It is often difficult for listed companies to judge when they have to publish information of relevance to the company by way of ad-hoc notification. This is particularly the case where an event is developing over a period of time and with several interim steps before the result is achieved for example an acquisition of a company or a change in the management board. The European Court of Justice (ECJ) has now decided in a fundamental judgement that in such cases which extend over a period of time, individual interim steps can already constitute notifiable insider information. With this, the European judges have significantly increased the extent of ad-hoc publicity and the ban on insider trading (judgement dated 28 June 2012, case C-19/11; FAZ dated 29 June 2012).

The procedure concerns a particularly prominent case: in mid May 2005 Jürgen Schrempp, as the Chairman of the Board of DaimlerChrysler AG, first spoke to the Chairman of the Supervisory Board Hilmar Kopper of his intention to prematurely resign from office. During the course of the following weeks, further persons were informed, a press release was drafted and the Presidential Committee of the company involved. At the end of July 2005 the Supervisory Board resolved in favour of accepting the resignation from office. Immediately afterwards, the imminent change of management was published ad hoc. There was a distinct rise in the price of Daimler shares.

About a hundred claimants who had sold their shares shortly beforehand demanded a total of 6.5 million euros from Daimler AG, claiming it should have announced the intended resignation at an earlier stage; as a result of the delay they had lost out on the rise of the share price. After the complaint had already been brought before the Federal Court of Justice (Bundesgerichtshof, BGH) and various higher regional courts (Oberlandesgerichte, OLG), the BGH addressed the ECJ with two questions on points of law. These concerned the interpretation of the EU Market Abuse Directive and an implementing directive on which the German ad-hoc and insider rules are based.

To begin with, the Karlsruhe judges asked whether an individual interim step in a procedure extending over a period of time can also constitute notifiable insider information. This had been negated by many German corporate lawyers on the basis that it is not the interim steps that are of relevance, but the future final result. An ad-hoc duty could therefore only be triggered by interim steps if the final result is al-ready sufficiently probable.

The ECJ ruled otherwise: an interim step can be notifiable as such if it fulfils the other prerequisites of insider information. This includes its disclosure being suitable to considerably influence the share price. Reliance upon the integrity of the financial markets would otherwise be endangered. Persons with information (insiders) could use this to the detriment of other investors. According to the European judges, the disclosure of interim steps is frequently already sufficient to trigger price reactions.

The BGH also asks when an event which will only occur in the future can become notifiable. The German version of the EU directives demands, as does Sec. 13 of the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG) in implementation of the directives, "sufficient probability" ("hinreichende Wahrscheinlichkeit") that the event will occur. Does this require that it is just more than likely or must there be a high degree of likelihood? Or is even a lesser degree of probability sufficient if an event is appraised as having particular relevance to the share price?

The ECJ initially clarified the fact that the German wording "hinreichende Wahr-scheinlichkeit" deviates from the other language versions of the EU directives against insider transactions and market manipulation. The criterion contained in those versions is that the event can "reasonably" be expected. From this, the ECJ concludes that proof of a high degree of probability is not necessary. Rather, it suffices that, following an extensive appraisal, the occurrence of the event can actually be expected. Of no consequence, on the other hand, is whether or not the event is of particular relevance to the share price.

In the underlying proceedings the ball is now back to the BGH's court, which must decide on the investors' damage claims against Daimler AG in the light of the Luxemburg judgement. The investors' chances should now have improved. However, the judgement is of fundamentalimportance to all listed companies: it clearly moves forward the time threshold for ad-hoc publicity. In future, companies will have to publish notifications earlier than before, which will also increase the number of notifications. Simultaneously, the extent of the ban on insider trading is also being extended.

In case of substantial measures which require longer preparation, the management boards of listed companies will now have to take even greater care when examining each step to determine whether or not a notification obligation already exists. Unfortunately, the ECJ's judgement fails to provide market participants with practicable assessment criteria for either the interim steps or for future events.

Consequently, the possibility stipulated in Sec. 15 para. 3 WpHG of temporary self-exemption from the ad-hoc obligation will be of even greater importance. The issuer may postpone notifications if legitimate interests of the company require such post-ponement, if there is no threat of misleading the public and if confidentiality can be guaranteed. Companies should examine and exercise the self-exemption option at an early stage. The Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) demands an express resolution of the management board for such exemption, which should be recorded in writing.

However, even self-exemption is not a cure-all. Because important measures are often dealt with by numerous employees and advisers, in practice it is often very difficult to maintain confidentiality. The issuer also bears the risk of being mistaken about the prerequisites of the exemption.

The ECJ's judgement is a particularly sensitive issue because the EU Commission is currently planning an extensive reform of the Market Abuse Directive. The proposal for the reform provides, inter alia, for the introduction of an "insider information light", which triggers the ban on insider trading without triggering an ad-hoc obligation. This can be welcomed to prevent an information overflow on the market also on grounds of the ECJ judgement. Brussels plans to, inter alia, considerably extend the sanctions in the event of a violation of the ad-hoc obligation. Instead of a fine in a maximum amount of 200,000 euro, in future up to 10% of the annual group turnover may be fined. In the light of such drastic penalties, the ECJ judgement gains far greater import.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.