Disclosure
1. Economic background, classification and terminology
Disclosure serves the purposes of both information and transparency. In private law, it is mainly due to information asymmetries that disclosure gains importance. As opposed to the neoclassical standard model, private actors are not completely informed. In general, information is not only incomplete, but often unevenly distributed. This phenomenon may indeed have desirable effects as it creates, eg, incentives for technical innovations. On the other hand, that information asymmetries may also result in market failures is now an established insight in informational and new institutional economics. As a consequence of these market failures, misallocations and welfare losses are to be observed (see 4. below). The specific preconditions under which these negative consequences prevail, however, are uncertain.
The legislature can apply different means if market failures are expected to result from information asymmetries. One possibility is to introduce mandatory substantive rules in order to protect the less-informed party (eg by prohibiting specific arrangements or by providing for judicial review). Another possibility, however, is to state an obligation for the better-informed party to pass certain information along. Such information rules are mandatory as well, but they do not state any material standard. Private actors maintain the freedom to choose any suitable legal arrangement; nothing but the disclosure of information is mandatory. This instrument aims to enable market participants to take informed decisions themselves and to negotiate arrangements that effectively correspond to their actual preferences. This information model is credited, above all, with the advantage that it preserves private autonomy as far as possible while (ideally) also providing for an effective and targeted remedy against market failure.
Information rules are to be found in various areas of law (information obligations (consumer contracts); information obligations (insurance contracts); mandatory disclosure (securities markets); information obligations (employment contracts); accounting). They consist of two characteristic elements. On the one hand, they state an obligation to give information; on the other hand and as an accompanying measure, they ensure trustworthiness of this information eg by providing for a binding effect on the information that is given, liability for wrong information, or independent verification (secondary information rules).
Disclosure constitutes a specific form of information, having the distinction of the number of recipients. As opposed to other obligations to inform that cover only specific contractual partners or, at least, a clearly defined group, disclosure rules state an obligation to pass information along to an indefinite, open circle of recipients. This distinction, however, is not always clear-cut. For example, even though the circle of shareholders as recipients of corporate information may be well defined at any given time, it is rather large and very dynamic over the course of time. Some disclosure rules, however, state obligations to deliver information or at least to make it accessible to literally everyone (publication in a registry or via specific means of communication). The borderline therefore depends on the means and format of information as well. In any event, many parallels can be drawn between disclosure and other information obligations, not only in a functional perspective (reduction of information asymmetries), but also with respect to the structural requirements. Ultimately, the legislature must not only define which information needs to be disclosed, but also the persons in charge as well as format and modalities.
2. Contract law (including labour and banking contracts)
Contract law is dominated by the privity of contract. As a consequence, obligations to provide information to the other contracting party are the typical regulatory instrument. This instrument is, at the same time, a characteristic feature of European contract law. Disclosure obligations to a broader circle of recipients, on the other hand, are rare but by no means entirely excluded.
Within ongoing contractual relationships, however, broad disclosure is only conceivable in instances of similar contractual relationships with a multitude of parties (typical bulk transactions or ‘bundles’ of contracts). Toeholds can be found in labour law, where the European legislature occasionally provides for broad disclosure (eg Art 30 Dir 2006/54, but only with respect to legal rules—and not private information—which are to be brought to the attention ‘by all suitable means and, where appropriate, at the workplace’, see also Art 10 Dir 89/391). In the event of substantial changes having an impact on the contractual relationship, however, the legislature counts on information transfer by employee representatives as information intermediaries (in the event of transfers of undertakings according to Art 7 Dir 2001/23; similarly, in the event of collective redundancies according to Art 2(3) Dir 98/59; and in the event of takeover bids according to Art 6(1) Dir 2004/25; see also, more generally for labour management relations: Arts 4 ff Dir 2002/14; Art 10(2) Dir 2009/38). This form of information transfer might seem favourable for bundled contracts in general, as it provides for information that is more precisely tailored according to the needs of each individual recipient.
