19.4 Selective Disclosure Internally 531This created a dilemma. When the banks converted their loans into shares, IFIL
might have to buy more shares, probably at a premium, to avoid losing control of
Fiat. But if IFIL increased its holding, it might have to make a mandatory bid for
the remaining shares in cash, something the Agnellis could not afford to do.
IFIL solved the problem by buying enough shares from Exor, its sister com-
pany, to retain control on the day the banks converted their loans into shares. Exor
in turn received the shares on the same day from Merrill Lynch under a prior eq-
uity swap. According to its original terms, the swap was to be settled in cash; on
the settlement day, however, the parties agreed on physical delivery. Was the
transaction in fact a call option from the beginning (which could have triggered a
duty to make a mandatory bid) or a cash-settled contract for difference (which
would not have had such an effect)? The CONSOB, the Italian securities regula-
tor, believed that it was a case of the former.^71
19.4 Selective Disclosure Internally
The main rule is that it is prohibited to disclose inside information selectively.
However, internal decision-making requires selective disclosure. In practice, the
issuer can benefit from exemptions that apply to selective disclosure and internal
decision-making under the Directive on market abuse.
Inside information. Inside information is a broad concept. For example, infor-
mation can be “of a precise nature” and inside information even where informa-
tion concerns a process which occurs in stages. Each stage of the process as well
as the overall process could be information of a precise nature.^72 Information
about the internal decision-making of the acquirer can thus be inside information
and information disclosed selectively by a corporate body to another corporate
body or managers inside the firm in the course of this process can also be inside
information.
Permitted disclosure. Generally, selective disclosure to a third party is not pro-
hibited under the Directive on market abuse when it is made to a person “in the
normal course of the exercise of his employment, profession or duties” and will
not trigger a duty to make the information public if the person receiving the in-
formation owes a duty of confidentiality.^73
Disclosure to the issuer’s own people is in effect governed by a similar confi-
dentiality requirement.^74 The issuer must also: establish effective arrangements to
ensure that only those who require inside information for the exercise of their
(^71) Still in the driving seat, The Economist, October 2005. For legal proceedings that re-
sulted from this case, see Zetzsche DA, Continental AG vs. Schaeffler, Hidden Owner-
ship and European Law - Matter of Law or Enforcement? CBC-RPS No. 0039 (October
2008). Available at SSRN.
(^72) CESR, Market Abuse Directive. Level 3 – second set of CESR guidance and informa-
tion on the common operation of the Directive to the market (July 2007).
(^73) Articles 6(3) and 3(a) of Directive 2004/25/EC (Directive on takeover bids).
(^74) Article 6(2) of Directive 2004/25/EC (Directive on takeover bids).