Under point (a) of Article 7(1) of the MAR, inside information generally comprises

• information of a precise nature
• that has not been made public,
• relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which,
• if it were to be made public, would be likely to have a significant effect on the price of those financial instruments or on the price of related derivative financial instruments.

Not been made public

The criterion “not been made public” is a negative definition:

Information has been made public if it has been made available to a broad investing public and hence to an indeterminate number of persons. It is not relevant who made the information public. It does not matter if the issuer itself discloses the circumstances underlying the information, if appropriate in a disclosure under Article 17 of the MAR, or if the information is made available to the public by other means. It is both sufficient and necessary for the information to be made available simultaneously to a broad investing public. This can happen, for example, using a generally accessible electronic information system. All interested market participants therefore have an opportunity to access the information, thereby ensuring equal access to the information. A system is also generally accessible electronic information system if there is a charge to access the system. As a rule, disclosing inside information in a (stock market) information service or newsboard that is only relevant for certain groups of persons does not satisfy the requirement of making the information available to a broad investing public. For the same reason, information is not deemed to have been made public if it can only be accessed from the commercial register.

As a rule, disclosures in the local media also do not satisfy the condition for information to be “made public” within the meaning of Article 7(1) of the MAR. The reason for this is that, in such cases, it cannot be presumed that the information has been made available to a broad investing public. Equally, disclosures on social media do not ensure the rapid, targeted availability of information to a broad investing public.¹ However, if the information is subsequently picked up and disseminated by the national press, it is deemed to have been made public.

Information is also not deemed to have been made public if the information in question is disclosed in the course of a press conference organised by the company or at a general meeting of shareholders. Such events are not directed at an indeterminate number of interested persons, but rather grant access only to a certain group of persons. This is also the case if the general meeting of shareholders is broadcasted live on the internet or the information is disclosed to the public on the company’s website. None of these cases offer sufficient assurance that the inside information is made known simultaneously to a broad investing public. Equally, disclosure of the information in open court proceedings does not meet the definition concept of being made public within the meaning of the MAR.

Information of a precise nature

Information is deemed to be of a precise nature if it indicates a set of circumstances that exists or that may reasonably be expected to come into existence, or an event that has occurred or that may reasonably be expected to occur. In addition, the information must be 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 the financial instruments or the related derivative financial instruments, the related spot commodity contracts or the auctioned products based on the emission allowances (first sentence of Article 7(2) of the MAR).

It is therefore necessary to examine whether the existing or future circumstances constitute information of a precise nature. Where future circumstances are concerned, the first sentence of Article 7(2) of the MAR sets out that it must be reasonably expected that they will come into existence in the future. What this means is that it must be reasonably certain that the event will occur. BaFin applies a standard of 50 per cent + x (more likely than not) in such cases. This requires an assessment of all available circumstances and information, which should also consider the final outcome of comparable matters at the company in the past, and what supports or does not support this in the specific case (for example, was the company regularly able – or unable – in the past to successfully complete planned acquisitions, and what are the special characteristics in the specific case?).

In addition, the information must be specific enough to enable a conclusion to be drawn as to the possible effect on the prices of the financial instruments concerned. Information that is merely vague or general and that does not enable a conclusion to be drawn about its possible effect on the prices of the financial instruments concerned is not of a precise nature. The direction of the possible impact on the price of the financial instruments concerned is irrelevant in order to determine whether an information is precise. In the “Lafonta judgment”², the European Court of Justice (ECJ) decided that, for information to be regarded as being “of a precise nature” within the meaning of Article 1(1) of Directive 2003/124/EG³, it need not be possible to infer from that information, 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.

By contrast, information that does not enable a conclusion to be drawn about its possible effect on the prices of the financial instruments concerned, such as non-binding musings by a member of the management board about potential growth, or opinions that do not appear to provide any reliable basis, are not information of a precise nature.

Relates directly or indirectly to the issuer or financial instruments

The information must relate directly or indirectly to one or more issuers of financial instruments or one or more financial instruments. There is therefore no requirement for the circumstances affecting prices to have occurred in the issuer’s field of activity or for them to relate directly to the issuer or the financial instrument. Circumstances that only indirectly relate to the issuer can also be inside information.

These include, for example, market data or market information, i.e. information about the general market environment or about the markets themselves that may also impact the circumstances of issuers or financial instruments. This may be the case, for example, with

• interest rate decisions by central banks,
• exchange rates,
• commodity prices,
• sector-specific statistical data,
• OTC sales of share packages by major investors without any strategic objective,
• data and information relating to trading in the financial instrument concerned (order volume, type of order, identity of the principal, etc., as well as inclusion in or removal from an index),
• compensation offers/squeeze-outs,
• natural disasters
• and legislative initiatives or changes in legislation, or other political decisions.

Under Article 17(1) of the MAR, there is no obligation to issue an ad hoc disclosure for information that does not directly concern the issuer, although it does trigger the prohibitions of insider dealing and disclosure of inside information (see section I.3.2.2.2 and section I.4.4).

