This article has been written by Shaswat Kashyap and Mahika Suri, 3rd Year B.A. LL.B students at Gujarat National Law University
Introduction
As noted by Oxford Reference, rumours refer to untrue tales that circulate through a community via verbal communication, often impacting the actions of collective groups. In the securities market, market rumours and media leaks have been a recurrent issue. These rumours can lead to significant fluctuations in share prices, causing harm to numerous public shareholders due to information asymmetry. To address this, the Securities Exchange Board of India (“SEBI”) (Listing Obligations and Disclosure Requirement) Regulations 2015 (“LODR Regulations”) has a provision [Regulation 30] wherein the listed entities are required to disclose material events or information to the stock exchanges.
Recently, in a slew of notifications and to strengthen the corporate governance and disclosure framework, the SEBI came up with SEBI LODR Regulations (Second Amendment) Regulations, 2023. SEBI has introduced mandatory requirements under Regulation 30 read with Schedule III of the LODR Regulations (“Market Rumors Amendment”). Under Regulation 30 (11), India’s top 100 listed entities (based on market capitalization), with effect from October 1, 2023, would have to mandatorily confirm, deny, or clarify market rumours in mainstream media. This requirement extends to the top 250 listed entities with effect from April 1, 2024. The rumours should not be general but that of an impending specific material event/information circulated amongst the investing public.
After a listed company becomes subject to obligations, it must promptly confirm, clarify, or refute any reported events or information, but no later than 24 hours after such reporting. Additionally, once the listed company confirms a reported event or information, it must also provide updates on its current status.
The genesis of the market rumours amendment can be traced back to Reliance Industries Limited (“RIL”) v. SEBI, where the SEBI ruled that RIL should have provided clarification to the public under Regulation 30(11) of LODR once they become aware of selective information made available by way of the Financial Times article “Facebook eyes multi-billion dollar stake in Reliance Jio.” [This ruling has been stayed by the SAT interpreting whether the word “may” in relation to “shall” under Regulation 30(11) (before amendment) is mandatory or directory.] One of the primary concerns highlighted by the SAT pertained to the practicality of a publicly traded company responding to the wide array of information disseminated globally.
The SEBI’s energetic, proactive and constructive approach to amending and curbing such practices is laudable. The article explores concerns surrounding public mergers and acquisitions (M&A) deals and shareholder interests. The article goes on to suggest considerations for regulatory improvement to strike a good balance between ensuring information symmetry and maintaining market stability.
Cross-jurisdictional analysis
Consistent with the Indian requirement, foreign jurisdiction stock exchanges have always maintained that companies have a duty to promptly notify the investing public of material news and developments. This principle has been incorporated in the NYSE Manual. The “frank and explicit” response to rumours is there in Para 202.03 of the NYSE Listed Company Manual. The rule requires companies to clarify, confirm or deny rumours and provide additional information if confirmed.
Similarly in the UK, the “Put Up or Shut Up” (“PUSU”) Rule, under the Takeover Code requires the bidder to announce a fully financed bonding offer within 28 days or announce it will not be making an offer- in which case the bidder would be subjected to standstill.
In the EU, the requirement of public disclosure of inside information is stipulated by Article 17 of the Market Abuse Regulation. Further, as per para 17.4 (to protect the listed entity’s legitimate interests without harming investors) or para 17.5 (to protect the stability of the financial system), an issuer can delay the disclosure of inside information. However, if the delayed disclosure of inside information no longer ensures confidentiality, the issuer must promptly make it public (para 17.7).
Unlike Indian Regulations, the above rules are not limited to just the top 250 companies.
Repercussions for M&A Deals
In a post-truth world, this could have been great for public shareholders, but there are various concerns bothering the listed entities. For instance, if sensitive information such as a term sheet is leaked before finalization and without binding documents, it could jeopardize the deal. Leaking information about a potential transaction and confirming it prematurely can cause significant volatility in the share price and put the deal’s viability at risk. Deal prices are not something that can be set upfront. So premature announcement can influence the deal price and can make the deal unviable. In public M&A transactions, price certainty and the success of a deal are contingent on the deal’s confidentiality. Further, unlike the UK PUSU Rule (as discussed above) there is no standstill period that is prescribed in the Market Rumours Amendment. So, if the deal is confirmed (bona fide) and the deal falls through, the listed entity can be held liable under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, or if a prospective buyer denies a market rumour and few weeks after announcing the same deal can be seen as fraudulent and unfair trade practice under FUTP [Regulation 4(2)(f) of the FUTP]. This was also flagged in V Natarajan v. SEBI, wherein it was held that spreading fake news to influence securities trading would constitute unfair trade practice.
Moreover, individuals with ulterior motives can intentionally propagate rumours about mergers and acquisitions to capitalize on the anticipated fluctuations in stock prices, even when the involved companies have no genuine merger plans. At times, there can be an artificial market created by the media and individuals involved that does not accurately reflect reality.
In the course of their operations, companies may encounter situations where the outcome is uncertain and rumours may surface at any stage, whether before or during negotiations. It is important to exercise caution when responding to such rumours, as premature acceptance or denial could have unintended consequences for the company and its shareholders. While it may seem like a good idea to address rumours in the interest of public shareholders, doing so could actually lead to negative commercial consequences, ultimately harming those same shareholders that regulatory measures aim to safeguard.
Chartering foreign waters
The recent amendments to Regulation 30(11) of the SEBI LODR Regulations have added further obligations to carefully craft the answer to the rumours. However, the absolute language of the amendment can cause problems, and some more leeway can be provided if the deal is confidential, or the negotiation is incomplete. For example, Rule 703(4)(a) of the Singapore Exchange requires an issuer to provide timely disclosure of material information in accordance with the Corporate Disclosure Policy, and there are exceptions under this Rule (See here).
Furthermore, the amendment is unclear about when and how much information should be disclosed. SEBI can set a standard for ascertaining ‘specific rumours’ and reference can be taken from the case of Greenfield v Heublein, Inc., where a clear guideline was established regarding the obligation to reveal information. The Court ruled that discussions related to a merger need not be disclosed until a preliminary agreement has been reached.
While SEBI’s efforts to curb such practices are laudable, there are a few course corrections that can be done by drawing from foreign jurisdictions.
Conclusion
Another cause of concern is the expansive definition of mainstream media, as both domestic as well as foreign newspapers/news channels are covered, and companies would also be required to keep track of content published in newspapers which are not available in the digital market. Further, covered listed entities would have to develop an elaborate AI/technology base. It is also unclear if digital social media constitutes the ‘mainstream media’. In the Hindenburg-Adani row, the Adani Group denied any rumours on Twitter.
M&A transaction information leakages can affect negotiations, deal value, and the market capitalization of the bidder and hence it is crucial to incorporate robust provisions in the NDA, to ensure that confidential deal details are exclusively accessible to a specific group of individuals within the company. Although the NDA requirements do not serve as a defense mechanism in the case of the company not confirming or denying market rumours, safeguarding sensitive information remains of utmost importance. Although there are valid concerns regarding the amendment, it should be noted that changes in Regulation 30(11) align with global regulations. In the face of rumours or pending negotiations, any response other than full disclosure or “no comment” will add to, rather than correct, the current market inefficiencies.