A broader scope of application for disclosure rules, however, is to be found in the period before a contract is concluded, with respect to pre-contractual information (information obligations (consumer contracts)) and advertising. Disclosure of this kind of information, however, tends to be targeted at entire markets and (not yet) at specific contractual parties. The subtle borderline between disclosure and other information obligations is best illustrated by various rules on banking contracts. For instance, the former Art 3 of the Directive on Cross-Border Credit Transfers (Dir 97/5, now replaced by Dir 2007/ 64) provided that specified information on conditions for cross-border credit transfers had to be made available not only to actual, but also to all ‘prospective customers’ (similar: Art 19(3) MiFID (Dir 2004/39), see also in general contract law, the even more comprehensive Art 3(1) of the former Time-Share Directive (Dir 94/47, ‘any person requesting information’), now replaced by Dir 2008/122). The information obligations of the new Consumer Credit Directive, reaching particularly far in substance, provide for a similarly broad distribution (Dir 2008/48, Arts 5 ff ‘in good time before the consumer is bound’; similar in general contract law: Art 4 Distance Selling Directive (Dir 97/7); Art 3(1) Directive on Distance Contracts for Financial Services (Dir 2002/65); see also Art 10 E-Commerce Directive (Dir 2000/31)).
All of these rules, however, do not effectively provide for a market-wide disclosure because market participants do not need to be informed unless there is an intention to enter a contractual relationship with them. Yet the circle of information recipients has been drawn particularly widely and includes any potential partner on the relevant market. Obviously, the legislature was worried that the relevant markets themselves would not arrange for sufficient information transparency and efficiency. For the information provider it might, under certain conditions, be even less burdensome to distribute the relevant information more widely. Accordingly, Art 22 Services Directive (Dir 2006/123) now provides for a choice between individual information ‘in good time’ (for some information only at the recipient’s request) and broad disclosure (information in advertising documents or general accessibility, on site or electronically). These pre-contractual information obligations are partly supplemented by rules on advertising. As far as advertisements specify costs at all, the Consumer Credit Directive, for instance, requires a whole range of general information to be included in order to facilitate comparisons of terms and conditions (Art 4; similarly in general contract law Art 3(2) Package Travel Directive (Dir 90/314)). This rule effectively provides for a broad disclosure but only if a large number of potential customers is addressed with specific price information in any case. Therefore, this rule may be conceptualized as a specific corollary of the prohibition of unfair commercial practices (see Art 7(1) Unfair Commercial Practices Directive (Dir 2005/ 29)). As opposed to earlier drafts (notice on the premises), the Consumer Credit Directive does not provide for a comprehensive, market-wide disclosure.
3. Company law (including accounting and structural changes)
In company law, information to be disclosed is mainly targeted at two different groups: (potential) creditors who intend to enter into a contract with the company and therefore need to know about liabilities and solvency, and shareholders. For the latter, corporate information is important in order to assess entrepreneurial perspectives but also to protect against opportunistic behaviour (by managers or major shareholders). For creditors, the respective information is relevant in all companies with limited liability; for shareholders, it is particularly relevant in larger, public companies. European company law accordingly distinguishes between different disclosure regimes. Still, the divergence creates a potential conflict that can be witnessed in the legal framework as well as in political discussions, namely with respect to accounting.