Potential to affect prices

Information is only inside information if the underlying circumstances would, if they were to become publicly known, significantly affect the price of the financial instruments of the issuer or related derivative financial instruments. Under Article 7(4) of the MAR, “information which, if it were made public, would be likely to have a significant effect on the prices of financial instruments”, means information that a reasonable investor would be likely to use as part of the basis of his or her investment decisions.

Reasonable investor

Recital (14) of the MAR states that “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, the related spot commodity contracts, or the auctioned products based on the emission allowances in the given circumstances.”

European law does not contain any definition of the term “reasonable investor”. BaFin is guided by the following considerations with regard to the circumstances that a reasonable investor would use to assess whether information may have the potential to affect prices:

To determine whose perspective should be applied to the assessment of price sensitivity, BaFin postulates an average investor with reasonable knowledge of the stock markets who makes his or her decisions on the basis of an objectively verifiable point of reference. BaFin does not believe that specialist expertise is necessary, although the reasonable investor should be familiar with the main features of securities trading practices and company law.

From BaFin’s perspective, however, a reasonable investor also considers all the specific characteristics of the individual case, i.e. he or she also considers the current market situation of the company in the overall picture, as well as whether the circumstances in question could significantly affect the price of the financial instrument concerned, having regard to that current market situation. In doing so, he or she also considers, based on his or her experience, how other market participants (i.e. the investing public) reacted to comparable fact patterns in the past. It should therefore be presumed that a reasonable investor includes not only the future financial strength and earnings power of the company in his or her investment decision, but potentially also additional factors that – in isolation from any change in enterprise value – could affect the price of the financial instrument, as is the case, for example, with dividend payments, a compensation offer or a squeeze-out. An investor therefore reacts in this respect to all information available to him or her that he or she has assessed in full and comprehensively with regard to its price-sensitivity; this also includes information based on experience.

Potential to have a significant effect on prices

The potential to have a significant effect on prices requires an assessment of the extent to which the price of a financial instrument or a related derivative financial instrument will be affected if the circumstances were to be made public. It therefore does not matter if the price of a financial instrument actually changed after the inside information was made public. It is sufficient if, from the perspective of a reasonable investor who is in possession of all available information, it appears likely that the price could be significantly affected. However, significant changes in the price that actually occur after the inside information was made public may be an indicator of the potential price-sensitivity of the information to be assessed (see also recital (15) of the MAR).

The condition of significance is designed to ensure that not all circumstances that can lead to a minor price movement have to be categorised as inside information. The key factor is whether a reasonable investor would probably consider the information in his or her investment decision. That is the case if there is an incentive to buy or sell and the transaction appears to be profitable to the reasonable investor. A transaction is already profitable if the expected return, net of transaction costs (for example order fees) exceeds the opportunity costs, i.e. the return that an investment in financial instruments with a comparable risk would generate. A transaction can also be considered profitable if the potential return is linked to an avoided price loss.

The price of a financial instrument is not only significantly shaped by information about the company concerned itself, but also by the state of the market as a whole and by additional factors. That is also why there cannot be any generally applicable thresholds. It is therefore not possible to draw any reliable conclusions about which circumstances are price-sensitive without a case-by-case examination.

The following steps are appropriate for assessing price sensitivity:

• In the first step, it is necessary to examine whether, considered in isolation, the circumstances could, on the basis of general experience, have the potential to have a significant effect on prices at the time it occurs (ex ante). Examples could be a takeover bid, signature of a particularly important contract or a significant discovery, a profit warning or the threat of insolvency, a capital reduction or the signature of a control and profit and loss transfer agreement. Other – non-exhaustive – examples are changes in dividends, in particular dividend cuts or cancellations.
• The circumstances of the individual case that are existing or foreseeable at the time the circumstances occur and that could increase or decrease the potential to have a significant effect on prices must then also be considered.

For example, if an increase in profits or a loss of 50 per cent compared with the previous year is established when the annual financial statements are prepared, this constitutes new information; however, its potential to have a significant effect on prices depends crucially on what information is available or has been made public, or on what forecasts about the company’s results of operations were already issued before preparation of the annual financial statements, and were already expected by the market on that basis. Please also refer to section I.2.1.5.2 for guidance on the price sensitivity of financial data.

It should be noted that, in order to assess the potential to have a significant effect on prices, it is necessary to estimate the extent to which the circumstances could affect the price of a financial instrument or a related derivative financial instrument if they were made public. That means that the potential of information to have a significant effect on prices must be determined in each case in relation to the financial instrument in question, and may therefore vary in practice. It is possible, for example, that information may be considered to have the potential to have a significant effect on prices in relation to an issuer’s shares, but not in relation to bonds it has issued, because the information in question does not affect the issuer’s credit rating. Scenarios are also conceivable in which the information is not expected to trigger any (considerable) reaction in the share price, but it could trigger such a reaction in the price of individual related derivatives on that share (compare section I.3.2.2.2 at the end). The effect of the information on each financial instrument must be assessed, taking the usual variability into consideration in each case. Further examples that categorised as price-sensitive are to be found in section I.2.1.5.

