Issuers listed on SIX Swiss Exchange (SIX) are, as a matter of principle, required to inform the market of any price-sensitive facts which have arisen in their sphere of activity (ad hoc publicity). SIX announced a revision of the Listing Rules as well as the Directive on Ad Hoc Publicity and the Directive on Corporate Governance, which will enter into force on 1 July 2021. Among other changes, the revision affects the way ad hoc disclosures need to be communicated and published by introducing a flagging obligation for communication deemed to be price sensitive and therefore an “ad hoc disclosure”. This article sets out certain considerations that issuers should bear in mind when making a determination on whether or not to flag corporate communication as an “ad hoc announcement”.
By Rashid Bahar / Thomas Reutter (Reference: CapLaw-2021-48)
Overview of the new Rules
The revised rules published by SIX Exchange Regulation on 30 April 2021 require issuers to flag disclosures of price-sensitive facts pursuant to the Listing Rules as such by including a classification “Ad hoc announcement pursuant to article 53 LR” (article 53 (2bis) LR) at the beginning of the announcement. Issuers will need to flag ad hoc disclosures on their website with the same flag allowing investors to find and identify ad hoc disclosures easily. Announcements should remain available in chronological order, including the date of distribution, for a period of three years, instead of two years (article 9 (1) DAH) as was the case under the current rules. This rule improves the information available to the market and contributes indirectly to investor protection in its broadest meaning as it allows investors to spot price-sensitive disclosures directly without the need to filter out the noise on their own.
At the same time, the new rule puts a heavy burden on issuers to make a clear and transparent determination and communicate it to the market. This approach marks an important departure from the existing rules. Until now, issuers were free to communicate ad hoc disclosures together with other media releases as long as they complied with the requirements of the Listing Rules and the Directive on Ad Hoc Publicity regarding the timing and process to publish announcement. This meant that issuers could, in doubt, comply with the process applicable to ad hoc publicity and discharge their duties. Under the new rules, issuers will be required to reach a conclusion whether a fact is price-sensitive or not. If they conclude that a fact is price-sensitive, it should be disclosed as such. If not, they should not flag the announcement or else the use of the flag could be misleading. In this context, the Issuers Committee Circular N°1 expressly stated that flagging notices for marketing purposes as an ad hoc announcement would not be permitted and that misuse of flagging may be sanctioned (n°12).
The use of discretion….
The burden is however attenuated by article 4 (3) DAH which expressly provides that the issuer “makes its decision using its discretion, taking into account the company’s internal division of responsibilities.” Accordingly, issuers are required to define within the framework of corporate law, including their articles of incorporation and organisational rules (art. 716b (1) CO), and internal directives, how they intend to reach a conclusion whether a new development qualifies as a price-sensitive fact triggering an ad hoc disclosure, subject to a deferral based on art. 54 LR (see Issuers Committee Circular N°1, n° 7). If they proceed within this governance framework, they enjoy discretion which grants them a certain latitude to exercise judgement, which is all the broader as issuers are called upon to determine ex ante whether an event is a price-sensitive fact (see Issuers Committee Circular N°1, n° 12).
In this context, the very definition of price-sensitive information also allows issuers to exercise discretion. Indeed, issuers are required to assess ex ante whether the disclosure of the fact would be capable of triggering a significant change in the market (art. 53 (1) LR). This determination needs to be fact specific and based on the circumstance that prevail prior to the announcement (art. 4 (2) DAH). Indeed, issuers should also determine if the fact can affect the reasonable market participant in its investment decisions (art. 53 (2) LR).
This definition opens some additional leeway for issuers to exercise judgement in reaching their conclusion whether an event is price-sensitive. Indeed, based on the guidance published by the Issuers Committee Circular N°1, the rational market participant is defined as “a rationally acting person who is familiar with the activity of the issuer and the market of the financial instrument in which this person is making an investment. This person knows the fundamentals of securities trading, corporate law and financial market practices but does not need to have any special expertise” (n° 9). By making this change, the Swiss rules align themselves with the definitions of EU law (ibid.). Consequently, recital 14 of MAR can be used as additional guidance to interpret this requirement: “Reasonable investors base their investment decisions on information already available to them, that is to say, on ex ante available information. Therefore, the question whether, in making an investment decision, a reasonable investor would be likely to take into account a particular piece of information should be appraised on the basis of the ex ante available information. Such an assessment has to take into consideration the anticipated impact of the information in light of the totality of the related issuer’s activity, the reliability of the source of information and any other market variables likely to affect the financial instruments […] in the given circumstances.” In other words, the assessment regarding price-sensitivity is fact specific and supposes the exercise of judgement prior to the disclosure.
