Insider Trading Law In Ireland (Part 2) - Fund Management/ REITs

4. Please explain the prohibitions of insider trading

Regulations

Regulation 5 of the Regulations provides that a person who possesses inside information (as defined in 3.1 above) shall not use that information by acquiring or disposing of, or by trying to acquire or dispose of, for the persons own account or for the account of a third party, directly or indirectly, financial instruments (as defined in 2.1 above) to which that information relates. The person who possesses the inside information shall not, pursuant to Regulation 5(2), disclose that inside information to any other person unless such disclosure is made in the normal course of the exercise of the first mentioned persons employment, profession or duties. That person shall also not recommend or induce another person, on the basis of inside information, to acquire or dispose of financial instruments to which that information relates.

Regulation 5(3) specifies the persons to whom the prohibition on insider dealing applies. Please see 3.7 above. Pursuant to Regulation 5(5), the prohibition on the use of inside information does not apply to any transaction conducted in the discharge of an obligation to acquire or dispose of any financial instrument which has become due and which results from an agreement concluded before the person concerned possessed the inside information.

If the obligation is conditional on the person not learning of major obstacles to the transaction during due diligence, arguably the obligation to acquire the financial instruments has not become due prior to the receipt of the insider information. There is, however, no guidance on the issue in Ireland.

If the pre-existing contractual obligation only enters into force from a certain point in time and can be revoked prior to its entry into force based on a decision made by the relevant party on foot of inside information which it has received, arguably the obligation to acquire the financial instruments has not become due prior to the receipt of the insider information. There is however no guidance on the issue in Ireland.

The prohibition on insider dealing is subject to an exception for actions carried in compliance with the Takeover Rules. See 4.2.2. below.

Listing Rules

Rule 6.2.4 of the Listings Rules provides that a listed company, whose securities are admitted on regulated market in Ireland, should consider its obligations under the Regulations and the Rules in relation to, inter alia, the disclosure of inside information, the maintenance of insider lists and the recording of manager transactions. Rule 6.2.5 of the Listings Rules provides that a listed company, that is not already required to comply with the Regulations, must comply with the Regulations as if it were an issuer for the purposes of the Regulations.

Rule 6.2.6 of the Listing Rules provides that no dealings in any securities may be effected by or on behalf of a listed company or any member in its group at a time when, under the provisions of the Model Code, a director of the company would be prohibited.

Rule 6.2.7 of the Listings Rules provides that a listed company must require every person discharging managerial responsibilities, including directors, to comply with the Model Code and must take all proper and reasonable steps to ensure their compliance.

Where clearance is given to a person to deal in exceptional circumstances (pursuant to paragraph 9 of the Model Code) in a close period, the notification to a RIS, required by listing rule 6.11 and/or Regulation 12 of the Regulations, must include a statement of the exceptional circumstances.

Model Code

The Model Code provides that a restricted person must not deal in any securities of the company without obtaining clearance to deal in advance. "Restricted person" is defined, for the purposes of the Model Code, as a person discharging managerial responsibilities who in turn are defined as members of the administrative, management or supervisory bodies of an issuer or a senior executive who is not a member of such bodies but who has regular access to inside information relating directly or indirectly to the issuer and has the power to make managerial decisions affecting the future developments of business prospects of the issuer.

In order to deal, a director (other than the chairman or chief executive) or company secretary must notify the chairman and receive clearance to deal from him. The chairman must not deal in any securities of the company without first notifying the chief executive (or director designated by the board for this purpose) and receiving clearance to deal from him. Where the chief executive is not present, the chairman must not deal without first notifying the senior independent director or a committee of the board or other officer of the company nominated for that purpose by the chief executive and receiving clearance to deal from that director, committee or officer. The chief executive must not deal in any securities of the company without first notifying the chairman (or director designated by the board for this purpose) and receiving clearance to deal from him or, if the chairman is not present, as above, first notifying the senior independent director.

A restricted person can not be given clearance to deal in any securities of the company during a prohibited period or on considerations of a short term nature. An investment with a maturity of one year or less will always be considered to be of a short term nature pursuant to the Model Code.

