CopiedA Deep Dive in The Market Soundings Safe Harbour

The MAR Art. 11 (Market Soundings Regime) stipulates certain procedures to be followed, allowing relevant involved parties to reach the protective “safe harbour” from what might otherwise constitute criminal legal exposure related to unduly disclosing inside information.

Key Parties in Market Soundings Copied

A market sounding involves specifically defined parties:

• DMP (Disclosing Market Participant): Typically an intermediary acting on the issuer’s or sell-side’s behalf in a contemplated transaction.
• MSR (Market Sounding Recipient): Typically the buy-side.
• MSB (Market Sounding Beneficiary): The issuer, which could also be the DMP in situations such as a merger.

Scope of MAR Art. 11 Copied

A vital aspect of MAR Art. 11 is that it is triggered regardless of whether the communication truly entails inside information. The scope includes classic wall-crossing related to a public issuer (e.g., IPOs, private placements, shareholder block sales) and more casual internal communications between directors and shareholders concerning the issuer’s capital structure.

This broad scope helps ensure that formal market-sounding processes provide safe harbour protection from legal exposure, avoiding ambiguous grey-area scenarios where parties may be unsure if inside information is communicated.

Art. 10 and the Safe Harbour Copied

Art. 10 of MAR contains the general prohibition against disclosing inside information, except for disclosures made in the exercise of employment, profession, or duties. By complying with Art. 11 (market soundings), these communications are automatically considered to fall under this Art. 10 exception, offering safe harbour protection.

Art. 11 Protection Against Assumptions of Unlawful Disclosure Copied

The following Art. 11 processes also protect against allegations under Art. 8 of unlawful disclosure. The purpose of Art. 11 communications is considered to be the lawful disclosure of inside information that should not be used for market abuse.

Obligatory vs. Voluntary Compliance Copied

Ongoing debate exists on whether failing to comply with Art. 11 leads to direct sanctions exposure (obligatory) or simply removes the safe harbour presumption of lawful disclosure (voluntary). ESMA has opined that all Art. 11 provisions are obligatory, though this has yet to be clarified.

ESMA 23 June 2022 Q&A Update Copied

The ESMA 23 June 2022 Q&A update clarified that the Art. 11(1a) alleviation must be interpreted narrowly. In practice, always following the normal Art. 11 market-sounding procedures is the safest approach.

Key Target Situations for Art. 11 Compliance Copied

Art. 11 applies to three key target situations:

1. Rights Issues
2. Book-Building
3. Block Sales

Concerning rights issues and M&A, it is essential to determine whether a parent or subsidiary is in scope. Generally, a listed parent acting on behalf of a non-listed subsidiary would be in scope. In contrast, a transaction involving a small non-listed subsidiary may be out of scope if not price-sensitive for the parent.

Block Sales and Scope Considerations Copied

For block sales, the aim must be to gauge the market. Contacts targeting a single investor or auctions are not in scope. An intermediary must act on behalf of the issuer—not independently building a presentation case. Determining if the communicator is considered a DMP, MSR, or neither is crucial.

Ambiguities in Art. 11 Definitions Copied

Art. 11(1) contains several ambiguous terms:

1. Information Scope: Not only inside information but also other information is covered.
2. Communication vs. Disclosure: “Communication” is broader than “disclosure”, which pertains to previously confined information.
3. Prior to Announcement: This does not always align with the timing of a formal market “notification” but may occur earlier. The definition remains unclear, and ESMA has suggested adding “if any” to clarify the announcement requirement.
4. Gauging Interest: This excludes specific negotiations and casual investor communications, such as roadshows or informal IR discussions.

M&A Provisions Under Art. 11(2) Copied

For M&A transactions, both takeovers and mergers are in scope, typically eliminating the need for NDAs. Importantly, both Art. 11(2) conditions must be met:

• Condition (a): Information must enable parties entitled to securities to form an opinion on their willingness to offer them.
• Condition (b): Willingness is required to decide to make the takeover bid or merger.

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