A key element of corporate disclosure is the Disclosure Directive (Dir 68/151, First Company Law Directive, now replaced by Dir 2009/101). It gives an obligation for all limited liability companies to disclose material information about the company in the company register (disclosure by entry into a registry) in order to enable creditors to gather information about the most important key details. The directive is supplemented by the Capital (Second) and the Annual Accounts (Fourth) Directives (Dir 77/91 and Dir 78/660). The former concerns information that is particularly relevant to investors (shareholders) and concerns (as a consequence) only public limited companies, whereas the Fourth Directive governs details of accounting and extends disclosure to all limited liability companies (information also relevant for creditors). The most important items to be disclosed include eg the instrument of constitution (including the articles of association, the content of which are specified by the Second Directive), the composition of corporate bodies and their power of representation (according to the Second Directive also the procedure of appointment and the allocation of powers), the subscribed capital, manner of accounting and corporate seat (according to the Second Directive also the legal form and objects of the company), as well as terms of winding up, instances of nullity and termination by liquidation. This short enumeration demonstrates that the legal rules distinguish between the disclosure of information relevant for creditors and for shareholders. Additional rules concern the means and format of disclosure, namely the entry into a multilingual, now European-wide available registry and its accessibility (an extract from the register, a publication or an indication on business correspondence). A third regulatory focus concerns supplementary, secondary information rules, namely on the effects of disclosure by entry into a registry. The directive provides mainly for negative effects (failure to register prevents the party responsible from invoking legal changes, for instance), but allows also for some positive effects (incorrect register can be invoked, but only in the absence of better knowledge). Rules on responsibilities for disclosure and sanctions have to a large extent been left to the national legislatures. With respect to accounting, however, the Annual Accounts Directive provides for audit obligations (auditor).
Furthermore, disclosure rules play an important role with respect to structural corporate changes (mergers and acquisitions/split/transformation). Again, the rules distinguish between information that is relevant for creditors and/or shareholders. The basic model is contained in the Merger Directive (Dir 78/855, now replaced by Dir 2011/35). The boards of both companies need to prepare two written information documents (draft terms and merger report). Both documents supplement each other: the draft terms inform on the key facts of the transaction; the report explains these facts together with the basis of valuation from a legal and financial perspective. A differentiated regime applies for the manner and form of disclosure. The draft terms are relevant for creditors as well; they need to be disclosed to the general public in the company register. Shareholders, on the other hand, may have an interest in both documents and are therefore granted respective inspection rights, covering also further documents of mandatory disclosure as well as an independent auditor’s report (supplementary examination of information). The basic model applies with some adaptations to all other structural corporate changes that are regulated on the European level and also to the transfer of seat and the formation of the European company (Societas Europaea) (exception: creation of a joint subsidiary). Modifications mainly concern the specific content of the information to be disclosed but also some supplementary information rules (none or restricted examination of information concerning the transfer of seat and conversion of the European company).
More important variations of the basic model may be observed in takeover law. Takeovers are not necessarily arranged by mutual consent between the boards of both companies concerned. This is why the rules provide for two separate information documents (offer document by the bidder and opinion document by the board of the target). Given that both companies will continue to exist as separate legal entities, disclosure of information on takeovers is relevant not so much for creditors, but mainly for shareholders (of the target company). Above all, those shareholders do not take a collective decision as members of the company (no decision of the general meeting on the takeover), but on an individual basis by the sale of shares on securities markets. Therefore, the modalities of disclosure are different as well. Because the market mechanism can generally be expected to lead to fair results (Richtigkeitsgewähr, as coined by Walter Schmidt-Rimpler), there is no provision for an independent examination. Furthermore, disclosure requires the relevant documents to be made available on regulated markets (Art 6(2), (8) Takeover Directive, Dir 2004/25). Notwithstanding all functional similarities with other structural corporate changes, information about takeovers can ultimately be qualified as a form of securities market disclosure.
4. Disclosure on securities markets
Disclosure contributes to allocative efficiency on securities markets by enhancing the efficiency of information markets (dual market hypothesis). As opposed to product markets, disclosure plays a much more important role given that the quality of traded securities cannot be assessed independently (so-called credence goods). This phenomenon accordingly gives rise to the risk that securities of higher quality will be systematically driven out of the market (market for lemons). Furthermore, there are important information asymmetries between management and shareholders, giving rise to a significant risk of opportunistic behaviour and agency costs. In this perspective, there is a dual threat of market failures. Therefore, securities markets are subject to particularly intensive disclosure rules (even though their theoretical underpinning and practical scope remain controversial). We can distinguish between three different forms of securities market disclosure.