Prohibited period means for the purposes of the Model Code any close period, or, any period where there exists any matter which constitutes inside information in relation to the company. "Close Period" is defined as a period of 60 days immediately preceding a preliminary announcement of the listed company's annual results or, if shorter, the period from the end of the relevant financial year up to and including the time of the announcement, or, if a preliminary announcement of annual results is not published, the period of 60 days immediately preceding the publication of its annual financial report or if shorter the period from the end of the relevant financial year up to and including the time of such publication. If the company reports on a half yearly basis, the close period means the period from the end of the relevant financial period up to and including the time of such publication and, if the company reports on a quarterly basis, the close period means the period of 30 days immediately preceding the announcement of the quarterly results or, if shorter, the period from the end of the relevant financial period up to and including the time of the announcement.

A person discharging managerial responsibilities must, pursuant to the Model Code, take reasonable steps to prevent any dealing in the securities of the company during a close period by:

(a) or on behalf of any connected person of his; or

(b) an investment manager on his behalf or on behalf of any person connected with him where either he or the connected person has funds under management with that investment fund manager, whether or not discretionary.

A person discharging managerial responsibilities must advise all of his connected persons and investment managers acting on his behalf of the name of the listed company in which he is a person discharging managerial responsibilities and of the close periods during which they cannot deal in securities of the company. They in turn must advise him immediately after they have dealt in the securities of the company. There are a number of exceptions to this prohibition on dealing which are dealt with in paragraph 2 of the Model Code.

Takeover Rules

The Takeover Rules provide that no person, other than the offerer, who is privy to confidential price – sensitive information concerning an offer or contemplated offer, shall deal in relevant securities of the offeree during the period from the time at which such person first has reason to suppose that an offer, or an approach to the view to an offer being made, is contemplated to the time of the announcement of the offer or approach or the termination of discussions, whichever is the earlier.

The Takeover Rules further provide that no person who is privy to such information shall make any recommendations during the relevant period to any other person as to the dealings of any kind in relevant securities of the offeree. The notes on the Takeover Rules state that notwithstanding the provisions of Rule 4, a person may be precluded from dealing or communicating price-sensitive information to others by virtue of the restrictions in the Companies Act, 1990 or by virtue of the Regulations and state that if the Takeover Panel become aware of incidences to which such restrictions may be relevant, it may inform the Stock Exchange and/or other authorities.

Companies Acts

Part V of the Companies Act, 1990 provides that a person who is, or at any time in the previous 6 months has been, connected with a company is prohibited from dealing in any securities of that company if, because of his position, he has information that is not generally available – but, if it were, would be likely to materially affect the price of those securities.

Furthermore, where a person connected with one particular company obtains inside information about another company, particularly where some business relationship or transaction is involved or contemplated between the two, it is unlawful for a person in the first company to deal in securities of the other company if the information is inside information, and relates to any transaction (whether actual, contemplated, or no longer proposed) involving both companies.

A person who receives inside information (a "tipee") is prohibited from dealing. This subsection complements the previous subsections which are concerned with the dealing activities of actual insiders. The prohibition applies to persons who are aware, or ought reasonably to have been aware, that the person who passed the information to him was already prohibited from dealing with the securities in question.

Any person who is prohibited under the preceding subsections from dealing in securities is also prohibited from getting another person to deal in those securities. Section 108(5) prohibits tipping if the tipper knows, or ought to know, that the person getting the information will himself either actually deal in the securities, or "cause or procure yet another party to do the dealing, while Section 108(6) extends the prohibition to a company where at anytime any of its officers are already prohibited from dealing by virtue of any earlier prohibitions mentioned. There are a number of exemptions for banks and stock brokers.

Section 30 of the Companies Act, 1990 makes it an offence for a director to buy options in listed shares or debentures of a company of which he is a director or of related companies. Specifically, a director who buys a right to call for delivery, or a right to make delivery or, at his election, a right to either call for or make delivery, at a specified price within a specified time with a specified number of listed shares or debentures of his company commits an offence.

