19.7 Selective Disclosure to Outsiders by the Target 537Due diligence. The absence of other exemptions makes one ask whether the
target can permit buyer due diligence and whether the acquirer can use inside in-
formation disclosed to it in the course of due diligence.
Due diligence, disclosure. The main rule is that disclosure of inside information
is prohibited. The whole purpose of permitting buyer due diligence in a share deal
is to “induce” the acquirer to acquire shares on the basis of information dis-
closed.^113 If this were not the purpose of permitting buyer due diligence, the peo-
ple responsible for permitting it would be likely to breach their fiduciary duties,
duty of care, or similar duties owed to the target company.
Due diligence, use of inside information. Does the prohibition to use inside in-
formation prevent the parties from completing the transaction where inside infor-
mation has been disclosed earlier in the course of due diligence?
The answer can depend on what the potential acquirer will do. Information
might be disclosed to: (1) a potential acquirer who decides not to pursue the acqui-
sition; (2) a potential acquirer who decides to pursue the acquisition; (3) a poten-
tial acquirer who makes a public takeover bid or a merger offer; or (4) a potential
acquirer who makes an offer to a small group of shareholders.
Furthermore, one can distinguish between different situations depending on the
knowledge level of the potential acquirer’s contract party: inside information will
not be in the possession of the other party or parties; inside information will be
disclosed to the other party or parties before the offer is made; or inside informa-
tion will be disclosed when the offer is made.
Walking away. From the perspective of the potential acquirer, it is not prohib-
ited to use inside information by not buying or not selling securities.^114 A party can
thus walk away from the deal without breaching insider trading rules.
Selective offers. On the other hand, the potential acquirer might prefer to com-
plete the transaction by making a selective offer designed to lead to a privately ne-
gotiated transaction between a small number of parties. The exemption discussed
above does not cover selective offers - neither a public takeover bid nor a merger
offer can be selective.^115 Do the rules on inside information apply to selective of-
fers?
The wording of the Directive on market abuse does not expressly permit any
exemption in this case. On the contrary, it implies that it is not the purpose of the
Directive to favour selective offers.
(^113) In Case C-27/02 Engler [2005] ECR I-481, paragraph 61, the ECJ said that one form of
“inducing” a consumer to enter a contract is to address to him in person a letter of such a
kind as to give the impression that a prize will be awarded to him if he returns the
“payment notice” attached to the letter and accepts the conditions laid down by the ven-
dor. In Case C-304/02 Commission v France, the Court considered that the sanctions
provided by the EC Treaty have a common objective of “inducing” a defaulting Member
State to comply with a judgment establishing a breach of obligations.
(^114) Article 2(1) of Directive 2003/6/EC (Directive on market abuse).
(^115) See Article 3(1)(a) of Directive 2004/25/EC (Directive on takeover bids) and Article 42
of Directive 77/91/EEC (Second Company Law Directive).