Inside Information Without an Incentive to Trade? What's at Stake in Lafonta v. AMF

Abstract

The term “inside information” is key to both the EU insider trading prohibition and the European continuous disclosure requirement. Artt. 2-4 Market Abuse Directive (MAD) prevent market participants from trading on, disclosing, and making investment recommendations on the basis of inside information. Art. 6 MAD requires issuers to publicly disclose any inside information which directly concerns them unless such disclosure would prejudice the issuers’ legitimate interests. In both contexts, the term inside information has the same legal definition, found in Art. 1 no. 1 MAD and Art. 1(1) of Directive 2003/124/EC. Recently, the French Cour de cassation submitted an interesting question to the European Court of Justice (ECJ, the “Court”) for a preliminary ruling, asking, in essence: Can there be inside information if the information does not provide an incentive to trade, i.e. can information be regarded as inside information if it does not allow an unambiguous prediction as to whether the market price will go up or down if it is publicly disclosed? This article attempts to answer that question from comparative, economic and dogmatic perspectives. It seeks to show that the ECJ must limit the concept of “inside information” to such information that gives market participants an incentive to trade on it, as otherwise the Court would contravene the policy considerations of MAD’s principle of equal access, contradict its own ruling in “Spector Photo Group” and harm the efficiency of European capital markets.