Revamped insider trading law, and new market manipulation prohibitions, commenced on 29 February. Listed company directors are no longer able to trade shares in reliance on the old “safe harbour” defence. However, the Listed Companies Association has suggested a “best practice” securities trading policy. Market announcements should be carefully considered so that they do not fall foul of the new market manipulation provisions.
Removal of the “safe harbour”
The “safe harbour” procedure – which provided a defence for directors and officers who traded in their own name with the prior consent of the public issuer during certain periods after full and half year announcements – has been removed.
In previous Boardroom articles we have explained the stated rationale behind the removal of the “safe harbour” exception. To recap, the Commerce Committee considered that the exception was not consistent with the market efficiency basis of the new regime (that insider trading is a wrong to the market rather than the previous focus on breach of fiduciary duty to the company).
Securities Trading Policy recommended
Removal of the “safe harbour” does not, of itself, mean that listed company directors can never trade. If they do, however, they should ensure that they do not hold any material information about the listed company at the time of trading.
Even though the safe harbour is gone, the Listed Companies Association Inc. (LCA) recommends that a formal securities trading policy be adopted by listed companies – not just to assist directors and employees to comply with the new law, but also to raise awareness about the prohibitions under the new regime. Specifically, the LCA has recommended that New Zealand listed issuers:
- establish a securities trading policy that applies to employees and directors
- publicise that policy in internal communications
- establish a share trading approval process for senior employees and directors more likely to possess material information
- introduce “trading windows” or “black-out periods”, during which senior personnel may trade (if trading windows are adopted) or not trade (if black-out periods are adopted).
In order to assist listed companies and their directors to comply with the new regime, the LCA, with the assistance of Chapman Tripp, has developed a suggested Securities Trading Policy.
The LCA’s Securities Trading Policy comprises a two-tiered approach:
- guidelines that apply generally to any director or employee who intends to trade in the listed issuer’s securities
- an approval process for senior personnel who are more likely to come into possession of material information – any trading would be subject to prior approval by a designated individual (say the company secretary), and could only occur during a “trading window”, or would be prohibited during a “black-out” period.
While a Securities Trading Policy is not compulsory, it is nevertheless highly desirable from a corporate governance perspective, and compliance with the policy is likely to be a significant factor in defending any proceedings for insider trading. Moreover, while the Securities Commission has been careful not to endorse any single policy as being suitable for all companies, it has expressed its approval of the LCA’s leadership in this area. The LCA’s suggested policy is available at www.listedcompanies.co.nz.
Listed company announcements – beware market manipulation
The new market manipulation prohibitions fall into two categories – disclosure-based manipulation (dissemination of false or misleading information which misleads other market participants about the value or trading volume of a security), and trade-based manipulation (trading activities that mislead or deceive other participants about the value or trading volume in that security).
Importantly, both prohibitions are “effects-based”, focusing on the likelihood of the statement in influencing a person to trade, rather than the intent of the person making a statement. So in the case of the disclosure-based prohibition, it is irrelevant that the disclosure is not intended to mislead, if the effect of that disclosure was, in fact, misleading.
The ambit of the disclosure-based prohibition is wide. It could apply to a statement made by a public issuer under its Listing Rule continuous disclosure obligations if an investor can show that the public issuer (or perhaps its directors or officers responsible for the announcement) knew, or ought reasonably to have known, that a material aspect of the announcement was false or misleading (including by omission). It could also apply to statements made by third parties that could have an effect on the market price of listed securities (such as comments about an intended takeover).
While it goes without saying that listed issuers must act with honesty in communicating with the markets, they must nevertheless remain vigilant that market disclosures are drafted in a way that does not have the effect of misleading investors.
Time will tell whether any action for market manipulation against a listed issuer for its market announcements is ultimately successful, but listed companies and their directors should nevertheless be aware of this important additional weapon in the Securities Commission’s and investors’ armour.