Issuer's handling of internal knowledge during the holding of a general meeting

Date 27 okt. 2011

 

In a memorandum published 3 October 2011, The Danish Financial Supervisory Authority stated their interpretation of the issuers’ continuous duty of disclosure of internal knowledge and the right to communicate with its investors during the holding of general meetings.


Legal basis

The starting point of capital market law: The issuer’s duty to publish internal knowledge

According to the Danish Securities Trading Act (hereafter referred to as DSTA), Section 27(1), the issuers of securities are obliged to publish internal knowledge concerning the issuer’s company as soon as possible. Internal knowledge is defined in DSTA, Section 34(2), as non-published, specific knowledge, which, directly or indirectly, concerns one or more issuers of financial instruments, and which may noticeably influence the pricing of one or more securities, if published.


In continuation of the issuer’s duty to publish internal knowledge Section 27(2), paragraph 1, of the DSTA (also called the prohibition of selective disclosure) states that internal knowledge which is passed on to a third party by the issuer, must, at the latest, be published in its entirety simultaneously with the selective disclosure to the third party.

 

An exception to the starting point: Third party prohibited from disclosing the knowledge

The simultaneity clause in DSTA section 27(2), paragraph 1, is modified by the DSTA section 27(2), paragraph 4, if (i) the third party receiving the internal knowledge is subject to confidentiality restrictions pursuant to law, resolution, articles of association or contract, or (ii) if the third party has been informed that the information is internal knowledge, and that the third party is consequently subject to section 36 of the DSTA and thereby prohibited from disclosing the internal knowledge. In such cases, the issuer will not be obliged to publish the internal knowledge.


However, according to the DSTA, Section 27(2), paragraph 3, the issuer will be obliged to publish internal knowledge as soon as possible if he is made aware or must be presumed to be aware of the fact that the internal knowledge is no longer confidential. Whether the internal knowledge has remained confidential, and whether the issuer is aware or must be presumed to be aware of the breach of confidentiality must be decided concretely. However, the issuer cannot intentionally keep himself ignorant to the breach of confidentiality and thereby circumvent his duty to disclose.


The Danish Financial Supervisory Authority’s assessment of the duty to disclose

The Danish Financial Supervisory Authority is of the opinion that the issuer’s option to discuss internal knowledge with its shareholders during the general meeting only applies to situations where internal knowledge is disclosed during the discussion. The issuer’s planned publication of internal knowledge during the general meeting[1] is therefore not included in the exemption. The internal knowledge must be disclosed accidently or by mistake in connection with the issuer’s discussion with the shareholders regarding matters which do not constitute internal knowledge.

 

The reason for accepting to disregard the simultaneity clause in DSTA, Section 27(2), paragraph 1, in connection with general meetings is the recognition of the challenge faced by the issuer to publish information simultaneously with the disclosure at the general meeting. Furthermore, the Danish Financial Supervisory Authority is of the conviction that it would impose inexpedient interruptions on the discussion carried out at the general meeting if the publication was to take place simultaneously with the disclosure. The postponement is thus meant to promote the discussion with active shareholders and thereby encourage active shareholder governance in general.

 

On the background mentioned above, it is acknowledged that the issuers - under certain conditions - may delay the publication of internal knowledge which has arisen and been disclosed during the general meeting until immediately after the general meeting has been concluded. In the opinion of the Danish Financial Supervisory Authority, this situation is regulated by the DSTA, Section 27(2), paragraph 4, as an exemption to the simultaneity clause stated in the DSTA, Section 27(2), paragraph 1.

 

The Danish Financial Supervisory Authority underlines that each case must be assessed individually as regards whether the issuer’s disclosure is comprised by the exemption to the simultaneity clause or is a breach of the duty to disclose to the public.

 

The general meeting in practice

The conditions for deviating from the simultaneity clause impose a number of requirements on the chairman of the general meeting.

 

First of all, the chairman must have a good understanding of what constitutes internal knowledge pursuant to Section 34(2) of the DSTA, just as he must be able to assess whether or not the specific knowledge constitutes internal knowledge.

