The continuous duty to disclose

Date 17 feb. 2010

The continuous duty to disclose

A Danish bank has been forced to disclose information on the fact that the Danish Financial Supervisory Authority had required it to improve its solvency, even though the bank was in the midst of negotiating for an infusion of capital.

 

The case in brief

On October 6, 2009, the Danish Financial Supervisory Authority (“DFSA”) issued an opinion regarding a Danish bank’s (”Bank”) individual solvency requirements. According to the DFSA, the solvency requirement was insufficient. The DFSA required the Bank to meet the solvency requirement by November 3, 2009, at 4 p.m. The Bank chose not to publish the opinion.

 

In the Bank’s most recent stock exchange notification, dated September 16, 2009, it stated that it had applied for participation in the Bank Bailout Package II.  Additionally, the Bank had requested its accounting firm to review selected materials in the Bank’s application. According to the Bank, this review had not given rise to any concerns regarding the Bank’s situation.

 

On October 6, 2009, the Bank decided to appeal the DFSA’s opinion to the Enterprise Appeals Board (“EAB”). The Bank did not inform the stock exchange that the DFSA had opined that the Bank’s solvency requirements were insufficient.

 

The DFSA was of the opinion that the Bank should have disclosed the DFSA opinion of October 6, pursuant to Section 27(1) of the Securities Trading Act (“STA”), which will be discussed further below.  

 

On October 29, 2009, the EAB upheld the DFSA’s opinion.

 

The legal basis

Pursuant to the STA Section 27(1), the issuer of securities that are traded on a regulated market must disclose internal knowledge as soon as possible, if the knowledge affects the issuer or its securities.

 

Internal knowledge exists, if the information is not available to the public, and is relevant for the trading prices. See the STA, Section 34(2).

 

The duty to disclose may be postponed, provided this is done to prevent harm to the issuer’s legitimate interests. Disclosure may not be delayed, however, if this may mislead the public. Lastly, if disclosure is postponed, the information must be kept confidential. See the STA, Section 27(6).

 

The DFSA requires a company to make the necessary changes, if it does not meet its requirements pursuant to the STA. See the STA, Section 93(3).  

 

If a company fails to make the necessary changes, the DFSA can publish the relevant information. See the STA, Section 84d(6).

 

The Bank’s arguments and the DFSA’s decision

The Bank decided to postpone disclosure, arguing that such disclosure would harm its own and other’s legitimate interests. See the TSA, Section 27(6). The Bank explained that it had a legitimate interest in postponing disclosure, as it wanted to wait for the EAB’s decision and the complaint’s potential suspensory effect. Additionally, the Bank argued that it had an interest in postponing the disclosure because of the ongoing negotiations regarding an infusion of capital.

 

Moreover, the Bank argued that postponing the disclosure would mislead the public, since the opinion had been appealed immediately, with the argument that the appeal had suspensory effect.

 

The DFSA argued that the decision regarding the Bank’s solvency was of such importance to the market that STA Section 27(6) could not act as a basis for postponement. The DFSA referred to the fact that the market had only received positive information, as evident from the Bank’s most recent stock exchange notification, dated September 16, 2009. Thus, according to the DFSA, the market did not possess the information necessary for making an informed determination of the price of the Bank’s securities.

Analysis

The legislative history of TSA Section 27 indicates that postponement is an exception to the general disclosure requirement, and as such, the exception should have limited applicability.

 

Postponement may take place if it is necessary to protect the issuer’s legitimate interests and provided this will not mislead the public, and the issuer can guarantee that the information will be kept confidential. See the TSA Section 27(6).

 

Possibility of postponement is limited, if the information is subject to the duty of correction. See the TSA, Section 27(1).

 

The duty of correction is the duty to disclose changes to public internal knowledge, at the time the changes occur. See the TSA, Section 27(1).

 

Furthermore, the legislative history indicates that a reorganization of a financial institution limits the access to use the postponement exception. Even though disclosure might result in a run on the financial institution, the interests of the investors outweigh the interests of the institution, in that the former may suffer losses because of the lack of relevant information.

 

The Bank emphasized that it had a legitimate interest in postponing disclosure, since disclosure could have had an adverse effect on the Bank’s ongoing negotiations regarding the infusion of capital.

 

The DFSA emphasized that the market was provided positive information only, as evident from the Bank’s most recent stock exchange notification, dated September 16, 2009. Thus, the Bank should have corrected this notification, in order for the market to be provided with the correct information. The DFSA’s weighing of the interests involved, therefore favours the investors, and consequently favours disclosure.

 

Had the Bank’s notification of September 16, 2009, been more positive, the DFSA would probably still have sided with the investors and disclosure should have taken place. A decision regarding the Bank’s solvency is of such importance, that the interests of the investors require disclosure.

 

The decision is in accordance with the legislative history, which acknowledges an access to postpone, but that this access is limited, both in relation to the duty of correction, and when the issue involves a reorganization of a financial institution.

 

If you have questions regarding the above or require additional information about the amended rules, please contact attorney Dan Moalem (dmo@mwblaw.dk), junior associate Christian R.J. Nielsen ( crn@mwblaw.dk ), or trainee Anders Kjær Dybdahl Pedersen ( akd@mwblaw.dk ).

 

The above does not constitute legal counselling and Moalem Weitemeyer Bendtsen does not warrant the accuracy of the information. With the above text, Moalem Weitemeyer Bendtsen has not assumed responsibility of any kind as a consequence of a reader’s use of the above as a basis of decisions of considerations.