For many years, the continuous disclosure of material information by issuers has been an especially contested topic in financial regulation. The ongoing €9 billion shareholder litigation in the VW/Dieselgate saga now provides an opportunity to reflect on some of the most fundamental questions of the European disclosure regime.
Under European market abuse law, issuers are generally required to inform the public as soon as possible of all inside information directly concerning them (now Art 17(1) of the Market Abuse Regulation of 2014 (‘MAR’)) and may only temporarily refrain from doing so under specific conditions (Art 17(4) MAR). Some commentators have rightly called this regime ‘a valuable supplement to the periodical financial reports, or, some would argue, a superior substitute’, while others with equally good reason voiced concerns about the concomitant costs for issuers:
[I]t seems quite clear that the ongoing tendency in Europe to rely on ever-increasing disclosure requirements is driven by an unfounded optimism of transparency which does not take into account the regulatory waste, the immense direct and indirect cost of information, and the necessity to strike a balance between the legitimate interest of corporate business to reduce disclosure obligations and of the public [...] to gain knowledge about the economic situation of the company.
Considering this complex regulatory challenge, the first two cases on continuous disclosure before the European Court of Justice dealt with rather superficial aspects of the European regime. This is because both Geltl and Lafonta only concerned the basic obligation to disclose (then Art 6(1) Market Abuse Directive of 2003 (‘MAD’)). However, since in the EU both the prohibition of insider trading and issuers’ disclosure duty draw on the single notion of ‘inside information’, the court had little choice but to rule for an extensive interpretation: In effect, any narrower construction of the term would have legalised at least some insider trading.
The main takeaway from the two cases therefore is that the balance highlighted by Schön has to be struck under the delay mechanism of Art 17(4) MAR (Art 6(2) MAD). In this regard, the case of VW could become the next cause célèbre of European market abuse law. This is because the issuer bases its defence before the Higher Regional Court of Braunschweig inter alia on the claim that it had in fact lawfully delayed disclosure when concealing its manipulation of diesel engines. In our paper, we give this argument a closer look. Specifically, we ask two questions: First, in whose interest is management acting when availing itself of the exemption? And second, what role does European law play in delimiting management’s discretion?
Both questions are particularly interesting in the case at hand since German law (under which VW is incorporated) has traditionally been reluctant to grant extensive leeway to the management of stock corporations when compared to other corporate law systems. This is grounded in a historical distrust in shareholder primacy and a political inclination to align corporate management with state interests. Still today, corporate governance is largely defined by mandatory law and stringent court control of corporate disclosure policies is the norm. Against the backdrop of this peculiar framework, we investigate how the continuous disclosure regime under MAR/D in general is affected by member state corporate law.
Our findings are twofold. First, European law partly seems to displace notions of state dirigisme in that it subscribes to a distinctly optimistic view of market signalling processes and the managerial agency problem in the public corporation. This is expressed in Art 17(4) MAR (Art 6(2) MAD) allowing the issuer to make use of the exemption ‘on its own responsibility’. We argue that management’s incentives are therefore generally deemed to align with the interests of the corporation, a view that is supported both by historical materials on the market abuse regime and the interpretive guidelines issued by the Committee of European Securities Regulators and the European Securities and Markets Authority. The disclosure decision under MAR/D thus indirectly constitutes a business judgment, not unlike the approach to continuous disclosure in the United States.
Second, access to the delay mechanism is contingent on the showing of ‘legitimate interests’. We argue that by failing to qualify the concept of legitimacy further, European law by and large draws on member state law—a reference similar to the ECJ’s understanding of selective disclosure ‘made in the normal exercise of an employment, a profession or duties’ (now Art. 10(1) MAR) in the case of Grøngaard and Bang (‘depends to a large extent on the applicable national law’). Consequently, national provisions that effectively exclude the appropriation of profits from certain opportunities (‘negative property rights’, to quote Goshen and Parchomovsky) will generally constrain issuers in arguing their interests to be legitimate for the purposes of Art 17(4) MAR (Art 6(2) MAD). (For VW, all this seems to be bad news—the prosecution-ordered disgorgement of profits arising from the contravention of emissions regulations confirming that the carmaker cannot legally appropriate any benefits resulting from its own manipulations.)
Besides, member states also appear to wield substantial influence over the de facto utilisation of the continuous disclosure regime. At least as long as the resulting harm to third parties is effectively remedied by means of criminal and/or civil law, they should be able to exclude managerial liability vis-à-vis the issuer in cases of efficient breach of MAR/D. We argue that by shielding managers from internal responsibility, member state corporate law could disincentivise disclosures mandated by European Union law where the corporate purpose (as stated by member state law) would be adversely affected.
The latter largely seems to be merely a theoretical possibility because it is ruled out in Germany by a general managerial ‘duty of obedience’ to public law owed to the corporation. Still, our analysis shows that member states substantially shape the disclosure decision under MAR/D—both by stating the corporate purpose and therefore the end of any disclosure policy and by defining property rights and thus the outer bounds of issuers’ access to the delay mechanism. Based on these insights, we conclude that even as traditional remedies under corporate law are increasingly supplanted by securities litigation, a profound understanding of the role of member state law continues to be eminently important for the proper application of the common European ruleset.
Mario Hössl-Neumann is an Associate at EY Law Austria and a doctoral candidate at the University of Vienna School of Law.
Andreas Baumgartner is an Assistant Professor (post-doc) at the University of Vienna School of Law.