Caselaw

While the only recent Irish decision in respect of insider trading is the Fyffes decision, the High Court in that case did make reference to US caselaw in considering whether the information was material by reference to the "reasonable investor" test which appears to be the relevant US test. While the "reasonable investor" test was not held to be the appropriate test in the context of the Companies Act, 1990, the use of, in particular, US caselaw in considering the "reasonable investor" test may be of relevance as the Regulations import the "reasonable investor" test into the definition of "information which, if it were made public, would be likely to have a significant effect on a price of financial instruments or related derivative financial instruments".

In order to determine the question of whether information was material or not, the High Court referred to the decisions in S.E.C. v Texas Gulf Supher Company 401 F.2d 833 [1968], T.S.C. Industries Inc v Northway Inc 426 US 438, S.E.C. v Lund 570 F. Supp. 1397[1983], Elkind v Ligett and Myers Inc.65 F 2 d 156 [1980], S.E.C. v Falbo 14 F Supp. 2 d 508 [1998], and Securities and Exchange Commission v Bausch & Lomb Inc. 565 F.2 d 8 [1977].

4.1 Is it required that the insider buys or sells insider securities for his own account, or is it sufficient that he buys or sells it on behalf or for the account of a third party?

Regulation 5(1) of the Regulations provides that certain persons possessing "inside information" shall not "use that inside information to acquire or try to acquire, dispose or try to dispose for that person's own account or for a third party, directly or indirectly, financial instruments to which that information relates."

Please see 4 above regarding the prohibition on tipping and the prohibition on dealings by connected persons.

4.2 Is insider trading committed if the insider has already decided on his action before obtaining the insider information?

Regulation 5(5) of the Regulations provides that the prohibition contained in Regulation 5(1) of the Regulations does not apply to any transaction conducted in the discharge of an obligation to acquire or dispose of any financial instrument which has become due and results from an agreement concluded before the person concerned possessed the inside information.

Please also see 4 above for an overview of the law on insider dealing.

Generally an offence is committed where a person acts or causes others to act (whether they are connected or otherwise) on the basis of inside information (as defined in 3 above). As a matter of fact it may be difficult to establish that a person had decided to act prior to receiving the inside information in the absence of an instruction to acquire/dispose of the relevant securities having been given prior to receipt of the inside information. Careful consideration would need to be given to any trading carried out on foot of a decision made before the receipt of inside information, but not executed until after the receipt of the information.

The prohibition on insider dealing is subject to an exception for actions carried in compliance with the Takeover Rules. See 4.2.1 below.

4.2.1 If the investor obtains insider information in the course of due diligence but purchases shares in the amount already decided upon before obtaining such information, does this constitute insider trading? Would it be any different if upon obtaining insider information the investor decides to purchase more shares than originally planned? What if the investor decides to acquire less shares than originally planned?

Having access to and using information in the context of a public takeover offer for the purpose of gaining control of that company or proposing a merger with that company in conformity with the Takeover Rules does not in itself constitute a contravention of the insider dealing provisions.

In addition, a company is not precluded from dealing in the financial instruments of another company at any time by reason only of information in the possession of an officer of the first mentioned company where that information was received in the course of the carrying out of the officers duties and consists only of the fact that the first mentioned company proposes to acquire or attempt to acquire financial instruments of the second mentioned company.

The exception contained in the preceding paragraph is of a limited nature as the exception only permits a company to acquire securities of another company where the only information which an officer has is that the company is acquiring or attempting to acquire financial instruments of the second mentioned company.

Actions taken in compliance with the Takeover Rules will not of themselves constitute market abuse provided that the general principles of the Takeover Act are complied with.

4.2.2 Does insider trading take place if a participant enters into a commitment to sell a defined quantity of shares to another party, at a defined date and price, without holding such shares, and only later obtains inside information before buying the shares?

The commitment to sell in the absence of the inside information may therefore not constitute insider dealing. Where the person, after coming into receipt of the inside information, acquires or disposes of the relevant financial instruments otherwise than in the discharge of an obligation to acquire or dispose of any financial instrument which has become due from an agreement concluded before the person concerned possessed the inside information, they may be in breach of the prohibition on insider dealing.

