3. Insider Trading Definitions - Securities Amendment Act 1988
Introduction
3.1 This Part raises for consideration some general questions in relation to the existing insider trading definitions contained in the SA Act as well as a number of miscellaneous matters which have been suggested as suitable technical amendments to the provisions of the Act.1
General Issues
3.2 It has been suggested that difficulties in interpretation or application of the SA Act may have hampered the effectiveness of the Act in combating insider trading. These suggested difficulties have generally related to three specific areas which are:
- a lack of clarity in the core definition of "insider" and the circumstances in which an insider is liable for trading;
- the limitation of the SA Act to information about "public issuers", being persons who are or have been parties to a listing agreement with the New Zealand stock exchange; and
- questions about the application of the SA Act to activities involving entities listed outside New Zealand.
Definition of Insider
3.3 The definition of "insider" contained within the SA Act determines the fundamental philosophy of the legislation. At present, there are essentially three ways a person can be an insider within the current definition. First, where a person is or has a relationship with a public issuer (as a director, employee or substantial security holder), and possesses the inside information. Secondly, where a person receives the inside information in confidence, directly or indirectly, from an insider. Thirdly, a person can be an insider simply by being a director or employee of, or substantial security holder in, a person who has inside information.
3.4 It has been argued that the present definition of insider is too broad in some instances, and accordingly, may lead to outcomes that are not intended. For instance, at present the law applies to transactions between informed parties. In an instance where both parties are informed and aware of the confidential information, there is arguably no detriment to either party.
3.5 It has also been argued that the present definition is too narrow in some instances. For example, the current definition applies to a person who has received inside information in confidence from an officer of the public issuer. However, it is unclear as to whether the SA Act applies in a situation where the person has obtained illegal access to the officer's records.
3.6 The issue is also sometimes raised that the SA Act is impractical in its application to situations involving due diligence. For example, an institutional investor may gain inside information about a public issuer in the course of acting as an underwriter in the raising of new capital.
3.7 Liability for tipping in the SA Act raises a further potential issue. At present, the law applies to make an insider who is a tipper liable for the trading of a tippee. Questions have been raised about whether the tipper needs to be aware that the information is inside information, and, if not, whether liability is appropriate in those circumstances.
Limitation to "public issuers"
3.8 At present the law relates only to inside information about a listed issuer. It has been suggested that the law should be extended to apply to all issuers of securities to the public.
Application to entities listed outside New Zealand
3.9 Under the SA Act, a "public issuer" means a person who is party to a listing agreement with a stock exchange. "Stock exchange" in turn is defined as the "New Zealand Stock Exchange; and includes a stock exchange registered under the Sharebrokers Act 1908". These definitions effectively limit the application of the SA Act to insider trading activity in New Zealand listed entities only. It has been suggested that "public issuer" should be extended to include entities listed on exchanges outside New Zealand, for example, the ASX.
Proposed Technical Amendments
Definition of Insider
3.10 The definition of "insider" could be extended to include company officers of related companies of a public issuer, with respect to information "about the public issuer or another public issuer" that is received by the company officers in the course of their employment. In this context, "related company" would have the same meaning as in section 2(3) of the Companies Act 1993.
3.11 This would have two main effects. Firstly, it would expose officers of related companies of public issuers to liability in respect of inside information about the public issuer. Secondly, it would provide a basis on which to extend the protections of the Insider Trading (Approved Procedure for Company Officers) Notice 1996 to company officers of related companies of public issuers. At present this notice may only be used by directors and employees of a company that is a party to a listing agreement.
3.12 Section 3(1) of the SA Act could be amended by inserting the words underlined below:
"For the purposes of Part I of this Act, "insider", in relation to a public issuer, means -
- the public issuer;
- a person who, by reason of being a principal officer, or an employee, or a company secretary of, or substantial security holder in, the public issuer or a related company of the public issuer, has inside information about the public issuer or another public issuer;"
3.13 Section 3(2) of the SA Act could be similarly amended to provide that inside information possessed by a company officer of a related company is presumed to be held by that company officer by reason of that person being a company officer of the related company.
