New judgment from the Supreme Court of Norway on the insider information definition

Background

On 15 March 2022, the Supreme Court heard a case between the Irish company SJI Equities Ltd., controlled by the investor Arne Vigeland, and the directors of the formerly listed company RenoNorden ASA. Thommessen is representing the directors and pleaded the case before the Supreme Court.

The underlying case has been pending before the courts since 2017, and one of the issues raised in the said case is whether the Board of Directors should in December 2016 have issued a stock exchange announcement to the market, disclosing that there was a risk that the company would be in breach of a loan agreement covenant at the end of the fourth quarter. This issue brought to fore the question of how likely it would have to be that a future event would occur for it to fall within the scope of the duty of disclosure. The Court of Appeal concluded that a preponderance of probabilities is required, and found in favour of the directors. It was the Court of Appeal’s application of law in this regard that was brought before the Supreme Court. In its judgment, the Supreme Court concluded that the minimum probability threshold for the potential occurrence of a future circumstance to constitute insider information is "close to a balance of probabilities, but somewhat lower". As a result the Court of Appeal judgment being set aside, with the case being referred back to the Court of Appeal for a new, limited hearing. The Supreme Court addressed neither the issue of whether the directors had acted in breach of their duty of disclosure in this specific case, nor the significance of the information that was actually available in the market.

Legal premises

Since the conduct alleged to have given rise to liability for damages dated back to December 2016, the Supreme Court reviewed the issue on the basis of the former Section 3-2, Sub-section 2, of the Securities Trading Act. The said provision implemented Article 1 (1) of the Market Abuse Directive; 2003/6/EC ("MAD"), and Article 1 of Commission Directive 2003/124/EC. MAD and the said Commission Directive have subsequently been replaced by the Market Abuse Regulation; EU/596/2014 ("MAR"), and Section 3-2 of the Securities Trading Act has been repealed, but the insider information definition has been maintained in MAR Art. 7. The relevant wording is:

(…) [I]nformation 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 (…).

The issue of what probability threshold applies for purposes of determining whether information on the potential occurrence of future events shall be considered insider information has been discussed in Norwegian and European practice and theory. The key source of law is the judgment delivered by the European Court of Justice in Geltl. v. Daimler AG in 2012 (C-19/11), in which the Court of Justice stated that a "high probability" of the future event occurring is not required, although future events the occurrence of which is "implausible" do indeed fall below the applicable probability threshold. The European Court of Justice concluded, furthermore, that there must be "a realistic prospect that [the circumstances or events] will come into existence or occur".

The position adopted by the Supreme Court

The Supreme Court judgment implies that there is no longer a requirement for a preponderance of probabilities in order for information on the potential occurrence of future events to constitute insider information. It would appear that the Supreme Court is basing its conclusion on the wording of the Securities Trading Act and the Directive, and on the premise that it is reasonable to assume that the lawmaker would have used the term "probable" if it had intended to stipulate a requirement for a preponderance of probabilities.

Moreover, the Supreme Court is of the opinion that it can be inferred from the European Court of Justice’s phrasing "realistic prospect that [the circumstances or events] will come into existence or occur" that there must be specific indications that the relevant circumstances or the specific event in question will come into existence or occur, although a preponderance of probabilities is not required. The Supreme Court claims that the considerations underpinning the insider information provisions do not offer any clear guidance on whether a preponderance of probabilities or somewhat less is required, but opines that the so-called "prudent investor" test, which is based on an overall assessment, should be used to determine whether there is insider information. The Supreme Court is of the opinion that this suggests that requiring a probability of somewhat less than 50 percent will suffice.

All in all, the Supreme Court adopts the position that the wording of the Directive and the Regulation, as well as the Geltl judgment, suggests that the minimum probability threshold for the potential occurrence of a future circumstance to constitute insider information is close to a balance of probabilities, but somewhat lower.

Implications for market participants

We are of the view that the Supreme Court has stipulated a new rule on what constitutes insider information, which needs to be observed by all issuing companies and other market participants. It will no longer suffice to assess whether it is "more likely than not" that any given future event will occur – since circumstances that are less than 50 percent likely to come into existence may also constitute insider information. The Supreme Court does not define a specific probability threshold, as it does as mentioned limit its observation to the stipulation that the threshold is "close to a balance of probabilities", thereby making it reasonable to assume that the probability must be close to 50 percent in order for the information to fall within the scope of the duty of disclosure. It is, however, difficult to quantify specific percentages, and issuers and market participants therefore need to make allowances for margins in their assessments. The Supreme Court judgment results in more uncertainty with regard to what constitutes insider information.

The Supreme Court judgment means that we risk the publication of more uncertain information, with an attendant risk of correcting (opposing) announcements, which may ultimately give rise to market manipulation claims if the potential future circumstances disclosed to the market by a company turn out to not come into existence. Another question in the wake of the judgment is how stock exchange announcements on non-probable circumstances should be phrased. One alternative would be to apply the "realistic prospect" norm defined by the European Court of Justice, i.e. to state that there is a realistic prospect that the circumstance will come into existence, but this is not in line with current market practice, and it is difficult to predict how investors will react to this type of phrasing.

It is also of major practical importance that listed companies will now have to publish information on interim steps of multistep processes, even if there is not a preponderance of probabilities that such interim steps will come into existence.