Overall, art. 4 (3) DAH and the overall nature of the changes to the definition of price-sensitive events allow issuers to enjoy a certain discretion in reaching a determination and can, in doubt, err in favour of disclosure and flagging the announcement, without being sanctioned for wrongly applying the flag. It is advisable under such circumstances to document the decision and to record the reasons why the issuer reached a determination that an event was sufficiently material to constitute a price-sensitive fact. This approach will allow the issuer to establish that it was acting in good faith in the event SIX Exchange Regulation initiates an investigation or even take sanctions.
…and its boundaries
While issuers may be tempted to overreport systematically developments as price-sensitive facts, there are also reasons why a measured approach is advisable. First and foremost, while we believe that an issuer can be cautious and err in favour of disclosure, a conscious decision to overreport facts as being fact sensitive is not compatible with the legal framework. Quite to the contrary, the rules now require issuers to flag price-sensitive facts and not to flag events that do not qualify. Consequently, even if the test is and remains an ex ante analysis, issuers should learn from the market. Indeed, the EU framework under the Market Abuse Regulation, recital 15, expressly states that “ex post information can be used to check the presumption that the ex ante information was price sensitive, but should not be used to take action against persons who drew reasonable conclusions from ex ante information available to them.” In other words, to err when in doubt does not amount to a full release from the duty to assess whether facts are price-sensitive before flagging them as such. An issuer can exercise discretion only if the facts and circumstances after due consideration following the internal processes and procedures leave room for judgment to be exercised.
Second, issuers should be consistent and when they determine that a given event is price-sensitive they can be expected to treat such determination as a relevant precedent if faced with a similar fact pattern and cannot arbitrarily change their reporting practice or, worse, decide to change the qualification of a fact pattern when the burden of reporting is too heavy. Therefore, when reaching a determination on a borderline case, issuers should not let their judgement be tainted by the consequences of reporting and flagging, not only because such an approach is methodologically wrong, but also because treating an event as price-sensitive may be innocuous in one set of circumstances but may have far-reaching consequences in others. Indeed, if an issuer sets a low threshold for reporting, this decision may subsequently limit its ability not to disclose a fact on the basis that it is not price-sensitive or require the issue to comply with the requirements of article 54 LR to postpone the announcement, which under the new rules is subject to a more burdensome requirement to not only ensure confidentiality but also have and follow internal rules and procedures to this effect. Considering the narrowing gap with insider information, issuers may also find themselves based on such a such a determination blocked from initiating a new buy back progamme or engaging in other transactions involving their own securities. In addition, board members and executive management may hardly have a window available to engage in transactions in equity securities of the issuer.
Ad hoc information vs. inside information
Third, the gap between price-sensitive information triggering ad hoc information and inside information pursuant to art. 2 (j) FMIA narrows with the new rules. Indeed, inside information is defined as “confidential information whose disclosure would significantly affect the prices of securities admitted to trading on a Swiss trading venue.” Under the new rules, ad hoc information continues to be limited to developments within the sphere of activity of the issuer, preventing the increased focus by securities regulators on the abuse of inside information relating to third parties (e.g. a target in an M&A process) to creep into this area. Nevertheless, subject to this distinction, the definition of price-sensitive information under the Listing Rules and insider information are becoming increasingly aligned. Indeed, FINMA RS 2013/8: Market Conduct Rules, n° 10, considers that price-sensitivity “is to be decided on a case-by-case basis with reference to whether or not the information is capable of influencing the investment behaviour of a reasonable investor who is familiar with the market. In principle, substantiality is assessed according to the market situation prior to the information being known.” Consequently, issuers should also bear in mind two consequences: first, by flagging a disclosure as an ad hoc announcement, they also admit that they are disclosing what was until then inside information and, conversely, if they postpone an announcement, they must not only ensure confidentiality under the Listing Rules, but also comply with the regulatory framework applicable to insider information under the FMIA. In other words, their choices under the Listing Rules are not only relevant for compliance with the Listing Rules but may also affect the assessment by FINMA and federal prosecutors and criminal courts. Second, the narrowing gap also means that their determinations and announcements is also increasingly likely to be scrutinized by FINMA and federal prosecutors in connection with compliance with their obligations under the market conduct rules of the FMIA.
Conclusion
In conclusion, the flagging obligation is not as harsh as commentators may have feared: issuers enjoy a certain discretion in deciding whether to flag a press release as being an ad hoc announcement under article 53 LR. However, issuers should be aware that their choice has consequences, which go beyond the threat of sanctions which apply both in the event of a failure to flag and in case of overreporting. While sense and sensibility may not be easy to match when considering ad hoc disclosure, issuers are well advised to engage in thorough analysis of the facts and circumstances rather than taking the easy way of flagging too quickly their announcements.
Rashid Bahar (rashid.bahar@advestra.ch)
Thomas Reutter (thomas.reutter@advestra.ch)