Intermediate steps as inside information

In the case of protracted processes, it should be noted that not only the final event itself may constitute inside information, and that certain intermediate steps that are connected with bringing about or resulting in that future circumstances or event may also constitute inside information. The EU legislator addressed this explicitly following the ECJ’s “Geltl judgment”⁴ in the second sentence of Article 7(2) and paragraph (3) of the MAR.⁵ The ECJ ruled that intermediate steps in a decision-making process may constitute inside information.

In the case of protracted processes – the final events can typically fail before the final decision is taken – the question of whether the information is precise must therefore be examined for each individual intermediate step (see Article 7(2) of the MAR). For example, if A-AG has manifested the firm intention to acquire B-AG, this may already be a relevant intermediate step under insider law (see the guidance under I.2.1.5.6). This applies irrespective of the question of whether there will ultimately actually be a takeover, i.e. the planned original decision. In the case of protracted processes, both the (planned) final outcome, as a future event, and the intermediate steps taken to achieving it, as events that have already occurred, must therefore be examined to determine whether they constitute inside information.

This must be distinguished from the question of whether the intermediate step already has the potential to have a significant effect on prices. That must be assessed from the perspective of the reasonable investor in the course of the examination of potential price sensitivity (see Article 7(4) of the MAR).

In the assessment of whether an intermediate step is relevant under insider law, a general distinction must be made between intermediate steps that, by themselves, satisfy the criteria of inside information, and intermediate steps whose price sensitivity depends on the future final event.

Under the general MAR rules, an intermediate step that, by itself, meets the criteria of inside information must be disclosed as soon as possible, unless a delay can be considered.⁶ Such an intermediate step is relevant under insider law by itself, without being dependent on the probability of occurrence of the final event (see Article 7(3) in conjunction with paragraph (1) of the MAR).

By contrast, in the case of intermediate steps whose relevance under insider law relates primarily to their dependence on a future final event, the question of whether there is any potential to have a significant effect on prices must also be adequately examined and assessed by the issuer.

In its decision of 23 April 2013⁸, the Federal Court of Justice ruled that, in the examination of “price sensitivity, it must generally be presumed that an investor will consider the likelihood of the occurrence of a future event [and] (…) this [must] also be the case if precise information is available about circumstances that have occurred that indicate a future event, and the investor must estimate the potential future development in this respect.”

With regard to the assessment of intermediate steps whose relevance under insider law relates primarily to their dependence on a future final event, BaFin therefore assumes that the greater the importance and probability of the final event, the more likely it is that a potential to have a significant effect on prices can be presumed, and an overall analysis of the circumstances that have occurred and the future circumstances suggests, taking the relevant market situation into account, that a reasonable investor will already use this intermediate step for his or her own purposes.

If the planned final event is still unlikely, any intermediate step will not normally have the potential to have a significant effect on the price. In this case, there will generally be no intermediate step inside information.

Further guidance on potential intermediate step inside information can also be found in section I.2.1.5.

Potential for rumours to have a significant effect on prices

Rumours that contain a kernel of truth may also constitute information of a precise nature. For example, the rumour may tell free float shareholders about a takeover project with a degree of substantive accuracy. The rumour is therefore information of a precise nature within the meaning of point (a) of Article 7(1) of the MAR, although it does not have to be true. Only when examining the question of whether the information has the potential to have a significant effect on prices is it necessary to clarify whether a reasonable investor would act on the basis of that rumour.

This must be verified on a case-by-case basis. The key factors are

• the source of the rumour, and in particular whether it appears to be credible,
• the verifiable facts underlying the rumour,
• the economic situation of the company concerned,
• the specific segment in which the company concerned is active and
• the state of the markets in general.

Selected individual issues relating to certain cases of potential inside information

Forecasts¹⁰

Forecasts may constitute inside information if they have been prepared for the further course of business on the basis of concrete indications and are specific enough to enable a conclusion to be drawn as to the possible effect of that forecast on the price of the corresponding financial instrument. Generally worded expectations (e.g. an indication that positive growth is expected for the current financial year) or long-term plans, for example for a multi-year time horizon, are not sufficient to qualify as inside information.

As a rule, a forecast has the potential to have a significant effect on prices if it differs considerably from market expectations – or from past business results if there are no such expectations. Please refer to the guidance in section I.2.1.5.2 regarding the determination of market expectations.

If significant circumstances arise in the subsequent period, the issuer must take the opportunity to examine whether the forecast can be maintained. New inside information arises if the issuer establishes during this examination that its new forecast will probably differ substantially from the previous one and that it has the potential to have a significant effect on prices – also because it differs from market expectations. It should be noted that the event triggering the new forecast may itself be inside information.

If, in both its original and in its latest forecast, the issuer indicated a plausible corridor within which it expects a profit or a loss (“between … and”), BaFin generally bases its assessment of whether the updated forecast has the potential to have a significant effect on prices on the difference between the mean value of the original and updated forecasts.

