On March 11th 2015, the European Court of Justice (ECJ) published a judgment on Jean-Bernard Lafonta v Autorité des Marchés Financiers concerning the definition of inside information in Article 1(1) of the Market Abuse Directive (MAD).
According to Article 1(1), “information shall be deemed to be of a precise nature if it indicates a set of circumstances which exists or may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to do so and if it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of financial instruments or related derivative financial instruments.”
In Lafonta, Mr Lafonta, chairman of Wendel S.A., argued that the financial operations to purchase a significant shareholding in another company was not inside information – and so did not need to be disclosed – because it was impossible to predict whether its disclosure would result in an increase or a decrease in Wendel’s share price and hence was not “precise”.
Therefore, the following question was referred to the General Court of the ECJ: “must point (1) of Article 1 of Directive 2003/6 and Article 1(1) of Directive 2003/124 concerning the definition of inside information be interpreted as meaning that only information in respect of which it may be determined, with a sufficient degree of probability, that, once it is made public, its potential effect on the prices of the financial instruments concerned will be in a particular direction may constitute inside information?”
Considering the increased complexity of the financial markets which makes it particularly difficult to identify accurately the direction of a particular change in the prices of financial instruments, the ECJ was of the opinion that if it were accepted that information is to be regarded as precise, only if it makes it possible to anticipate the direction of a change in the prices of the instruments concerned, the holder of that information could use any uncertainty in that regard as a pretext for refraining from making certain information public and thus profit from that information to the detriment of the other actors on the market.
Therefore, it was held in that judgment that information of a 'precise nature' for the purposes of the definition of inside information under MAD was not restricted to information which made it possible to determine the likely direction of a change in price and that the only information that could be regarded as imprecise was information that was vague or general, from which it was impossible to draw a conclusion as regards its possible effects on price.