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The Lamfalussy process has led to the adoption and implementation of four central Level 1 Directives: the Market Abuse Directive155, the Markets in Financial Instruments Directive156, the Transparency Directive157, and the Prospectus Directive158, and numerous Level 2 directives. The result is a dense European legislation which approximates full harmonization and has, in large part, established a level playing field in capital markets regulation. Given the positive experiences, the Lamfalussy process has also been extended to related legislative fields, such as the supervision of banking services, insurances and pension funds and financial conglomerates.

2.6.2  Prohibition of Insider Trading

According to Sec. 14 WpHG market participants must not (1) trade with insider securities on the basis of inside information, (2) disclose or make available such inside information to another person without the authority to do so and (3) recommend another person to trade with insider securities on the basis of their own knowledge of the inside information, i.e. recommending such securities without actually disclosing the information.

‘Insider securities’are securities admitted to trading on a German organized market, an organized market in another EU/EEA Member State or which are traded on the open market (Freiverkehr).159 Furthermore, the insider trading rules also apply to other financial derivatives such as stock options, cash-settled equity swaps, financial forward contracts and other forward contracts entailing a commitment to acquire or dispose of securities if both the derivatives/forward contracts and the corresponding securities are admitted to trading on an organized market within the EU or EEAor are traded in the open market.

According to the legal definition of Sec. 13 WpHG, ‘inside information’is specific information relating to insider securities or an issuer of insider securities, if such information has not yet been published but would be likely to have a significant effect on the price of the insider security if it were. Information is deemed likely to have such effect if a reasonable investor would take the information into

155  Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on insider dealing and market manipulation, OJ 2003 L 96/16.

156  Directive 2004/39/EC of the European Parliament and of the Council of 21April 2004 on markets in financial instruments, OJ 2004 L 145/1.

157  Directive 2004/109/EC of the European Parliament and of the Council of 15 December 2004 on the harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market, OJ 2005 L 390/38.

158  Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading, OJ 2003 L 345/64.

159  See Sec. 12 WpHG; an ‘organized market’within the meaning of the WpHG is a market which is regulated and supervised by state-approved bodies, is held on a regular basis and is directly or indirectly accessible to the public, see Sec. 2 para. 5 WpHG.

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account for investment decisions. A valuation based solely on information about publicly known circumstances is not inside information, even if it could have a significant effect on the price of insider securities.

Naturally, the exact scope and limits of inside information and the prohibition of insidertradingcanbedifficulttodetermine.InM&Atransactions,forexample,usually a due diligence review takes place in the course of which the vendor discloses internal documents to the potential buyer. Such disclosure could well be assessed as a violation of Sec. 14 para. 1 no. 2 WpHG (disclosure of inside information to third parties). However, most scholars would argue that such disclosure in the course of a due diligence review does not constitute a disclosure ‘without the authority to do so’within the meaning of said provision, since it serves the interest of the company and does not jeopardize the functionality of the market.

2.6.3  Publication of Inside Information

According to Sec. 15 para. 1 sentence 1 WpHG, inside information, which directly concerns a domestic issuer of financial instruments, shall be published without undue delay, i.e. as soon as reasonably possible. The purpose of this so-called ‘ad-hoc disclosure requirement’is to ensure that the public receives the respective information as soon as possible to make insider trading impossible. An issuer is deemed ‘directly concerned’ within the meaning of this provision if the inside information relates to the developments within the issuer’s sphere of activity, e.g. the company enters an M&A transaction. After having published the inside information, the issuer is also obliged to file the information with the competent Commercial Register.

A failure to make a publication in contravention of Sec. 15 para. 1 sentence 1 WpHG, i.e. incompletely, incorrectly or not timely, constitutes an administrative offence under Sec. 39 para. 2 no. 5 lit. a WpHG, punishable by a fine of up to EUR 500,000.00. Furthermore, individual shareholders may be entitled to damages if the information was not published (Sec. 37bWpHG) or the publication was incorrect (Sec. 37c WpHG).

Especially with regard to negotiations in the run-up to M&A transactions, it can be difficult to determine whether and when concrete information is given that triggers the ad-hoc disclosure obligation. Of course, the fact that the issuer enters such negotiations does not necessarily mean that an agreement can be reached and that the transaction will actually take place. However, depending on the size of the transaction, the fact that the issuer entered into negotiations can, as such, already be likely to have a significant effect on the stock exchange or market price of the issuer’s securities. Moreover, according to Sec. 13 para. 1 sentence 3 WpHG the definition of inside information also applies to future circumstances, e.g. the signing of the M&A contract, if such circumstances may reasonably be expected to come into existence in the future.

In order to protect legitimate business interests, Sec. 15 para. 3 WpHG allows an issuing company to exempt itself from immediate disclosure (Selbstbefreiung). According to this provision, the issuer is exempt from the publication requirement

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if and as long as such exemption is necessary to protect its legitimate interests, provided there is no reason to expect a misleading of the public and the issuer is able to ensure that the inside information will remain confidential. As soon as such necessity is no longer given, the issuer has to effect the publication without undue delay. For instance, the issuer may withhold a publication if otherwise current negotiations would be adversely affected and thus interests of shareholders and investors would be compromised.160

2.6.4  Share Ownership Notification Rules

Shareholders of a listed stock corporation whose home county is Germany are required to notify the Federal Security Supervisory Authority and the corporation if they acquire or dispose of shares of that company and their shareholding hereby reaches, exceeds or falls below certain thresholds.161 According to Sec. 21 para. 1 WpHG the relevant thresholds are 3, 5, 10, 15, 20, 25, 30, 50 and 75% of the total voting rights existing in the company. The notification has to be made without undue delay and within four trading days at the latest. The notification period begins at the point when the shareholder learns (or in consideration of the circumstances must have learned) that her/his percentage of voting rights has reached, exceeded or fallen below the above-mentioned thresholds. Since the law assumes that the shareholder learns of this two trading days after reaching, exceeding or falling below the threshold, a maximum period of six trading days applies. The notification must also be published and filed with the Commercial Register.162

In determining whether or not a shareholder reaches, exceeds of falls below a threshold,. voting-rights held by third parties may, under certain circumstances, be attributed to the shareholder in question.163 For example, according to Sec. 22 para. 1 WpHG shareholdings of subsidiaries are attributed to the parent company for the purpose of the notification requirement; shareholdings of the parent company and the subsidiary are added. The reason for such attribution is to prevent the shareholder from circumventing the notification requirements by means, which— from a strictly formal legal perspective—do not or do not yet constitute a direct shareholding but which have a similar or identical economic effect. Otherwise, for instance, a shareholder holding only 2.9% of the shares of a corporation directly would not be obliged to make a notification although she/he might be entitled to another 27.1% by way of stock options or forward contracts with several banks. If such acquisition rights were not attributed to the shareholder164, she/he would be able to ‘silently’ build up a controlling majority without the corporation or other market participants being forewarned.

160  Detailed requirements for this self-exemption procedure are regulated in the WpAIV. 161  For further detail see van Kann et al. 2007, pp. 255 et seq.

162  See Sec. 26 WpHG.

163  See Sec. 22 WpHG.

164  See Sec. 22 para. 1 no. 5 WpHG.