 

Secondly, when disclosing internal knowledge the chairman must make the participants of the general meeting explicitly aware of the prohibition against disclosure of internal knowledge according to Section 36 of the DSTA. The abovementioned duty to inform the participants must be observed every time internal knowledge is disclosed at the general meeting. However, the duty to inform the participants of the prohibition against disclosure of information classed as internal knowledge, may be performed either at the beginning of the general meeting or continuously, every time internal knowledge is disclosed. If the general meeting is convened electronically, the information must be given electronically.

 

The chairman is also obliged to make a specific assessment of whether the shareholders present at the general meeting are capable of receiving and understanding that the information in question constitutes internal knowledge and is therefore comprised by the prohibition of disclosure according to the DSTA, Section 36.

 

Thirdly, during the entire general meeting, the chairman must assess whether he/she is in control of the internal knowledge and the disclosure hereof. If he/she considers himself/herself in control of the internal knowledge, he/she/the issuer may postpone the publication of the information until the collective company report after the general meeting. However, if he/she is not certain of whether he/she is in control of the internal knowledge, the information must be published immediately. In some cases, the chairman must consider whether the risk of a breach of the prohibition of disclosure is increased to such an extent that he should reconsider disclosing internal knowledge to shareholders. Especially if some of the persons present at the general meeting are reporters, the chairman should make sure that they do not leak any of the internal knowledge, by continuously checking the relevant media’s news channel, webpage etc.

 

Furthermore, the chairman must be expected to pay attention to possible leaks that may occur if participants present at the general meeting leave the general meeting before the meeting is over, but after having received internal knowledge. The reverse situation, with new participants arriving during the general meeting, may also pose a challenge for the chairman.

 

As a starting point, it is for the issuer, which in practice means the chairman, to prove that the abovementioned requirements have been met. For that reason, the chairman should fourthly make sure that he can document his deliberations concerning the assessment of whether or not the information is to be considered internal, whether or not the general meeting is made aware of this in a satisfactory way and whether or not the risk of a leak is real or not. The documentation requirement may be fulfilled by minutes or records of the general meeting.

 

In case the chairman does not comply with the abovementioned requirements, the issuer will be forced to publish the internal knowledge simultaneously with the general meeting, i.e. during a break, according to the simultaneity clause.

 

Conclusion

The Danish Financial Supervisory Authority’s opinion on the interaction between the duty to disclose and the rules of selective disclosure may be interpreted as follows. An unequal handling of the market is allowed in extraordinary situations where internal knowledge is disclosed during a general meeting, out of consideration for the practical holding of the general meeting and especially the interest in giving active shareholders the opportunity to discuss sensitive subjects with the issuer’s management without interruptions. The persons participating in the general meeting will in reality receive internal knowledge before it is published and will therefore potentially be able to disclose the information i.e. through mobile phones, laptops etc. However, this possibility is countered by the prohibition of disclosing internal knowledge in Section 36 of the DSTA.

 

Furthermore, The Danish Financial Supervisory Authority accepts the latent risk which entails that a participant does not receive or understand the information given on the internal knowledge or the prohibition of disclosure, as well as the risk of a leak which naturally exists when the shareholders are gathered.

 

While the Danish Financial Supervisory Authority’s abovementioned opinion on the interaction between the duty to disclose and the rules of selective disclosure establishes clarity on the subject, it imposes significant requirements on the chairman’s role and abilities at the general meeting. Practically speaking, this will mean that the chairman will have to legitimate the exemption to the duty of disclosure. Because of this, in future, the chairman will be expected to assess whether the information given constitutes internal knowledge and the consequences of this to the general meeting in question.

 

 

If you have any questions or require additional information on the memorandum from the Danish Financial Supervisory Authority, please contact Partner Dan Moalem (dmo@mwblaw.dk) or Attorney Christian R.J. Nielsen (crn@mwblaw.dk) or junior associate Mattias Vilhelm Warnøe Nielsen (mvn@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 or considerations.


[1] That is, in a situation where the issuer has chosen to postpone the publication pursuant to DSTA, Section 27(2)