Financial data

A company’s course of business within a quarter or a full financial year, as conveyed in the context of quarterly, half-yearly and annual reports, may also constitute inside information. As the course of business is reflected to a very large extent in the financial data, the question of the potential of the course of business to have a significant effect on prices must be answered on the basis of the financials in the form of an overall assessment.

However, individual items of financial data that are relevant for the assessment and, in concrete cases for the company, may also in themselves constitute inside information.

It should also be noted that an individual transaction that significantly influences one or more individual items of financial data – e.g. if the result is a substantial profit or loss – may also constitute inside information.

Additionally, inside information in connection with the annual financial statements regularly arises before the annual financial statements have been prepared or adopted, and at the very latest when they have been prepared by the management board. This must be assumed, for example, if the financial data – for instance in the monthly management accounting report – has become sufficiently concrete in advance that it can be reasonably expected that the final performance measures in the prepared annual report (or half-yearly report or interim statement) do not differ differently from the performance measures that can be calculated on the basis of the monthly management accounting. This can be assumed all the more the sooner the available data corresponds to the data in the income statement, or the lesser it is expected there will be a need to adjust these figures.

Finally, inside information must also be presumed if the magnitude of the relevant financial data can already be stated with such precision up-front (e.g. in the form of a minimum/maximum range) (often referred to as “preliminary figures”) that it can be reasonably expected that the final performance measures in the prepared annual report (or half-yearly report or interim statement) will differ significantly from the relevant benchmark positively or negatively, even if in the first case they land at the lower end, or in the second case at the upper end, of that range.

If the issuer is a group company, the corresponding group performance measures must generally be used, i.e. the inside information will regularly only arise once the financial data of the business units and subsidiaries has been consolidated, unless a conclusion can be drawn with reasonable certainty about the group performance measure even before all of the group companies have been consolidated, and hence about whether there will be a significant shortfall or surplus compared with the benchmark. The management board can validate the plausibility of the data from financial accounting/financial control (normally in the form of a management accounting report) and examine how adjustments that still need to be made will affect the relevant final financial data.

The information in question is price-sensitive if it differs significantly from the relevant benchmark:

In the first instance, the issuer’s own published forecast should be used as the benchmark. If the issuer indicated a corridor in its forecast that is based on an objectively verifiable fact pattern, the information has the potential to have a significant effect on prices if the financial data lies outside the corridor. The following principle applies to financial data that lies inside the corridor: the narrower the corridor, the less likely it is that the information has the potential to have a significant effect on prices. Conversely, however, this also means that the information may have the potential to have a significant effect on prices if the projected corridor is very broad and the results are close to the upper or lower end of the corridor. By contrast, if the issuer only indicated a minimum expectation in its forecast, this does not mean that the information does not have the potential to have a significant effect on prices because the upper end of the range was left open. In such a case, the issuer must establish how the forecast was understood by the market.

If the financial data in question matches the issuer’s own forecast or if they differ from the forecast but are in line with the significantly more recent market expectations, it can be assumed that the financial data does not have the potential to have a significant effect on prices. In this case, however, the issuer must examine whether it would have been subject to an obligation at an earlier date to adjust its forecast.¹¹

• If there is no forecast or if it is so vague/unspecific that no comparison with the financial data for the purpose of assessing the potential to have a significant effect on prices is possible, the quantitatively verifiable market expectations must also be used as the benchmark.

  Estimates by analysts are a key indicator for assessing market expectations. BaFin assesses market expectations by applying the mean value of analysts’ estimates at the time when the inside information arises (consensus estimate). Because it can be difficult in individual cases to determine the mean value from a methodological perspective (for example because there are too few estimates), market expectations may also be determined by other means. An issuer does not have to determine these market expectations itself, but can use an external data provider for this purpose. If no plausible market expectations can be determined, for instance because there are no current estimates, the prior-year figures must be used.

• If there are no such market expectations, the financial data for the prior-year comparative period (in the case of order intake, order backlog and cash flow indicators also: the previous quarter) must ultimately be used as the benchmark.

This guidance applies, with the necessary modifications, to intraperiod financial data, half-yearly reports and interim statements on quarters. If intraperiod financial data does not contain any explicit relevant forecast, it cannot be calculated by dividing the annual forecast by four or two because the capital markets cannot readily assume that transactions, and hence revenue, income or expenses, are distributed evenly over the quarters.

If an issuer does not publish any forecast for intrayear periods, but merely an annual forecast, this means that inside information may also exist if the annual forecast is maintained, provided that the intrayear financial data differs significantly from market expectations or, if there are no such expectations, from the financial data for the prior-year comparative period (in the case of order intake, order backlog and cash flow indicators also: the previous quarter). If there is no significant difference, there may still be the potential for a significant effect on prices, for example if the figures in question differ significantly from the previous course of business (e.g. turnaround after several loss-making quarters; collapse in revenue following a sustained growth phase over several quarters).

Conversely, publication of quarterly or half-yearly figures may trigger an obligation to correct the annual forecast if it cannot be expected that the annual forecast will be maintained, despite the fact that the current financial year is still ongoing and transactions are still outstanding.