3.14 Section 8(1) of the SA Act could be amended to allow company officers of related companies of the public issuer to take advantage of the approved procedure for company officers, as follows:
"No action shall be brought under section 7 of this Act against a director, or company secretary, or employee of a public issuer or of a related company of a public issuer if ..."
3.15 The Commission would need to consequentially amend The Insider Trading (Approved Procedure for Company Officers) Notice 1996.
Clarify references to spouse or child of insider
3.16 Any Commission insider trading notice establishing an approved procedure under section 8(1) may apply in respect of securities sold or purchased in the insider's "own name or in the name, or on behalf, of that person's spouse or child" (section 8(1)(a)). There has been difficulty in interpreting these words. Presumably the section is intended to apply in respect of securities sold or purchased by the insider either in his/her own name or in the name of his/her spouse or child and either on his/her own behalf or on behalf of his/her spouse or child. If so, the section could say so more clearly, as follows:
- that person; or
- that person's spouse or child; and ...
Extend exception from liability for takeover offers
3.17 Section 8(2) protects the bidding company in a takeover from liability under section 7. The section 10 exclusions from liability for tipping do not make provision for an exception from liability for tipping in a takeover situation.
3.18 It has been suggested that section 10 should include an exception for both the bidding and target companies and any insider of either of them which does an act to which section 9 applies if the purchase or sale results from a takeover offer under the Companies Amendment Act 1963 or any Takeovers Code in force.
3.19 This proposal could remove doubt about liability incurred by recommendations from either company. It is consistent with the policy already found in section 8(2), applying it further to section 9 liability. It may increase certainty for directors in takeover situations and address a noted difficulty with the law.
Chinese Walls exception
3.20 The wording of paragraph (a) of each of sections 8(3), 10, 12(2), and 14 has caused difficulties for firms attempting to establish Chinese Wall procedures. The difficulty lies with the words "arrangements existed to ensure ...". This wording has caused confusion, and it has been suggested that the word "ensure" by itself means that no standard short of absolute separation will suffice to meet the test in section 8(3).
3.21 This confusion could be avoided in each case by replacing the words "arrangements existed to ensure" with "arrangements existed that could reasonably be expected to ensure". This amendment could reduce compliance costs by providing a certain and familiar test against which market participants could measure their procedures. The requirement in paragraph (b) of each provision to the effect that no inside information is held by the decision-maker should be sufficient to ensure that the exception applies only where the arrangements are reasonably effective.
Remove automatic prohibition on managing companies
3.22 Section 382(1)(c) of the Companies Act 1993 provides that where a judgment has been obtained against any person in an action under Part I of the SA Act that person shall not take part in the management of a company for five years without the leave of the Court.
3.23 This provision may be too inflexible, particularly in view of the decision of the Court of Appeal in Colonial Mutual Life Assurance Society Limited v Wilson Neill Limited [1994] 2 NZLR 152 that liability under Part 1 of the SA Act is strict and is not dependent on fault. Section 382(1)(c) could be revoked without affecting the Court's discretion to disqualify any person against whom a judgment has been obtained under Part I from directing or managing a company. This is provided for in section 383 of the Companies Act.
Lawyers appointed under section 17
3.24 It has been suggested that section 17 should expressly allow the lawyer to receive information from the Commission and to consult with the Commission. This could be achieved by inserting the following subsection:
- receive from the Commission the books or papers of any person which may be material to the preparation of the opinion,
- consult the Commission in the preparation of the opinion,
- provide such reports to the Commission as the barrister or solicitor thinks fit from time to time in the course of preparation of the opinion.
3.25 It has also been suggested that a public issuer should be required to give a copy of the lawyer's opinion to any person against whom the public issuer may have a cause of action. This reflects the practice to date and both this practice and that above were remarked upon by the Court of Appeal in the Wilson Neill case as being "consistent with the Act and useful in complicated cases".
