European Court of Justice Examines Elements of Inside Information and Market Abuse Directive in Case Involving German Company

The two elements required for information to be inside information within the meaning of the EU Market Abuse Directive that the information be precise and likely to have a significant impact on the company’s stock price and co-dependent, decided the European Court of Justice. Thus, the greater magnitude of the possible impact of a future event on the stock price does now lower the degree of probability required in order for the information in question to be held to be precise. Geltl v. Daimler AG, June 28, 2012.


The Court’s opinion was issued in reference to the German Federal Court of Justice, which sought clarification on the notion of precise information in connection with proceedings before it between an investor and Daimler AG concerning the investor’s claimed loss as a result of the allegedly late public disclosure by that company of information relating to the early departure of the Chair of Daimler’s management board. Daimler’s share price rose sharply following the announcement of the decision, adopted the same day, of Daimler’s Supervisory Board that the Chair would step down at the end of the year and be replaced by Mr. Zetsche. The investor had sold Daimler shares before that announcement.

In order to ensure the integrity of EU financial markets and investor confidence in those markets, noted the Court, the Market Abuse Directive (2003/6) prohibits insider dealing and requires issuers of financial instruments to disclose, as soon as possible, inside information which is of direct concern to them. Inside information is defined as information which is of a precise nature, has not been made public, relates to one or more financial instruments or their issuers 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. Directive 2003/124, implementing Directive 2003/6, gives a closer definition of the notion of precise information. Thus, the information must refer 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 do so. 


The EU Court said that that, in the case of a protracted process intended to bring about a particular circumstance or to generate a particular event, not only may that future circumstance or future event be regarded as precise information, but also the intermediate steps of that process which are connected with bringing about that future circumstance or event. An intermediate step in a protracted process may in itself constitute a set of circumstances or an event in the meaning normally attributed to those terms. This interpretation does not hold true only for those steps which have already come into existence or have already occurred, but also concerns steps which may reasonably be expected to come into existence or occur.


The Court holds that the notion of 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 do so refers to future circumstances or events from which it appears, on the basis of an overall assessment of the factors existing at the relevant time, that there is a realistic prospect that they will come into existence or occur. It is, accordingly, not necessary that proof be made out of a high probability of the circumstances or events in question coming into existence or occurring. Moreover, the magnitude of their possible effect on the prices of the financial instruments concerned is immaterial in the interpretation of that notion.


Apart from the German version, which speaks of a sufficient degree of probability, all the other language versions of Directive 2003/124 existing at the time it was adopted use the adverb reasonably, such as may reasonably be expected in the English version and may reasonably be thought in the Dutch version.  By using that term, noted the Court, the European Union legislature introduced a criterion based on rules drawn from common experience in order to determine whether or not future circumstances and events come within the scope of that provision. In order to determine whether it is reasonable to think that a set of circumstances will come into existence or that an event will occur, noted the Court, an assessment must be made on a case-by-case basis of the factors existing at the relevant time. Consequently, Directive 2003/124, in using the phrase ``may reasonably be expected’’ cannot be interpreted as requiring that proof be made out of a high probability of the circumstances or events in question coming into existence or occurring.