Dividends

BaFin takes the view that the answer to the question of whether a company distributes its net profit to the shareholders in the form of dividends or reinvests it in the company is generally important for the capital markets. For this reason, the capital markets factor information about dividends into the price of the shares, which results in price effects after the publication of dividend announcements. As a rule, dividend increases therefore have positive price effects; by contrast, cutting or cancelling the dividend generally triggers negative price reactions.

In light of the capital adequacy rules, what a dividend decision signals to investors has a particularly strong effect in the case of credit institutions. If the institution has a strong capital base, increasing the dividend routinely sends a strong signal to the markets that the institution continues to expect to have adequate capital resources in the future. The situation is likely to be different if the capital markets reckon that the credit institution’s capital cover is too thin. In that case, a dividend increase (or also distributing a special dividend and sticking to the existing dividend policy) sends a negative signal to the investors.

The criteria for financial data (see section I.2.1.5.2) should be applied, with the necessary modifications, to the assessment of potential of dividends to have a significant effect on prices. What this means is that, if the change compared with the relevant benchmark is sufficiently great, dividends have the potential to have a significant effect on the share price and may therefore be inside information.

With regard to the assessment of the potential to have a significant effect on the share price, a special factor affecting dividends is that companies often pursue a dividend policy and also publish it.

A policy of dividend continuity is the first issue here. If the company unexpectedly makes a significant change to the amount of the dividend, which has been constant over the course of several financial years, this is normally associated with the potential to have a significant effect on prices and can trigger an obligation to publish an ad hoc disclosure during the course of the year. Secondly, companies can define a dividend payout ratio, meaning the ratio of the dividend to be distributed to the net profit (or another earnings figure). An unexpectedly significant increase or decrease in this distribution ratio will normally have the potential to have a significant effect on prices.

Paying a special dividend (as a rule, this is distributed because of the special course of business of the company, or entirely unrelated to it, e.g. if demanded by a major shareholder or because of a company jubilee) can only be price-sensitive if it comes unexpectedly, meaning that it could not be expected by the capital markets and it represents a considerable premium on the “regular” dividend.

A special dividend that is not attributable to an extraordinary transaction affecting profit or loss must be treated in the same way as a (possibly temporary) change in the dividend payout ratio. If it results in a significant change in the amount distributed per share, a potential to have a significant effect on prices must be assumed.

Corporate actions

Corporate actions also constitute potential inside information. These may relate in particular to capital increases in the form of share issues with and without pre-emptive rights, borrowings, the issuance of convertible bonds and share buybacks. In the course of a capital increase process, it should be noted that not only the resolution by the management board to implement the capital increase may constitute inside information, but other inside information may also be conceivable here in the form of intermediate steps. Please refer to the guidance in I.2.1.4.3 in this respect.

As a general principle, it should be noted that the event underlying the capital increase (e.g. the acquisition of an asset) may itself constitute inside information.

Provided that it could be expected by the investing public, the successful implementation of the corporate action does not usually constitute inside information once the corresponding resolution has been made public. Correspondingly, the abandonment or reversal of a corporate action or the fact that there was not sufficient interest on the part of the investing public to ensure that all the new shares would be subscribed constitutes inside information.

With regard to share buybacks under section 71 (1) no. 8 of the Stock Corporation Act (Aktiengesetz – AktG), the resolution by the management board to exercise the authorisation of the annual general meeting to implement a buyback programme may constitute inside information in the form of an intermediate step or because of future circumstances. However, resolutions by the management board and the supervisory board of the issuer to propose a share buyback authorisation to the annual general meeting, and the authorising resolution by the annual general meeting in this connection do not normally constitute inside information.

Borrowing transactions, such as promissory note loans, are a commonly used financing method for companies. As a rule, it can be assumed that they do not have the potential to have a significant effect on share prices, not least because their impact on a company’s net assets, financial position and results of operations tends to be low, taking opportunity costs into consideration (which apply in the case of alternative financing using equity). Exceptionally, if special circumstances are involved, borrowing transactions may be price-sensitive. An example of such circumstances is when the company (because of its strained economic or financial position) has to pay unusually high interest rates, with the result that these substantially exceed the normal cost of debt, or the loan is accompanied by debt rescheduling that substantially reduces the company’s interest burden, each of which will considerably impact the net assets, financial position and results of operations. Examples of other factors that have the potential to have a significant effect on share prices include termination of the loan and the repurchase price.

Considerable extraordinary income/expenses

Considerable extraordinary income/expenses may also constitute inside information, provided that they materialise. Examples of extraordinary income/expenses include:

• gains/losses on the disposal of significant parts of business operations or entire business operations,
• gains/losses on the disposal of significant equity investments,
• write-downs for impairment due to an extraordinary event, e.g. closure of business operations, expropriation or destruction of business operations due to natural disasters,
• extraordinary losses, for example due to embezzlement,
• income/expenses due to the outcome of litigation of existential importance for the company,
• compensation paid for mass redundancies,
• gains/losses due to reorganisations,
• income due to the general waiver of claims by creditors (restructuring gain) and
• non-recurring public sectoral restructuring subsidies.

