A deep dive in the market soundings safe harbour

The MAR Art. 11 (Market Soundings Regime) stipulates certain procedures that are to be followed – and in exchange, relevant involved parties navigating through those procedures reaches the protective “safe harbour” – from what might otherwise constitute criminal legal exposure related to unduly disclosing inside information.

A “market sounding” entails certain defined parties: The DMP (“Disclosing Market Participant”) and MSR (“Market Sounding Recipient”) are both explicitly defined in Art. 11. The MSR is typically simply the buy-side. The DMP is typically an intermediary acting on behalf of the issuer or sell-side in a contemplated transaction. The issuer would then be termed the MSB (“Market Sounding Beneficiary”). There are obviously many varying situations here and in case of e.g. a merger the DMP could indeed also be the MSB.

A vital baseline to bear in mind is that MAR Art. 11 is triggered regardless of whether the communication really entails inside information. Further, the scope not only includes classic wall-crossing related to a public issuer, such as IPO, private placement or shareholder block sales communications – but also more casual internal communications between directors and shareholders concerning the issuer’s capital structure. Seen from another perspective, pieces of potentially inside information can more or less intentionally surface in many communications, risking legal exposure – while at the same time the market soundings scope might be much wider. Hence, by thereby complying with the formal market soundings processes, communicators ensure obtaining such MAR market soundings “safe harbour” protection from legal exposure. Consequently, this MAR process helps avoiding ambiguous grey-area calls, where possibly not all parties are aware whether inside information is possibly communicated and/or for what purposes.

Art. 10 simply contains the general prohibition to disclose inside information. The Art. 10 exception principally entails when there is “a close link between that disclosure and the exercise of that employment, that profession or those duties in order to justify such disclosure” (see ECJ “Grøngaard & Bang”).

Yet, following the Art. 11 (market soundings) processes, those communications are automatically deemed included in the Art. 10 exception concerning permitted inside information communications (i.e. deemed “made in the normal exercise of a person’s employment, profession or duties”). In other words, the relevant communicator automatically sails into this safe harbour merely by complying with the formal stipulations of Art. 11.

Similarly, Art. 11 provides protection against allegations based on Art. 8 assumptions that that unlawful disclosure is at hand. This since the purpose of Art. 11 communications is principally deemed to be disclosure of inside information not to be used for market abuse.

Another perspective is to try to resolve whether not complying with the Art. 11 processes would lead to direct sanctions exposure (“obligatory”) or if the communicators are then merely unshielded from the presumption of unlawful use of inside information (“voluntary”). During 2021 and into 2022, the EC has been reviewing MAR. ESMA is thereby opined that the Art. 11 provisions are all obligatory. Still, even into autumn of 2022, it has not been finally clarified if the ESMA positioning will prevail, would result in such a MAR amendment.

Notably, the ESMA 23 June 2022 Q&A update merely puts into print what was already known. The Art. 11(1a) alleviation indeed “has to be interpreted narrowly.”. Art. 11(1a) means that there is a tiny possibility to navigate into the safe harbour (as described per Art. 10 and Art. 11 “shall be deemed to be made in the normal exercise of a person’s employment, profession or duties”) – without having to formally follow the normal Art. 11 market soundings process, i.e. to still not qualify as a proper “market sounding”. This delicate navigation first presumes an issuer that is inside the scope of MAR (Art. 2), communicating with qualified investors (defined in the Prospectus Regulation), when issuing bonds. Such communication may however then not be to “gauge the interest”, but merely be “negotiating the contractual terms of the bond”. Still, Art. 11(1a) demands also: “That issuer or any person acting on its behalf or on its account shall ensure that the qualified investors receiving the information are aware of, and acknowledge in writing, the legal and regulatory duties entailed and are aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information.” The obvious conclusion is simply that this ESMA Q&A update finally extinguished any lingering hope that the elaborated special Art. 11(1a) alleviation would be really usable in practice. The simple conclusion is hence to simply stick to playing safe; i.e. always follow normal Art. 11 market sounding procedures.

Returning to the topic of what is even considered in scope of Art. 11, the three key target situations are gauging certain major, price sensitive, acts: (i) rights issues; (ii) book-building and (iii) block sales.

Concerning in particular rights issues and M&A, questions often arise related to if a parent or a subsidiary is in scope or not. Normally, a listed parent acting on behalf of non-listed subsidiary would be in scope. Conversely, a transaction in a small non-listed subsidiary which is not price-sensitive for the parent, would be out of scope.

Considering block sales, it is important to emphasize that the communicative aim must be to try determine the market. Therefore, neither contacts aimed at a single investor nor auctions are in scope. Also, any intermediary must be acting on behalf of the issuer – not merely act independently, building a case to present. Questions also often arises concerning whether a certain communicator would be considered in scope, being considered a DMP, an MSR or neither. The Art. 11 language is aimed at the seller side. If instead the intermediary acts on behalf of the buy-side to purchase a block, that would understandably be deemed out of scope. A strict reading of the Art. 11 language would give at hand that the intermediate representative is not deemed a DMP.   

Even the Art. 11(1) definition of a market sounding contains many ambiguous terms:

Firstly, it is factually clear from the context that not only inside information is in scope, but also mere “information”.

Secondly, the term “communication” is obviously a wider term than the otherwise used “disclosure”, “disclosure” reasonably only pertaining to previously confined information.

Thirdly, the phrase “prior to the announcement”, does not really equal the timing of a formal market “notification”, but may factually often a point in time earlier than when the factual public “notification” is made. It is likely that the time of such an “announcement” has come in case so much communication has taken place that there is a very small risk remaining of disclosing further inside information which would be useful for the buy-side. It has even been questioned that if no “announcement” is ever made, then maybe such gauging would be out of scope. ESMA has hence suggested to add “if any” – but it remains unclear whether such an addition would constitute a material change from the current legal situation or possibly rather merely a clarification.

Fourthly, the “gauging the interest” part of Art. 11 is really the crucial part. It excludes on the one hand specific negotiations to reach an agreement, but also – on the other hand – more casual, more undetailed, information (not inside information) communicated at general investor presentations, “road shows”, informal IR communication to major stakeholders etc.

Considering then finally the M&A provision (Art. 11(2)), such transactions, both takeovers and mergers, are considered in scope, hence resulting in normally scrapping the need for NDAs. The legislator is however clear that Art. 11(2) is strictly for M&A situations, not mere large block-sales. Importantly, both the important Art. 11(2) conditions must be fulfilled:
“(a) the information is necessary to enable the parties entitled to the securities to form an opinion on their willingness to offer their securities: and
(b) the willingness of parties entitled to the securities to offer their securities is reasonably required for the decision to make the takeover bid or merger.”

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