Market abuse: Geltl v Daimler: some further thoughts on when intermediate steps might be precise (and thus inside information)

In our earlier post, we reviewed the ruling of the European Court of Justice (CJEU) in Markus Geltl v Daimler AG [C-19/11], which held that steps preceding a decision may in themselves be precise, and accordingly constitute inside information in their own right.   We've been giving some thought to what the CJEU's decision did not do - unsurprisingly, since the purpose was to interpret the Directive in the context of the specific legal questions referred to it - namely, give specific guidance on when, in practical terms, one or more announcements should have been made to the market about the proposed resignation of the CEO and the proposals to appoint a successor.   

The test

The CJEU found that an intermediate step in a protracted process may in itself constitute a set of circumstances or an event, both steps which have already come into existence or have already occurred, and also steps which may reasonably be expected to come into existence or occur.  To categorise information about such intermediate steps as precise, it is also necessary to establish that the information was specific enough to draw a conclusion as to the possible effect of the set of circumstances or event on the price of the financial instruments in question.

What was the information?

It seems to us that the information relevant to a CEO's resignation which a reasonable investor could be likely to use as part of the basis of his investment decisions might be broken down as follows:

• the incumbent CEO's intention to retire before the end of his term
• the reasons for the retirement (which do not feature in the opinion or the CJEU's judgment)
• the timing of the proposed retirement
• the company's acceptance of the decision to retire (informal as well as formal)
• the initiation of succession planning
• the identification of one or more potential successors
• the formal appointment of a successor

Tentative conclusions

Clearly, it will be for the German Courts to decide at what stage the proposed resignation of Mr Schrempp and Daimler's succession planning should first have been disclosed to the market.  That decision will be made with the benefit of far more detail than we can currently glean from the CJEU's judgment and the Advocate General's opinion, and will be important in determining when, if any, loss was suffered by the claimants in the civil proceedings.   

Our surmises are based on the limited factual information available from the opinion and judgment. Whilst we have worked our analysis backwards through the facts, companies in Daimler's position do not, of course, have the benefit of hindsight, and are required to make these assessments in real time.

The fact of the Supervisory Board's decision to accept Mr Schrempp's resignation and to appoint a new CEO was clearly inside information.  This was recognised, announced to the market and reported to BaFin within 15 minutes - without delay in so far as the announcement related to the fact of the Supervisory Board's decision.  It is however plain that

i) Mr Schrempp's intention to resign had crystallised and been communicated to some within Daimler

ii) succession planning had been initiated, and

iii) a potential candidate had been identified

well before then, and on any view before the decision of the Presidential Committee on 27 July and discussions with shareholder representatives. 

By 18 July, when the CEO and the Chairman had agreed to table the matter of the proposed resignation and succession for discussion at the Supervisory Board meeting scheduled for 28 July, Mr Schrempp's decision to resign before the end of his term had certainly been made, and indeed the search for a successor had culminated in the provisional selection of a favoured candidate.  

Indeed, the plans were sufficiently advanced for it to be possible to begin drafting a press release, a public statement and a letter to the company’s employees, on 10 July.  It is not clear from the CJEU's judgment when the timing of the outgoing Chairman's departure was settled.  

In fact, by 15 June at the latest, it seems that Mr Schrempp's proposed successor had been identified and informed.  The question of the succession had therefore arguably crystallised by then (obviously subject to Board ratification) and it seems that a good case could be made that this intermediate step was precise enough to constitute inside information and should have been announced.  Daimler might arguably have been entitled to a short delay, on its own responsibility, so as not to prejudice its own legitimate interests, whilst the board was informed, and to facilitate the negotiation of terms between the company and the successor.  However, a period of 6 weeks between provisional selection and board ratification seems to us likely to be unacceptably long.

It can also credibly be contended that Mr Schrempp's own intentions had crystallised and been communicated to Daimler as early as 17 May, and that succession planning had begun sometime thereafter (probably by 1 June at the latest).  There is therefore a good argument that the intention to resign should have been announced soon after 17 May, probably accompanied by a holding statement to the effect that succession planning had been initiated. 

The second limb of the test

The CJEU stressed that to categorise information about such intermediate steps as precise, it would also be necessary to establish that the information was specific enough to draw a conclusion as to the possible effect of the set of circumstances or the event in question on the price of the financial instruments in question. 

In the UK enforcement case of Massey, the Upper Tribunal expressed the view that this second limb of the test was rather less than straightforward.   

Clearly, it was not necessary to reach a conclusion as to the actual or probable effect on the price, but only as to the possible effect. 

In this case, the Tribunal avoided deciding whether a mere risk of alteration of the price would be of itself a "possible effect" and for the purposes of its decision, assumed - in Mr Massey’s favour - that the conclusion as to a possible effect on price must relate to "an effect in a particular direction".  On the particular facts, no one could reasonably have thought that a possible effect of the information would be an increase in price.

It could be argued that this second limb of the test would be satisfied if the conclusion drawn is that the event, when it becomes known, might alter the price - even if it is not known whether, when it became public, the effect would more likely be an increase or a decrease.  On  the other hand, can the event of circumstances really be sufficiently precise if it is not possible to conclude what the likely effect of their occurrence would be? 

In this case, the announcement - which dealt both with the early resignation and the appointment of the successor - resulted in an increase in the share price.  An early announcement of a proposed resignation of a CEO, decoupled from certainty about succession, might have led to a decrease in price - although it seems from press reports at the time that an increase in price might well have been the price effect that might have been anticipated from the market (even without certainty in relation to succession).

The German Courts will face the interesting challenge of grappling not only with the issue of when each piece of information should have been announced, but also with the likely effect of each announcement, in order to determine what, if any, loss each of the individual claimants suffered as a result of having allegedly been misled by the delayed announcement.

However, the decision also highlights the need for issuers and their advisers to monitor evolving events and circumstances more closely and to satisfy themselves, where any announcement is delayed, that there is a legitimate interest in the delay and no risk that the market is being misled.