On 14 October 2016, Cyprus enacted the Market Abuse Law No. 102(I)/2016 (the Law) implementing the Market Abuse Regulation 596/2016 (MAR) and abolishing the previous legislation. MAR has strengthened the EU market abuse regime, incorporating a wider range of, and tougher, sanctions. One of the provisions of MAR which attracted a lot of discussion relates to the responsibilities of persons discharging managerial responsibilities within an issuer (PDMR) and the obligations of persons closely associated with them (PCA) in relation to transactions on their own account in the issuer’s shares, debt instruments, derivatives or other linked financial instruments.
MAR applies to financial instruments admitted to trading on a regulated market, traded on a multilateral trading facility or on an organised trading facility and transactions and behaviour relating to such instruments. The regulatory authority in Cyprus for matters relating to MAR is the Cyprus Securities and Exchange Commission (CySec).
Notification Requirements under Article 19 of MAR
A PDMR is defined in MAR as a person within an issuer who is either (i) a member of the administrative, management or supervisory body of that entity, (ii) a senior executive who is not a member of the administrative, management or supervisory body of that entity, who has regular access to inside information relating directly or indirectly to that entity and power to take managerial decisions affecting the future developments and business prospects of that entity.
PCAs include (i) a spouse, or a partner considered to be equivalent to a spouse in accordance with national law, (ii) a dependent child, in accordance with national law, (iii) a relative who has shared the same household for at least one year on the date of the transaction concerned, or (iv) a legal person, trust or partnership, the managerial responsibilities of which are discharged by a PDMR or by a person referred to in any of the three bullet points above, which is directly or indirectly controlled by such a person, which is set up for the benefit of such a person, or the economic interests of which are substantially equivalent to those of such a person.
The issuer must draw up a list of all PDMRs and PCAs and notify the PDMRs of their obligations under Article 19 in writing. PDMRs in turn must notify their PCAs of their obligations under Article 19 in writing and keep a copy of such notification.
PDMRs and their PCAs are required to notify the issuer and CySec of transactions conducted on their own account in the issuer’s shares, debt instruments, derivatives or other linked financial instruments. In turn the issuer must promptly make the information public and no later than three business days after the transaction.
A de minimis exception to notification applies, being a transaction totalling up to €5,000 in a calendar year. The notification obligation applies only to any subsequent transaction once a total amount of €5,000 has been reached. The threshold of €5,000 is calculated by adding (without netting) all transactions referred to above.
It is prohibited for a PDMR within an issuer to conduct any transactions on its own account or for the account of a third party, directly or indirectly, relating to the shares or debt instruments of the issuer or to derivatives or other financial instruments linked to them during a closed period. Note that the restriction applies only to PDMRs.
A closed period means the period of 30 calendar days before the announcement of an interim financial report or a year-end report, which the issuer is obliged to make public according to the rules of the trading venue where the issuer’s shares are admitted to trading or national law. According to the Transparency Law N. 190(I)/2007 (as amended from time to time), an issuer whose home member state is Cyprus is required to publish an annual financial report and a half yearly financial report. A stock exchange where such an issuer has securities admitted to trading may require that additional financial reports are published.
On a strict interpretation of MAR and in cases where the issuer elects to voluntarily publish its financial results quarterly (rather than where such publication is mandatory), there is no requirement to implement a closed period for such voluntary quarterly results, although it is believed that many companies will choose to implement a closed period before such announcements.
The “announcement” is the public statement whereby the issuer announces the information included in an interim or a year-end financial report and the date of the “announcement” marks the end of the thirty-day closed period.
Typically, a Cypriot issuer may publish preliminary financial results in advance of the publication of the final year-end report. In such case difficulties may occur in determining the closed period for the year-end reporting. ESMA has clarified that the announcement of the preliminary financial results may be considered to be the announcement of the year-end report for the purposes of the closed period provided that it contains all the key information relating to the financial figures expected to be included in the year-end report. It would also not trigger another closed period if the information announced in such way changes after its publication.
An issuer may allow a PDMR within it to trade on its own account or for the account of a third party during a closed period either:
- On a case-by-case basis due to the existence of exceptional circumstances, such as severe financial difficulty, which require the immediate sale of shares (Exceptional Circumstances Exception)
- Due to the characteristics of the trading involved for transactions made under, or related to, an employee share or saving scheme, qualification or entitlement of shares, or transactions where the beneficial interest in the relevant security does not change (Characteristics of Trading Exception)
The exception has been further explained in the Commission Delegated Regulation (EU) 2016/522 which clarifies that a PDMR within an issuer shall have the right to conduct trading during a closed period provided that the following conditions are met:
- One of the circumstances referred to above is met
- The PDMR is able to demonstrate that the particular transaction cannot be executed at another moment in time than during the closed period
Exceptional Circumstances Exception
As regards the Exceptional Circumstances Exception, prior to any trading during the closed period, the PDMR shall provide a reasoned written request to the issuer for obtaining the issuer's permission to proceed with immediate sale of shares of that issuer during a closed period.
When deciding whether to grant permission to proceed with immediate sale of its shares during a closed period, an issuer shall make a case-by-case assessment of a written request by the PDMR. The issuer shall have the right to permit the immediate sale of shares only when the circumstances for such transactions may be deemed exceptional.
Circumstances are considered to be exceptional when they are extremely urgent, unforeseen and compelling and where their cause is external to the PDMR and the PDMR has no control over them.
When examining whether the circumstances described in the written request are exceptional, the issuer shall take into account, among other indicators, whether and to the extent to which the PDMR:
- Is at the moment of submitting its request facing a legally enforceable financial commitment or claim
- Has to fulfil or is in a situation entered into before the beginning of the closed period and requiring the payment of sum to a third party, including tax liability, and cannot reasonably satisfy a financial commitment or claim by means other than immediate sale of shares
Characteristics of Trading Exception
The Commission Delegated Regulation (EU) 2016/522 clarifies under which circumstances the issuer has the right to permit a PDMR to trade within a closed period on the basis of the characteristic of trading exception. Broadly this covers employee scheme options or the acquisition of an entitlement to shares which, by virtue of the issuers by-laws, could not be acquired in another period outside the closed period.
Sanctions under the Law
CySec has the power to impose the following administrative sanctions for any breach of Article 19 of MAR:
- An order requiring the person responsible for the infringement to cease the conduct and to desist from a repetition of that conduct
- The disgorgement of the profits gained or losses avoided due to the infringement insofar as they can be determined
- A public warning which indicates the person responsible for the infringement and the nature of the infringement
- Maximum administrative pecuniary sanctions of at least three times the amount of the profits gained or losses avoided because of the infringement, where those can be determined
- In respect of a natural person, maximum administrative pecuniary sanctions of at least €500 000
- In respect of legal persons, maximum administrative pecuniary sanctions of at least €1 000 000
Even though there are still areas of ambiguity with respect to Article 19, MAR has successfully introduced an updated market abuse regime. In practice, Cypriot issuers will have to familiarise themselves with the timing, electronic forms and submission processes that CySec will require for the reporting of PDMR transactions, which may be more onerous than their existing practices.