New insider trading laws which come into force today will expose management of listed companies to a risk of liability, if they pass unpublished price sensitive information to other managers or directors who hold shares in the company.
While the effect is unintended it creates a serious flaw that requires urgent remedy.
The insider trading laws have until now prohibited an insider from trading while in possession of inside information, or "tipping" by either passing on inside information to a person who is likely to buy or sell shares or otherwise encouraging them to buy or sell shares. There has not been any prohibition on passing inside information to a person who is not likely to buy or sell shares. However, under the new law, a person with inside information (i.e. information that is material to the price of an NZX-listed company's shares and that is not generally available to the market) must not directly or indirectly disclose the inside information to another person if they know or ought reasonably to know that the other person will or is likely to:
buy or sell the company's shares; or
if the person already holds shares in the company, continue to hold the shares; or
The reason for providing the information is irrelevant - as is the absence of dishonesty and the fact that the recipient of the information did not alter their behaviour as a result of the tip. Similarly, a person with inside information must not advise or encourage another person to buy, sell, or continue to hold shares.
The effect of the new law is that, from today, any person who provides inside information about a public issuer to a shareholder of that public issuer may be committing an offence, no matter what the reason for communicating the information is. A manager of a public issuer who knowingly passes inside information to a director of the public issuer will be committing an offence if the manager knows or ought reasonably to know that the director holds shares in the public issuer (which will often be the case as it is common for directors to hold shares and this must be publicly disclosed). This is because if a director holds shares, he or she must be likely to either buy, sell, or continue to hold them, any one of which would make the provision of the inside information by the manager an offence. The manager cannot avoid liability by ensuring that the director who receives the information will not trade on it because it is enough to give rise to liability if the manager knows that the director will continue to hold his or her shares.
This effect of the new law must be unintended as it is clearly necessary for managers and directors of public issuers to communicate non-public price sensitive information within the company. While there would be strong grounds for arguing that - in the absence of any moral fault - the Securities Commission should exercise its discretion not to prosecute (for example where there was clearly a management requirement to communicate the inside information and no wrongful intent), the consequence of the new law is that company directors and managers are placed in the position of having to rely on the discretion of the Securities Commission to avoid prosecution. They are also exposed to the risk of the provision being misused by shareholders or other parties who are able to seek injunctive relief and civil remedies under the Act.
This problem is unique to New Zealand. There is no prohibition on tipping to hold in Australia, despite the fact that our new laws are largely modelled on Australia's. Bell Gully has written to the Minister of Commerce advising her of the legislative flaw and proposing that an urgent law change is implemented either repealing the "tipping to hold" prohibition or, at the very least, creating a defence for internal management communications.
The firm has also written to the Securities Commission, the Listed Companies Association and NZX requesting that they support our proposal for a law change.
To view a copy of the letter to the Minister of Commerce from Bell Gully's Roger Partridge, Andrew Brown and Jenny Cooper click here.