4.2.3 Do insider trading prohibitions apply to employee share ownership programs if such shares and/or options are credited to an employee's security account 'automatically' at the end of the program term and the employee had no insider information when declaring his participation in the program?

The definition of "financial instrument" includes options to acquire transferable securities and would therefore include the granting of options under a share ownership programme.

Section 110 of the Companies Act, 1990 provides an exemption from the insider dealing provisions of that act where the dealing relates to the acquisition of shares in the company concerned by its employees, or their trustees, under a pension fund or superannuation scheme.

Paragraph 2 of the Model Code provides that the following dealings are not subject to the provisions of the code:

(i) transfers of shares arising out of the operation of an employees share scheme into a savings scheme investing in securities of the company following:

(a) exercise of an option under a savings related share options scheme, or;

(b) release of shares from a profit sharing scheme,

(ii) with the exception of a disposal of securities of the company received by a restricted person as a participant, dealings in connection with the Revenue Commissioners approved employees' share scheme, or any other employees' share scheme under which participation is extended, on similar terms to those contained in a Revenue Commissioners approved employees' share scheme, to all or most of the employees of the participating companies in that scheme,

(iii) the cancellation or surrender of an option under an employees' share scheme,

(iv) transfers of the securities of the company by an independent trustee of an employee share scheme to a beneficiary who is not a restricted person,

(v) transfers of securities of the company already held by means of a matched sale and purchase into a saving scheme or a pension scheme in which the restricted person is a participant or beneficiary,

(vi) an investment by a restricted person in a scheme or arrangement where the assets of the scheme (other than a scheme investing only in the securities of the company) or arrangement are invested at the discretion of a third party.

4.3 What should be done in order to demonstrate that the potential insider had already decided his actions prior to obtaining insider information?

While it is not possible to definitively state what should be done in order to demonstrate that a particular decision was taken prior to obtaining the inside information, one would assume that a written note of a meeting or a written record of an instruction given to a third party to deal in the financial instruments dated prior to the date on which the inside information was received would assist in demonstrating that the actions were decided prior to obtaining the inside information.

4.4 Do insider trading provisions also apply to insider trading securities that are traded in OTC or private deals? If yes, is insider trading committed if both parties of such private deal have the same information?

The Regulations apply to financial instruments which are admitted to trading on a regulated market in at least one Member State or which have requested admission to trading on a regulated market in at least one Member State whether or not any transaction in or relating to the financial instrument takes place on that market.

As set out in paragraph 2.1, securities are defined for the purposes of Part V of the Companies Act, 1990 as shares, debentures or other debt securities issued or proposed to be issued, whether in Ireland or otherwise, for which dealing facilities are, or are to be, provided by a recognised stock exchange.

It would appear therefore that the insider trading provision contained in the Regulations and the Companies Act, 1990 could apply to OTC or private deals.

If both parties to the transaction possess information of a precise nature which has not been made public, and which, if it were made public would be likely to have a significant effect on the price of those financial instruments or related derivative financial instruments then both parties could be guilty of insider dealing as the rules apply to primary insider and tipees who know, or ought to have known, that the information is inside information.

4.5 Please explain if, and under which circumstances, the insider trading prohibitions extend to share buy-back programs and stabilisation measures.

The prohibition on insider dealing in the Regulations does not apply to trading in own shares in buy-back programs, trading to secure the stabilisation of a financial instrument, provided that such trading is carried out in accordance with the Market Abuse Regulation or to the purchase of own shares carried out in accordance with Part XI of the Companies Act, 1990.

In order to benefit from the exemption provided for in Article 8 of Directive 2003/6/EC, a buy-back program must comply with Articles 4, 5 and 6 of Commission Regulation (EC) No2273/2003. The sole purpose of the buy-back program must be to reduce the capital of an issuer (in value or in number of shares) or to meet obligations arising from debt financial instruments exchangeable into equity instruments, employee share option programs or other allocation of shares to employees of the issuer or of an associate company.