When securities are first admitted to a regulated market, at the latest with a public offer, a prospectus needs to be issued (prospectus liability). This prospectus serves the information needs of potential investors, but it is also a mode of advertising. The Prospectus Directive (Dir 2003/71) contains details with respect to the content of the prospectus (including obligations to issue supplements, if necessary), but also with respect to the means and format of disclosure (generally in a widely circulated newspaper or, alternatively, by deposit at the stock exchange and by making it known publicly where it can be obtained). It also provides for supplementary information rules in order to safeguard trustworthiness: a (formal) examination and approval of the supervisory authority is required, and a European framework regime for prospectus liability applies. Given the internationalization of securities markets, it is crucial that prospectuses be able to circulate all over Europe. This is why a notification regime has recently been introduced. Its language regime is particularly controversial because the published information must be comprehensible for the information recipient (see Art 19 Prospectus Directive, Dir 2003/71, transparency).
Secondly, ongoing disclosure obligations apply to securities markets. These obligations have become significantly more intensive under the Transparency Directive (Dir 2004/109, mandatory disclosure (securities markets)). Given that information based on accounting needs to be made available to investors on capital markets quickly and on a permanent basis, short notice periods (‘as soon as possible’, at the latest, respectively, after two or four months) are provided as well as an obligation to ensure that the documents remain available to the public for five years. Furthermore, reliance on the relevant information is once again enhanced: those in charge must explicitly state that the financial statements have been prepared carefully and, thereby, necessarily take responsibility for their accuracy. Moreover, at least a European minimum standard for the liability of the issuer or the member of management will henceforth apply. Significantly, more recent information must supplement the accounting documents. In addition to the annual financial report, a half-yearly financial report needs to be issued containing condensed financial information during the period (including a statement of responsibility), as well as either a quarterly statement or an interim management statement (explaining all material events and their impact on the general financial situation).
In the third place, ad hoc disclosure obligations apply on securities markets (mandatory disclosure (securities markets)). On the one hand, the ‘disclosure of changes in major holdings’ requires shareholders and issuers to report every instance where the specified thresholds of voting power have been crossed (including attributed shareholdings of third parties). This two-step reporting procedure leads to comprehensive disclosure. In addition to this well-defined obligation, a much more general, so-called ad hoc disclosure obligation applies according to the Market Abuse Directive (Dir 2003/6). This obligation serves not only to reduce information asymmetries, but also to prevent a specific form of their exploitation, namely insider dealing. The obligation is triggered by any information of a precise nature that has not been made public, relating directly or indirectly to the issuer and which, if it were made public, would be likely to have a significant effect on the prices of the issued financial instruments. Such information must be disclosed immediately and be available for a reasonable (but not further-specified) period of time, for instance, on the issuer’s website.
Literature
Klaus J Hopt, Der Kapitalanlegerschutz im Recht der Banken—Gesellschafts-, bank-, und börsenrechtliche Anforderungen an das Beratungs- und Verwaltungsverhalten der Kreditinstitute (1975); Paul G Mahoney, ‘Mandatory Disclosure as a Solution to Agency Problems’ (1995) 62 University of Chicago Law Review 1047; Holger Fleischer, Informationsasymmetrie im Vertragsrecht (2001); Hanno Merkt, Unternehmenspublizität—Offenlegung von Unternehmensdaten als Korrelat der Marktteilnahme (2001); Guido Ferrarini, Klaus J Hopt and Eddy Wymeersch (eds), Capital Markets in the Age of the Euro—Cross-Border Transactions, Listed Companies and Regulation (2002); Wolfgang Schön, ‘Corporate Disclosure in a Competitive Environment’ (2006) 6 Journal of Corporate Law Studies 259; Charlotte Villiers, Corporate Reporting and Company Law (2006); Stefan Grundmann and Florian Möslein, European Company Law—Organization, Finance and Capital Markets (2007); Florian Möslein, ‘Das Europäische Recht unternehmerischer Strukturmaßnahmen’ (2007) Juristische Arbeitsblätter 833; Peter Mattil and Florian Möslein, ‘The Language of the Prospectus—Europeanisation and Investor Protection’ 23 (2008) Butterworths Journal of International Banking and Financial Law 27.
