Due Diligence on Listed Companies: From Best Practices to New Legal Obligations
Key words: use of inside information; due diligence; data room, market soundings; market abuse
What is the current situation?
The manner in which potential investors may have access to inside information in the context of due diligence on listed companies has always been a sensitive issue in Romania1. Although the manner in which a data room could be organized in case of potential transactions involving listed companies has always been of a high practical interest, this topic continues to be one that is insufficiently explored in our doctrine2 or in the interpretations of the competent authority (National Securities Commission/Financial Surveillance Authority)3.
In line with the provisions of the EU directives, the Capital Markets Law4sets forth a number of interdictions with respect to: (a) the use of inside information for trading or the intention to trade with inside information and (b) the disclosure of inside information to any other persons5. The exceptions admitted by the law from these interdictions are relatively few6, and the possibility to apply them in order to release inside information in the data room before a transaction has been subject to various debates in the practice.
Considering the legal uncertainty on whether it is legal or not to release inside information in the data room, even subject to the existence of a series of contractual confidentiality obligations, determined several different trends in practice, depending on the risk appetite of the company and of the investors and the specific conditions of the transaction.
Specifically, in practice, these trends range from organizing a data room which contains exclusively public information and/or information which is neither public nor price sensitive, to organizing the data room in a manner similar to that organized for non-listed companies, obviously, subject to the existence of certain contractual confidentiality obligations and provided that the insider trading prohibitions are applied.
The new EU regulations: a welcomed support or new burdensome obligations?
The adoption of the Market Abuse Regulation7 which expressly recognizes the legitimacy of disclosing inside information in the context of market soundings preliminary to a transaction8 is beneficial, even if it requires the performance of new obligations. This recognition can be an actual support for combating certain potentially unreasonable interpretations with respect to the possibility to disclose inside information “in the normal exercise of an employment, a profession or duties”.
The Regulation imposes the adoption of a series of measures both after and subsequent to taking the decision to organize the market sounding process (e.g., the provision of information to potential investors by organizing a data room including inside information).
Some of the measures imposed by the Regulation to take in advance to adopting the market sounding decision are so natural that the regulation almost appeared unnecessary (e.g., the identification of potential investors, the assessment and estimate related to the fact that it is possible that during the market sounding inside information is disclosed). However, the obligation to determine the reasons justifying the qualification of a certain piece of information as inside information certainly constitutes a new formality.
After establishing and justifying the necessity to disclose certain inside information in order to gauge the interest of certain potential investors, the disclosing party must consider, on the one hand, the obligations to notify the recipients of the inside information (e.g., notification also with respect to the fact that certain information no longer has the status of inside information), and, on the other hand, the record keeping obligations with respect to the circulation of such information (e.g., the obligation to record certain conversations).
As of July 3, 2016, the Regulation, which is of direct application, becomes mandatory9; even prior to its entry into force, itsprovisions were useful as they could serve as inspiring “good practices” for handling the access to information which may potentially qualify as inside information.
Despite the fact that the Market Abuse Regulation now expressly regulates sensitive topics previously un-regulated or falling in a “grey regulatory area”, the disclosure of inside information will remain a tricky topic, which must be addressed with a maximum level of diligence and care.
Just to give an example, the Regulation makes it clear that irrespective of the assessment made by the listed company/offeror with respect to the qualification on a piece of information as inside information or not, the persons having access to this non-public information will continue to have the obligation to perform their own assessment in order to determine whether they are in possession of inside information or not .
In such a context, both the persons potentially disclosing inside information and the recipients thereof should adopt adequate measures to protect themselves and the companies involved from various forms of civil, administrative or criminal liability, which may be triggered in case of inadequate access to or use of this information.
1To simplify, in this article references to a “listed company” will be references to a company whose shares are admitted to trading on a regulated market or for which an application has been submitted for admission to trading on a regulated market. We note that as of 3 July 2016, the scope of market abuse regulations will be extended to include any financial instrument admitted to trading not only on a regulated market, but also on a multilateral trading facility or on an organized trading facility or for which a request for admission to such trading venue has been made.
2As an exception, we would like to mention the article “The Legal Regime Applicable to Inside Information in the Context of the Romanian Legislation concerning the Capital Market”, Vlad E. Verdeș, RRDA, issue no. 5/31.05.2013. Despite the fact that the article stands out as one of the few articles which treat directly the issue of the data room specific procedures, in the context of our legislation, we consider that the interpretation according to which the practice of organizing the data rooms is de plano in contradiction with the provisions of Art. 245 (1) of Capital Markets Law no. 297/2004 and it allegedly “meets all the constitutive elements of the criminal offence set forth in Art. 246 letter a of the Capital Markets Law” [our emphasis: the interdiction to disclose inside information, except for the case where disclosure was made in the normal exercise of an employment, a profession or duties]” cannot be accepted as such.
3Unlike other authorities, such as the French authority (Autorité de Marche Réglementée, previously COB), which expressly admits, in certain conditions and subject to the conclusion of confidentiality agreements, the possibility to organize data rooms before carrying out certain important transactions involving shares of the listed company. Please see:
4Capital Markets Law no. 297/2004 as subsequently amended and supplemented, hereinafter the “Capital Markets Law”;
5See Art. 245 and 226 of the Capital Markets Law;
6It is considered that inside information is lawfully disclosed if disclosure takes place during the normal exercise of an employment, a profession or duties of a person (According to Art. 246 (a) of the Capital Markets Law);
7REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC (hereinafter referred to as the “Market Abuse Regulation”);
8A market sounding comprises the communication of information, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and the conditions relating to it such as its potential size or pricing, to one or more potential investors by: (i) an issuer, (ii) a secondary offeror of a financial instrument, in such quantity or value that the transaction is distinct from ordinary trading and involves a selling method based on the prior assessment of potential interest from potential investors, an emission allowance market participant or (iii) a third party acting on behalf or on the account of a person referred to in point (i) și (ii) (see point 32 in the Preamble and Art. 11 para.1 of the Market Abuse Regulation). The Regulation expressly specifies that the disclosure of inside information by a person who intends to make a public offering or a merger constitutes, under certain circumstances, market sounding.
9The Market Abuse Regulation came into effect on July 2, 2014 and will be directly applicable starting from July 3, 2016, for most articles, except for articles regarding obligations of ESMA.