Share buy-backs
3.26 When the SA Act was enacted there was no provision for share buy-backs. Without any exception in the statute it seems that a company may be liable as an insider, to itself and its shareholders, where it purchases shares pursuant to a buy-back. The statutory procedure in the Companies Act regulating buy-backs contains detailed restrictions on the extent to which the board can hold material price sensitive information that is not disclosed to shareholders when making a buy-back offer. In these circumstances it has been suggested that buy-backs should be taken outside the ambit of the insider trading provisions of the SA Act.
Statutory exception for certain transactions
3.27 It has been suggested that the transactions identified and excepted from liability in Procedure II of the Insider Trading (Approved Procedure for Company Officers) Notice 1996 should be extended, by statute, to all types of insiders without the need for a specific procedure to be followed. In other words no liability should lie under Part I of the SA Act in respect of the following transactions:
- The selling or buying of securities of a public issuer under -
- any compromise, arrangement or amalgamation effected in accordance with the Companies Act; or
- any reorganisation or reconstruction of a public issuer that involves all the securities of the same class.
- The selling of securities of a public issuer where -
- the proceeds are to be used solely to buy rights to subscribe for securities of the public issuer that are offered to all security holders of the same class by means of a current registered prospectus; and
- the sale occurs during the offer period stated in that registered prospectus.
- The selling of securities of a public issuer as the result of the acceptance of an offer to buy the securities made by means of an announcement through a stock exchange in any country on which the securities are listed, being an offer that -
- was made in accordance with the rules of the exchange; and
- remained open for acceptance for a period of not less than 20 trading days.
3.28 The rationale for identifying these transactions is either that, like buy-backs, there is a statutory procedure regulating the transactions, or that these are transactions in respect of which an insider would not stand to make any greater gain or loss than any other shareholder.
Empower court to direct any person to reimburse the costs of the public issuer in obtaining a legal opinion under section 17
3.29 The preparation of a section 17 opinion is at the public issuer's (and therefore its shareholders') expense. It may sometimes be appropriate for the public issuer to recover from another person (other than the person seeking the opinion) the costs of obtaining the opinion, particularly, but not necessarily, where the public issuer (or a shareholder acting on the public issuer's behalf) has obtained a judgment against an insider under the SA Act. This proposal would allow costs to fall on a culpable party (usually, the insider) at the discretion of the court.
3.30 Alternatively, the power of the court proposed in paragraph 3.29 could be limited to requiring a person who has been judged to have committed insider trading, rather than any person, to pay the cost of a section 17 opinion.
Questions for Submissions
| 3.1 Are there any fundamental difficulties with the definition of "insider" within the SA Act? If so, what are they?
3.2 Should the SA Act be extended to include unlisted issuers of securities? 3.3 Should the SA Act be extended to issuers listed outside New Zealand? 3.4 Do you believe the suggested technical amendments to the definition of "insider" would add clarity to the provision? 3.5 In your view, do the references to spouse and child in section 8(1)(a) require clarification as suggested? 3.6 Should section 10 be amended to provide an exclusion from liability for tipping in a takeover situation? 3.7 In your view, should the wording of the chinese walls exception be amended as suggested in the discussion? 3.8 Do you believe the automatic prohibition on insider traders managing companies should be removed? What would be the implications of leaving this to the Court's discretion? 3.9 In your view, is it appropriate for lawyers appointed under section 17 to be permitted to receive information from, and consult with, the Commission? 3.10 Do you believe a public issuer should be required to give a copy of a section 17 opinion to any person against whom the public issuer may have a cause of action? 3.11 Do you think that share buy-backs should be removed from the ambit of the insider trading provisions of the SA Act? 3.12 Should the insider trading provisions be amended to exclude any liability under those provisions in respect of the transactions referred to in paragraph 3.27? 3.13 Should the court be empowered to direct any person (or, alternatively, an insider trader) to reimburse the costs of a public issuer in relation to a section 17 legal opinion? |
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