CESR/09-219, May 2009).

6 Act No 3340/2005, Official Gazette A 112; Hellenic Capital Market Commission, Decisions 1-5/347/2005, Official Gazette B 983.

7 Supreme Court of Greece (Council of State – Conseil d’État) Decision No 317/2014 (2014) 1 Chrimatopistotiko Dikeo [Χρηματοπιστωτικό Δίκαιο] 147 (hereinafter “Case 317/2014”).

8 See eg Case C-14/83 Von Colson and Kamann v Land Nordrhein-Westfalen [1984] ECR 1891; Case C-106/89 Marleasing v La Comercial Internacional de Alimentación [1990] ECR I–4135; Case C-334/92 Wagner Miret v Fondo de Garantía Salarial [1993] ECR I–6911; Case C-131/97 Carbonari and Others v Università degli Studi di Bologna and Others [1999] ECR I–1103; Case C-406/08 Uniplex (UK) Ltd v NHS Business Services Authority [2010] ECR I-817.

9 Case 317/2014, para 5.

10 Case 317/2014, para 6.

11 Case 317/2014, para 7.

12 Ibid.

13 Commission Directive 2003/124/EC, Art 1(1).

14 CESR/06-562b, para 1.5. See also CESR/02-089d, para 18.

15 CESR/06-562b, para 1.5. See also CESR/02-089d, para 20.

16 An extension of this argument is that the stages of negotiation preceding the conclusion of a transaction do not per se possess any informational value and do not affect market prices. However, this line of reasoning is nullified by the discussion that follows regarding the second limb of the definition of precise information and the market impact of information relating to mergers and acquisitions (M&As): see infra text to nn 29–34 and section D.

17 CESR/06-562b, para 1.5. See also CESR/02-089d, para 20.

18 Case C-19/11 Markus Geltl v Daimler AG [2012] 3 CMLR 32 (hereinafter, “Geltl”), para 45.

19 Ibid, para 49.

20 Ibid, para 47.

21 CESR/06-562b, para 1.6. See also CESR/02-089d, para 20.

22 CESR/06-562b, para 1.7. See also CESR/02-089d, para 20. Similarly, a piece of information could be considered precise even if it refers to matters or events that could be alternatives (CESR/06-562b, para 1.7). For example, information on the prospective acquisition of one of the two candidate target banks, ie, Finansbank or Denizbank, may well be precise enough to qualify as inside information.

23 Geltl, para 31.

24 Ibid.

25 Ibid, para 33.

26 Ibid. See also Case C-45/08 Spector Photo Group and Chris Van Raemdonck v Commissie voor het Bank-, Financie- en Assurantiewezen [2010] 2 CMLR 30, para 47.

27 MAD, Recital 24; Geltl, para 34.

28 Geltl, paras 35–38.

29 Committee of European Securities Regulators, CESR Market Abuse Consultation: Feedback Statement (CESR/02-287b, December 2002), paras 22–23. See also Case C-628/13 Jean-Bernard Lafonta v Autorité des Marchés Financiers [2015] WLR (D) 116 (hereinafter “Lafonta”), paras 34–38. Cf L Klöhn, “Inside Information Without an Incentive to Trade? What's at Stake in ‘Lafonta v AMF’” (2015) 10 Capital Markets Law Journal 162.

30 CESR/02-287b, paras 22–23; Lafonta, para 31.

31 Lafonta, para 31.

32 Lafonta, para 32.

33 CESR/06-562b, para 1.8. See also CESR/02-089d, para 18.

34 CESR/06-562b, para 1.8.

35 Lafonta, para 28. See also Geltl, paras 50–54.

36 CESR/06-562b, para 1.3. See also CESR/02-089d, para 18. See finally Geltl, para 55.

37 Geltl, para 55: “It is true that, as is apparent from recital 1 in the preamble to Directive 2003/124, reasonable investors base their investment decisions on all ex ante available information. They must therefore take into consideration not only the ‘anticipated impact' of an event on the issuer, but also the degree of probability that the event will occur. Such considerations, however, go to determining whether information is liable to have a significant effect on the prices of the issuer's financial instruments.”

38 CESR/06-562b, para 1.12. See also CESR/02-089d, paras 21–23.

39 CESR/06-562b, para 1.11. See also CESR/02-287b, paras 30–31.

40 CESR/06-562b, para 1.12.

41 Directive 2003/124/EC, Recital 1 of the Preamble in conjunction with CESR/06-562b, para 1.13.

42 CESR/06-562b, para 1.14.

43 For an excellent overview of the relevant literature, see A Golubov, D Petmezas and N Travlos, “Empirical M&A Research: A Review of Methods, Evidence and Managerial Implications”, in A Bell, C Brooks and M Prokopczuk (eds), Handbook of Research Methods and Applications in Empirical Finance (Cheltenham, Edward Elgar, 2013), 287–313. See also J Haleblian, C Devers, G McNamara, M Carpenter and R Davison, “Taking Stock of What We Know about Mergers and Acquisitions: A Review and Research Agenda” (2009) 35 Journal of Management 469; R DeYoung, D Evanoff and P Molyneux, “Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature” (2009) 36(2) Journal of Financial Services Research 87; M Martynova and L Renneboog, “A Century of Corporate Takeovers: What Have We Learned and Where Do We Stand?” (2008) 32 Journal of Banking and Finance 2148; C Tuch and N O'Sullivan, “The Impact of Acquisitions on Firm Performance: A Review of the Evidence” (2007) 9 International Journal of Management Reviews 141; A Shleifer and R Vishny, “Takeovers in the 60s and the 80s: Evidence and Implications” (1991) 12 Strategic Management Journal 51.