The buy-back program must furthermore comply with the conditions laid down in Article 19(1) of Directive 77/91/EEC. In addition, prior to the start of trading, full details of the program approved in accordance with Article 19(1) of Directive 77/91/EEC must be adequately disclosed to the public in Member States in which the issuer has requested admission of its shares to trading on a regulated market. All transactions must be publicly disclosed no later than the end of the seventh daily market session following the execution of any buy-back transaction.

When executing trades under a buy-back program, the purchase price must not be at a price higher than the price of the last independent trade and the highest current independent bid on the trading venues where the purchases are carried out. So far as volume is concerned, the issuer must not purchase more than 25% of the average daily volume of the shares in any one day on the regulated market in which the purchase is carried out. The average daily volume figure must be based on the average daily volume traded in the month preceding the month of public disclosure of that program and fixed on that basis for the authorised period of the program. The 25% limit may be breached in cases of extremely low liquidity where certain conditions are met.

The issuer shall not, during its participation in a buy-back program, engage in the selling of own shares during the life of the program, trade during a period which, under the law of the Member State in which trading takes place, is during a closed period or trade where the issuer has decided to delay the public disclosure of inside information in accordance with Article 6(2) of Directive 2003/6/EC (being regulation 10(7) of the Regulations).

In order to benefit from the exemption regarding stabilisation of a financial instrument, the stabilisation must be carried out only for a limited period and can only be undertaken where the fact that:

stabilisation may be undertaken,
that there is no assurance that it will be undertaken,
that it may be stopped at any time,
that stabilisation transactions are aimed to support the market price of the relevant securities,
the beginning and end of the period during which stabilisation may occur,
the identity of the stabilisation manager and the existence and maximum size of any over allotment facility or exercise of the greenshoe option must be adequately publicly disclosed by issuers, offerers or entities undertaking the stabilisation.

There are further requirements contained in the regulation regarding the making available of information post the stabilisation period. In the case of an offer of shares or other securities equivalent to shares, stabilisation of the relevant securities shall not in any circumstances be executed above the offering price. In the case of an offer of securitised debt convertible or exchangeable into shares, stabilisation of those instruments shall not in any circumstance be executed above the market price of those instruments at the time of the public disclosure of the final terms of the new offer.

4.6 It is prohibited to merely disclose, or make available, insider information to third parties without authority to do so? If yes, when is such disclosure unauthorised?

Regulation 5(2) of the Regulations provides that persons possessing inside information shall not disclose that information to any other person unless such disclosure is made in the normal course of the exercise of the first mentioned persons employment, profession or duties. Other than that exception and the requirement of issuers to disclose inside information pursuant to regulation 10 of the Regulations, it is prohibited to disclose inside information. The granting of authority, or lack thereof, is not a relevant consideration.

4.7 Is it prohibited to merely induce a third party to buy or sell insider securities, even if such third party does not receive the insider information itself?

Regulation 5(2) of the Regulations provides that persons possessing inside information shall not recommend or induce another person, on the basis of that inside information, to acquire or dispose of financial instruments to which that information relates.

The mere inducement of a third party is therefore prohibited.

4.8 Is intention required in order to commit insider trading? To which circumstances must the insider's knowledge extend? Is a precise estimate of the effect of the insider information on the price of the securities required?

There has been one prosecution under the insider dealing provisions of the Companies Act, 1990 – DPP v Byrne, Circuit Court, unreported January 2002. In that case the DPP accepted that mens rea of a kind was required under the relevant section of the 1990 Companies Act. The DPP accepted that the defendant must know that he was dealing in shares. The judge held that the DPP would have to prove that the defendant not only knew he was dealing but also that he intended to make improper profit from the dealing. The legal basis for this is based on precedent that Irish courts in imposing light penalties do not take account of whether mens rea is present. Where the penalty is severe, as in this case, where the penalty is 10 years in jail and a fine of €253,947.61, it is likely that the courts will require the presence of mens rea. Given that the Regulations have not been considered by the Irish courts it is not possible to say what approach the courts would adopt, although the decisions in Byrne and Fyffes would be relevant.

