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A European biotech company was fined half a million euro, with two directors also receiving six-figure sanctions. The local regulator, AMF, found it had failed to disclose inside information as soon as possible. In addition, it was reported that the business had provided misleading information to the market and its shareholders relating to the information that remained non-public and it did not follow the correct procedure for delaying disclosure.
This anonymised case study highlights the importance of handling inside information in the correct manner, even when that information may include disappointing news for your stakeholders.
The background
In the late 2010s, the biotech firm had developed a drug that aimed to ease symptoms of a neurodegenerative disease in patients. However, when it made an application to popularise the therapy in a major overseas market, the drug safety agency in that country was not convinced of its efficacy.
The inside information
The first piece of inside information occurred when the drug safety agency claimed that the biotech firm could not provide substantial evidence that the drug was effective and requested additional studies to support the application to market the drug in that territory.
This communication from the agency constituted inside information, as it was non-public, specific and, if made public, would have had a significant impact on the company’s share price. The disappointment of the drug’s delayed introduction into a lucrative market could have reduced investor confidence in the business’s prospects.
Rather than following the obligation under the Market Abuse Regulation (MAR) to disclose this information to the market immediately, the company chose not to make it public for more than four months.
The second piece of inside information involved the drug safety agency informing the company that it did not agree on the design of a further study suggested by the company to support its application to market the drug. This met the threshold for inside information as it was specific, liable to affect the share price if it became public and the biotech firm did not disclose this information, despite making further applications and receiving further non-agreement responses. Five months after the first application was rejected, the company abandoned this procedure without making public the details of these applications.
How to deal with inside information
Under MAR’s Article 17, “an issuer shall inform the public as soon as possible of inside information which directly concerns that issuer.” The issuer should do so in “a manner which enables fast access and complete, correct and timely assessment of the information by the public.”
This includes sending press releases to the industry and financial media, informing the financial markets and posting the information on the company website for no less than five years. This helps to ensure that investors can find information likely to affect share prices when researching their investment decisions. Without this disclosure, insiders – those with knowledge of the information – have an advantage over the rest of the investment community.
Issuers may delay the disclosure of inside information if:
- Disclosing immediately would harm the interests of the issuer
- The information is not in contrast with the latest public communication by the issuer on the same matter
- The issuer can guarantee it remains confidential
At the time of the offence, the second condition was less specific, stating only that delaying disclosure should be unlikely to mislead the public. This has since been updated in the EU Listing Act.
When qualified to delay disclosure, the company must document the decision and the reasons for it, as well as create an insider list for all those stakeholders with access to the information. It must also ensure they understand their obligation not to disclose the information or to use it to commit insider trading. Once they disclose it publicly, they must inform the national competent authority (NCA) of the delay and provide meticulous records of the information, the time it became inside information and how the organisation met the criteria for postponing.
What happened next?
The biotech company did not follow the correct procedure to delay the disclosure of inside information and there is no record of it creating insider lists or providing detailed records relating to the delay. It made the first piece of inside information public four months after being asked to carry out further studies on the drug and never disclosed the information about the non-agreement decisions.
The company also did not meet the threshold for delaying disclosure of insider information. It had made multiple public communications, in the form of press releases and letters to shareholders, that alluded to positive news about the drug. However, it had omitted the information about the need for additional tests or the non-agreement on the design of additional studies.
The regulator concluded that the firm had breached its obligation twice by failing to publish inside information as soon as possible and by disseminating false or misleading information about it.
It held two former directors liable, fining the company €500,000 and the directors €200,000 and €100,000. In addition, the public ruling by the regulator caused the company considerable reputational damage with the investment community regarding its governance processes.
Conclusion
A deep understanding of your responsibilities regarding inside information and how to handle it is essential for ensuring compliance. You must disclose it as soon as possible unless you meet the requirements for delaying public disclosure. In this circumstance, you must keep meticulous records, including insider lists created in digital form that meet the correct format guidelines and are updated as soon as anything changes.
InsiderLog provides a user-friendly platform to manage the insider list process efficiently, saving you time and effort. It meets the MAR requirements and retains all versions of the list, timestamping them and storing them securely for your audit trail. You know you are always working with the most recent version of the list and that you are adhering to your compliance obligations.
Want to see how you can improve your insider list management? Request a demo of InsiderLog today.
References and further reading
- Why you need a market abuse policy
- Strategies to prevent insider trading
- Monitoring market abuse
- Preventing financial misconduct in your organisation
- Insider trading case study