Mergers and acquisitions

In the course of merger and acquisition (M&A) processes in which an issuer is involved, the question of the timing of the emergence of inside information can arise both with regard to the bidding company and with regard to the target company, or with regard to the seller – provided that their financial instruments are admitted to trading on a regulated market or included in trading on a multilateral (MTF) or organised trading facility (OTF). This applies both to public takeovers and private M&A transactions. A general distinction must be made here as to whether one or more companies are involved in the negotiations on the side of the bidder or the target. Because of the wide variety of potential scenarios, it is not possible to provide any conclusive guidance.

As a result, there is a need to examine throughout the entire process whether intermediate steps that have already occurred (or are upcoming) or the final event itself (the merger/acquisition), as a future event, can be categorised as inside information. Please refer to the guidance in I.2.1.4.3 in this respect.

These intermediate steps must be distinguished from preparatory measures that do not yet meet the criteria for inside information.

For example, a purely internal decision to launch preliminary discussions with a potential target company does not normally constitute inside information because, unless special circumstances also occur, both this intermediate step and the completion of the M&A process, as a future event, will not, as a rule, have any substantial potential to have a significant effect on prices. The same applies to purely internal organisational measures, such as examination and preparatory measures, the initial engagement of advisers (lawyers, banks, management consultants) or first contact with the target company.

By contrast, the extent to which it can be assumed that any non-binding indicative offer letter does not constitute inside information must be examined on a case-by-case basis. Experience shows that, at this early stage, the success of a transaction will depend on a large number of as yet uncertain factors. The same applies to preliminary talks of the potential bidder with the target company or shareholders of the target company. Nevertheless, it is still necessary to examine whether information of a precise nature exists at these stages and this information has the potential to have a significant effect on prices, for instances because it was possible to clarify key aspects of a potential transaction or a willingness to reach agreement is evident.

Because of the variety of potential scenarios, it is not possible to produce any schematic representation illustrating the point at which the existence of intermediate step inside information can be presumed. Accordingly, the emergence of inside information does not depend on any specific terminology (e.g. communicating term sheets). Rather, the assessment of whether intermediate step inside information exists must be made from a content-driven perspective, and in particular a holistic approach must be applied to examine which steps have been taken and which content has materialised on the way towards the final event. The more progress has been made in the acquisition process, the greater the potential will be to have a significant effect on prices. Accordingly, the following list of potential intermediate step inside information can be no more than an initial indication; the final assessment must be guided exclusively by the content of the steps already completed.

As a minimum, the following circumstances should be taken as an opportunity to examine whether inside information could have arisen in the form of a relevant intermediate step under insider law:

• bilateral meetings with a concrete background, at least if preparatory measures have already been taken and material aspects have been discussed,
• signature of a letter of intent, provided that, for instance, it contains agreements on the key aspects of the future agreement, a price range or another agreement that documents the serious willingness of the negotiation parties to reach an agreement,
• deployment of mutual working groups to examine the feasibility of a merger,
• communicating term sheets,
• agreement in principle by key decision-makers on core issues (including before they have been addressed by governing bodies),
• removal of major obstacles,
• performing due diligence.

It should be considered in this context that – the closer an intermediate event is to the final event – it may be reasonably likely that the final event will occur, for example when concrete agreements are entered into.
In situations in which several companies are involved on one or both sides (e.g. in the case of bidding processes), a non-disclosure agreement and a process letter will routinely be communicated if there is continued interest after potential prospective buyers have been approached. Limiting the group of potential buyers in this way may constitute inside information with regard to the listed target company, although it can be assessed differently from the perspective of a listed bidder because of the uncertain outcome of the process. However, at the latest when concrete negotiations are initiated on an exclusive basis, the bidder should examine whether there is inside information in the form of an intermediate step.

Personnel-related decisions

Personnel-related decisions at a company’s senior management level may constitute inside information in certain cases. In particular if there is an unexpected appointment or dismissal of key members of governing bodies, i.e. if it involves persons who have had up to now, or are expected to have, significant influence on the course of business, such a change may constitute inside information. For example, the unexpected departure of the chair or spokesperson of a governing body or the departure of one of the company’s founding members from a governing body may send a signal to the capital markets. For companies whose performance depends on the innovation or creativity of individual persons, this may also be the case for personnel-related changes outside the governing bodies in areas that are critical for the company (e.g. research and development, design, asset management).

Potential personnel-related changes may also constitute advance inside information in the form of intermediate steps. Please refer to the guidance in I.2.1.4.3 in this respect. In the event of a dismissal, the intention to resign, for example, or the intention of the CEO not to do extend his or her contract, should be considered. In the course of appointing a successor, the intention of the responsible body to appoint a certain individual as the new CEO may constitute inside information, for example. The potential of this information to have a significant effect on prices may be linked to the person who is going to be appointed, as well as the fact that deciding on a particular individual removes the uncertainty about the future direction of the issuer.

Administrative and court proceedings

The outcomes of administrative and court proceedings in which the issuer is directly or indirectly involved or that otherwise affect it (e.g. a third-party notice) may constitute inside information. Open court proceedings are not comparable with the general public within the meaning of point (a) of Article 7(1) of the MAR.