Given that section 32 of the Act provides penalties of a fine not exceeding €10,000,000 or imprisonment for a term not exceeding 10 years or both and that the Regulations provide that a person who contravenes the insider dealing provisions shall be guilty of an offence and liable on summary convictions to a fine not exceeding €5,000 or imprisonment for a term not exceeding 12 months or both, it appears likely that a court would require an element of mens rea.

5. Are release mechanisms available?

5.1 What can be done in order to still be able to buy and sell insider securities even when in possession of insider information (e.g. OTC/private deals, big boy letters, public cleansing statements)?

Save for actions taken in conformity with the rules made under section 8 of the Takeover Act which of themselves do not constitute market abuse and are not in contravention of regulation 5 of the Regulation and actions which are within the exemptions granted for buy-back programmes or stabilisation measures, there would appear to be no provision to enable a person to buy and sell insider securities when in possession of insider information without being in breach of the law.

5.2 Does it make a difference whether the contracting party has the same information (i.e. can insider securities be sold by simply sharing the information with the potential buyer/seller)?

The definition of inside information is set out at 3.2 above. One of the components of the definition of inside information is that the information must not be available to the public. The commentaries on the matter indicate that the test of whether information is available to the public or not would appear to be whether reasonably extensive disclosure to the securities market has been made. In that context, simply disclosing the inside information to the purchaser would appear to be insufficient.

The same considerations would apply in OTC and private deals. If the information constitutes inside information, simply disclosing it to the Purchaser in an OTC or private deal will not affect the status of the information as inside information as it is difficult to see how the information could be considered to have been reasonably widely disclosed.

6. What are the legal consequences of insider trading?

Apart from the statutory prohibition on insider dealing, a director or other fiduciary may not, except with the consent of the company in general meeting, use confidential information obtained by virtue of his position as a director in order to make a personal profit. Thus, he may be accountable for profits he makes from dealings in securities issued by his company or any other company where he has price sensitive information about that company which is not available to investors generally, and which information has come to him by reason of his fiduciary position. In normal circumstances, such an action could only be maintained against the director or other fiduciary by the company itself and not by individual shareholders who had suffered losses as a result of the insider dealing. In some exceptional circumstances an individual shareholder could maintain such a claim himself where the director had been appointed as his agent or where there was a pre-existing relationship of trust and confidence between the director and the shareholder.

Under the Regulations, insider trading is an offence which may be prosecuted summarily by the Central Bank with a maximum penalty of €5,000 and/or 12 months imprisonment. In a prosecution on indictment, the maximum penalty is €10,000,000 and/or 10 years imprisonment.

The Regulations also provide that the unsuccessful defendant must also compensate any other party to the impugned transaction who did not possess the same information. The measure of this liability is the difference between the price at which the securities changed hands and the price at which they were likely to change hands if the information in question had been generally available.

It would appear that an intention to deceive or defraud is not a prerequisite of civil liability. It would appear in other words that liability is strict. In Fyffes the High Court concluded that liability was strict in that sense and, further, assuming the information involved was price sensitive, that it was not necessary to show the defendant or his agent was aware of that fact.

Under the Companies Act, 1990 where it is still relevant, a person who engages in insider dealing is liable to both criminal and civil sanctions. Under that Act a person who suffers a loss as a result of another party to the transaction engaging in insider dealing, can seek to recover the loss suffered by taking a civil action against the offender. The offender may also be liable to account to the company that issued securities for any profit he made on the transaction. The question of determining the profit made from the transaction is a question which has been left to the courts to decide.

There are certain automatic consequences where a person is convicted of a criminal offence under the Companies Act, 1990 which include a prohibition from further dealing for a period of 12 months from the date of conviction and where, inspite of such prohibition, a person does deal, and is convicted of an offence under this new section for doing so, he is automatically prohibited from dealing for a further 12 months from the date of the second conviction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Ireland: Insider Trading Law In Ireland (Part 2)

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