It is becoming increasingly common for Maltese issuers to hold routine update meetings with financial analysts and brokers to provide them with information about the company's performance and its future prospects. This initiative is good and commendable because it adds a layer of much needed sophistication to our capital markets and also benefits investors by equipping their advisors with more knowledge and insight in the instruments available for investment. Unfortunately, however, these meetings do not come without their risks, especially from a market abuse perspective.
The Market Abuse Regulation is premised on the idea that market abuse harms public confidence in the financial market, which is crucial for economic growth and job creation. One of the methods which the Regulation uses to promote public confidence in the market is to prohibit the unlawful disclosure of inside information. In a nutshell, the Regulation prohibits any disclosure of inside information unless the disclosure is made (a) indiscriminately to the public, or (b) in the course of a market sounding, or (c) in the normal exercise of one's employment, a profession or duties.
An issue may therefore arise where an issuer's chief executive officer (CEO) discloses inside information (e.g.; profit forecasts or significant transactions) during a meeting with financial analysts. Such a disclosure will lead to an asymmetric and unfair distribution of inside information, making it "unlawful". Naturally, the fact that information provided to analysts during a meeting is unpublished does not necessarily make it inside information, but if that the information is also precise and likely to have a significant effect on the price of the issuer's shares or bonds, then it will qualify as "inside information" in terms of the Regulation, and the CEO making the disclosure will likely be in breach of the prohibition set out in the Regulation – which may subject him or her to hefty fines and, in grave circumstances, to imprisonment.
Of course, the prohibition will only be breached if the disclosure of inside information is "unlawful", namely if the disclosure is not permitted under any of the three circumstances mentioned above. On the basis that inside information is not disclosed to the public unless it is disseminated indiscriminately to the investing public, it is clear that the disclosure in the hypothetical meeting above will not qualify as a public disclosure permissible under point (a). It is equally clear that a routine meeting with analysts which is intended to keep them informed about the company's progress is not a "market sounding" (as defined in the Regulation) and any disclosure made during the meeting would therefore not benefit from the protection granted under the market sounding regime. The only potential justification for a disclosure of inside information during an analyst meeting would therefore be under point (c) above.
That being said, justifying a disclosure of inside information on the basis that it was made in the course of one's "employment, profession, or duties" is not an easy one. Rather, case law suggests that this justification is an exception to the general prohibition of 'selective disclosures' (that is, disclosures made to a select group of people rather than to the public) and should therefore be interpreted narrowly and restrictively. Suffice it to say that market abuse law tends to frown upon a disclosure of inside information to analysts. The Handbook of the Financial Conduct Authority in the UK even considers the selective briefing of analysts as indications of unlawful disclosure.
Unfortunately, this leaves issuers in an uncomfortable position of having to carefully navigate analyst meetings so as to avoid any unlawful disclosures of inside information that may take place. The difficulty in finding a balance between having a meaningful meeting and not disclosing inside information may even dissuade issuers from holding analyst meetings in the first place and this to the detriment of the entire market. a legislative amendment recognising the importance of analyst meetings and creating a framework to allow them to take more freely would therefore be most welcome. In this regard, in 2019 the European Securities and Markets Authority (ESMA) launched a consultation process regarding certain possible updates to the Market Abuse Regulation, and some of the feedback received resolved around this issue. Several respondents requested ESMA to issue guidance on the subject, and others also recommended an amendment to the Regulation in order to set out how to disseminate information to analysts, institutional investors, without proceeding to a wider disclosure.
Until such guidance is issued and the necessary legislative amendments passed (if ever), it is important for issuers to tread carefully in their meetings with analysts. These are some tips that might help:
- Don't disclose inside information. While this is more of an instruction rather than a tip, it goes without saying that abstinence will nip the issue in the bud, and erring on the side of caution is always advisable.
- Be prepared. Preparing (and thoroughly reviewing) a detailed list of points to be covered during the analyst meeting is important to keep the meeting on track and to avoid inadvertent disclosures of inside information. It is equally important for the presenters at the meeting to be aware of their (and their companies') obligations in terms of the Market Abuse Regulation, and any other applicable rule applicable (e.g.; internal market abuse policies).
- Be upfront. Make it clear to analysts at the beginning of a meeting that certain questions may not be answered for regulatory reasons. This point also underscores the importance of thorough preparation in order to be able to spot any questions, the answer of which may include or require the disclosure of inside information.
- Pay attention. A slip of the tongue during an analyst meeting may still amount to a "disclosure" of inside information, even if inadvertent. Being prepared and having a detailed slide deck and speaking points will help to mitigate the risk.
- Scheduling analyst meetings to after the publication of financial statements or other major disclosures is advisable as this will ensure that most, if not all, inside information existing within the issuer will be cleansed by the previous publication.
- Have a contingency plan. In the event of an inadvertent disclosure of inside information during the meeting, the issuer should be prepared to publicly disclose the inside information that was 'leaked' during the meeting by means of a company announcement. This will rectify any disparity of information that was created by the leak and may also soften any sanctions that a regulator may impose.
Issuers intending to remain relevant and attractive to investors must necessarily win the trust and respect of the stockbroking and analyst community. Keeping the market updated with periodic analyst meetings is a must – and one hopes to see more initiatives of the sort in the near future. But while these meetings are definitely a step in the right direction, they ought to be planned well and carried out with caution, not least due to the ever-increasing regulatory focus on market abuse compliance, because the cost of non-compliance will definitely outweigh any benefit that may be achieved from a meeting that doesn't go to plan.
This article was first published on the Times of Malta on the 23/05/2023.
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