The time when inside information arises does not depend exclusively on the time when it must be expected that it is reasonably certain that the outcome of the proceedings will have the potential to have a significant effect on prices (inside information as an end event). This is because once proceedings have reached a particular stage, this may also in itself constitute inside information in the form of an intermediate step. Please refer to the guidance in I.2.1.4.3 in this respect.

The mere initiation of criminal or administrative investigations will only by itself constitute inside information in specific cases.

A case where it is already established that the issuer or persons acting on its behalf infringed the law, for example because the infringement was already admitted without any court or administrative decision being issued, must be assessed differently. When assessing the potential to have a significant effect on prices, the issue of the legal and financial consequences for the issuer attributable to the infringement plays a major role. Not only the criminal or administrative impact should be considered (e.g. the amount of a fine or administrative penalty), but also the economic consequences of the infringement or of the associated reputational damage to the company (e.g. lost revenue, claims for damages, etc.).

Inside information may additionally arise if the issuer takes measures that in themselves constitute inside information (e.g. formation of provisions), regardless of the outcome of the proceedings.

Insolvencies

Insolvency matters also regularly contain inside information because they can be associated with substantial losses for shareholders.

Inside information does not arise only when the insolvency petition has been filed as a formal act. In this case, too, relevant intermediate steps under insider law cannot be ruled out. Please refer in the guidance in I.2.1.4.3 in this respect.

During the entire course of the crisis, the issuer must therefore examine whether inside information might already have arisen. This may be justified by both the declaration of (pending) insolvency (section 17 and section 18 of the Insolvency Code (Insolvenzordnung – InsO)) and by overindebtedness (section 19 of the InsO). Both insolvency and overindebtedness trigger an obligation to file a petition under section 15a of the InsO that must be satisfied at the latest three weeks after insolvency or overindebtedness has been determined. Both the information about the (pending) insolvency and the information about the overindebtedness are of particular interest for reasonable investors because they directly reflect the company’s economic position and the future of the company will be guided by them. In particular in the event of overindebtedness, the management board must already have arrived at a negative going concern forecast within the meaning of section 19 (2) of the InsO, which could mean a total loss for the investors.

However, other pre-insolvency measures such as delays in payments or a liquidity squeeze may also be price-sensitive, provided that the extent of the issuer’s financial difficulties is not known to the capital markets. Other cases of potential inside information in the event of a crisis also include the loss of half of the share capital (section 92 (1) of the AktG), the asset deficiency or the termination of significant credit lines.

The extent to which filing the insolvency petition and opening the insolvency proceedings themselves constitute inside information is likely to depend above all on whether a reason for insolvency was already known to the market, or the market should have assumed that it would exist very quickly.

Conditions precedent and subsequent

Conditions precedent and subsequent often play an important role when significant contracts are entered into, for example because necessary financing still has to be secured or the ability to implement the project depend on third-party approvals, such as approval by the competition authorities. In projects like this, it must be assumed that these involve deferred matters whose final result will be the implementation of the transaction agreed when the agreement was entered into. In this respect, conditions precedent and subsequent influence the timing of inside information. Please refer to the guidance in I.2.1.4.3 in this respect. For example, if an agreement to purchase a significant immovable property has been signed and if it is still subject to the bank’s financing commitment, this restriction affects the probability of occurrence of the final event – the property acquisition. If the financing negotiations are already sufficiently advanced that it can be expected with reasonable certainty that they will be concluded with a positive outcome, it must also be assumed that it is reasonably certain that the final event will occur.

The same applies to cases in which an M&A transaction is subject to approval by the competition authorities. Note that signing the agreement itself may represent a key intermediate step towards implementing the planned project, and that it may already constitute inside information for this reason.

Internal reservation of consent by governing bodies

In many cases, decisions taken or agreements entered into by the management body of an issuer require the consent of another governing body of the issuer, such as the supervisory board. Resolutions by the management board before a decision has been taken by the responsible bodies may therefore constitute inside information in the form of an intermediate step. Please refer to the guidance in I.2.1.4.3 in this respect. If the management board can already expect with reasonable certainty at the time of its resolution that the supervisory board will approve the planned project, inside information in the form of a future event, namely the implementation of the project, must be assumed.

For example, if an agreement to acquire a significant immovable property has been signed and if the approval of the supervisory board is needed for the contract to be valid, this approval requirement affects the probability of occurrence of the final event – the property acquisition. It is also the case here that the realisation of the final event has already become reasonably likely when the management board adopts the resolution on the agreement (or signs it) if it can be expected that the supervisory board will give its approval. It depends on the circumstances prevailing in each case in this respect.

Linked inside information

If circumstances contain several potential cases of inside information, each relevant matter must be examined to determine whether the conditions for inside information are satisfied. However, there are also cases in which the potential cases of inside information are linked, for example because one would not have arisen without the other, but might then continue to exist even without the other case.