44 Golubov et al, supra n 43. See also R Calipha, S Tarba and D Brock, “Mergers and Acquisitions: A Review of Phases, Motives, and Success Factors” (2010) 9 Advances in Mergers and Acquisitions 1, 11–12; Y Altunbas and D Marques, “Mergers and Acquisitions and Bank Performance in Europe: The Role of Strategic Similarities” (2008) 60 Journal of Economics and Business 204.

45 M Cornett, B Tanyeri and H Tehranian, “The Effect of Merger Anticipation and Target Firm Announcement Period Returns” (2011) 17 Journal of Corporate Finance 595; J Cai, M Song and R Walking, “Anticipation, Acquisitions, and Bidder Returns: Industry Shocks and the Transfer of Information across Rivals” (2011) 24 Review of Financial Studies 2242; A Akhigbe, J Madura and A Whyte, “Partial Anticipation and the Gains to Bank Merger Targets” (2004) 26 Journal of Financial Services Research 55; M Song and R Walking, “Abnormal Returns to Rivals of Acquisition Targets: A Test of ‘Acquisition Probability Hypothesis’” (2000) 55 Journal of Financial Economics 143; P Malatesta and R Thompson, “Partially Anticipated Events: A Model of Stock Price Reactions with an Application to Corporate Acquisitions” (1985) 14 Journal of Financial Economics 237; P Asquith, R Bruner and D Mullins, “The Gains to Bidding Firms from Merger” (1983) 11 Journal of Financial Economics 121; M Jensen and R Ruback, “The Market for Corporate Control: The Scientific Evidence” (1983) 11 Journal of Financial Economics 5; K Schipper and R Thompson, “Evidence on the Capitalized Value of Merger Activity for Acquiring Firms” (1983) 11 Journal of Financial Economics 85; P Malatesta, “The Wealth Effect of Merger Activity and the Objective Functions of Merging Firms” (1983) 11 Journal of Financial Economics 155.

46 To support the inference that the non-binding offer for the acquisition of Finansbank does not qualify as “precise information”, the Supreme Court in Case 317/2014 also noted that the submission of the non-binding offer as well as the related information that leaked in several newspapers did not artificially affect the stock price of the bidding firm (Case 317/2014, para 6). This argument is absolutely futile because the non-binding offer and the relevant newspapers’ releases contained true, as opposed to false or misleading, information; hence, from a conceptual, legal or even economic perspective, it is absurd to imply a correlation between the information contained in the non-binding offer, on the one hand, and the manipulation of the bidder's stock price, on the other hand. Perhaps the test that the Supreme Court had in mind was whether the non-binding offer and the relevant leaks in the newspapers affected the bidder's stock price. Again, however, the analysis of the data (derived from Bloomberg and Datastream) does not lend support to the Supreme Court's inference. Between 15 February 2006 and 3 April 2006, ie, the period during which information about the acquisition of Finansbank leaked to the newspapers and until the conclusion of the final agreement on the transfer of shares, the average closing price of the bidder's stock increased significantly compared with the average closing price of the bidder's stock during 2005 and until 14 February 2006. This finding on the substantial growth of the bidder's stock price is not only consistent with the anticipation effect reported by the empirical research on M&As, it also lends support to the argument that the information that leaked about the prospective acquisition of Finansbank was specific and material. The aforementioned analysis of the stock price data also offers supporting evidence that the information about the acquisition of Finansbank effectively lost its confidentiality, thus triggering the obligation of the bidder firm to promptly make a corporate announcement via the official disclosure mechanisms.

47 CESR/02-089d, para 14.

48 Regulation (EU) No 596/2014 [2014] OJ L173/1. The potential introduction of different definitions for “inside information” in the EU insider dealing regime, that is, a wider definition for the insider dealing prohibition and a more restrictive definition for the issuers’ disclosure duty (“twofold notion” of inside information) has been discussed by the industry since the publication of the CESR's second set of Level 3 guidance in July 2007. However, the CESR considered that introducing a varying definition of inside information would raise a number of complex issues and thus abstained from taking any action. The EU Commission adopted the “twofold notion” of inside information in the initial proposal for the MAR (EU Commission, Proposal for a Regulation on Insider Dealing and Market Manipulation (market abuse), COM(2011) 0651 final), but the final version of the MAR reinstated the uniform “onefold” definition of inside information.

Additional information

Panagiotis Staikouras, LLM, PhD is Assistant Professor in Banking and Finance Law, Department of Banking and Financial Management, University of Piraeus, Greece.