Another example is a decision to implement a strategic realignment resulting in lower income in the current financial year that may trigger an adjustment to forecasts or even a profit warning, or a capital increase in order to finance an M&A transaction.

However, it should be noted that it is not possible to present any generally applicable approach because of the wide variety of potential scenarios, and that a solution must always be based on a case-by-case analysis.

Examples of potential inside information

It is not possible to elaborate a generally binding and exhaustive list of potential inside information. The examples in the following can also only serve as recommendations. They must therefore not be understood to mean that, where they arise, they automatically have the potential to have a significant effect on prices. Rather, it is always necessary to assess the specific circumstances of each individual case.

For example, no significant price-sensitivity can be assumed if information is of no particular significance for the issuer as a whole in the specific circumstances (e.g. merger of an insignificant subsidiary). The question of whether information has the potential to have a significant effect on prices will also depend on factors such as the company’s size and structure, its sector, its competitive situation, market expectations, etc.

As a rule, there is potential to have a significant effect on prices in the following scenarios:

• restructuring of the business model, e.g. by discontinuing or adding old/new core business lines,
• significant restructurings, such as mergers, integrations, spin-offs, reorganisations, divisions within a group or involving other companies,
• significant changes in the shareholder structure,¹²
• squeeze-outs,
• control and/or profit transfer agreements or loss absorption agreements,¹³
• entering into, modifying or terminating particularly important contractual relationships, such as the receipt/loss of a major order, the purchase/sale or a significant asset (e.g. property, subsidiary), entering into significant licensing agreements,
• entering into significant financing agreements, terminating important loans or prolonging them on new terms that differ significantly from the old ones (especially interest rates),
• significant corporate actions, such as capital increases, capital reductions, share buy-backs, issuing convertible bonds,¹⁴
• a significant change in connection with expected or expected new dividends, an unexpected change in the dividend policy,¹⁵
• suspected accounting fraud, announcement that the auditor will refuse to issue an audit opinion on the annual financial statements, unexpected change in the auditor,
• default of significant debtors,
• significant changes in a rating relating to the issuer or to the financial instruments it has issued,
• significant inventions, the grant of significant patents and licences (to or by the company),
• significant product liability or environmental damage cases, sudden commodity developments,
• litigation of particular importance,
• application by the issuer to revoke admission to trading on the organised market, MTF or OTF, if the securities are not admitted to trading or included with the issuer’s consent at another German trading venue.

Non-equity securities

The assessment as to which information has the potential to have a significant effect on prices must also be made on the basis of the class of the financial instruments that are admitted to stock exchange trading.

Circumstances that may justify a substantial potential for fixed income securities to have a significant effect on prices are likely to arise less frequently in principle than in the case of exchange-traded shares. Examples of circumstances that have the potential to have a significant effect on prices where conventional debt securities¹⁶ are concerned are likely to include a situation where the issuer is no longer able to meet its obligations associated with the financial instrument (e.g. repayment, interest payments), or its ability to do so is affected because of the circumstances underlying the information. The same applies to early repayment or changes in the repurchase price. However, this does not apply if the market is expecting the instrument to be called, for example because the terms and conditions of the bond provide for an increase in the interest rate once a particular call date has passed. In this case, not calling the bond could have the potential to have a significant effect on prices.

For example, if the return on a profit-participation certificate depends on the issuer not reporting net accumulated losses, inside information may arise if it can be expected with reasonable certainty that net accumulated losses will be recognised.

Inside information relating to credit and financial institutions

For credit and financial institutions whose financial instruments are admitted to trading on an organised market or whose financial instruments are included in trading on an MTF or OTF with their approval, the importance of selected institution-specific performance measures should be noted. Potential indicators include in particular net fee and commission income, net interest income, risk provisioning and capital ratios, especially the Common Equity Tier 1 capital ratio (CET1), the leverage ratio and liquidity reserves. Changes in the institution’s rating can also constitute inside information.

Additionally, the question of the existence of inside information also arises in cases where the institutions are impacted by regulatory measures. This must be assessed on a case-by-case basis, and it also depends on the nature of the regulatory measure. ESMA clarifies in its Q&As on the MAR that institutions must examine whether the communicated results of the Supervisory Review and Evaluation Process under Article 97 of Directive 2013/36/EU¹⁷ or the determination of the institution-specific minimum MREL¹⁸ requirements under Directive 2014/59/EU might constitute inside information.¹⁹

Due to the wide variety of potential scenarios, it is not possible in this case to produce any exhaustive list or even an assessment. Rather, there is a need to examine on the basis of the relevant individual case whether inside information might have arisen.

Inside information relating to collective investment undertakings

Inside information may also arise with regard to investment funds if the corresponding units have been admitted to trading on a regulated market or are traded on an MTF or OTF on application by or with the approval of the management company.

Examples of potential inside information in this context are circumstances that have a significant effect on the valuation of the assets of the investment fund and hence on the net asset value (NAV) or unexpected circumstances relating to the creation of new units or the redemption of existing units, e.g. circumstances as a result of which no new units of the investment fund concerned can be issued or no units can be redeemed. ESMA has issued Q&As on this subject.²⁰

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