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Common abuses of shareholder rights - Market Abuse, Inside information -…
Common abuses of shareholder rights - Market Abuse
Market abuse
A civil offence that encompasses a wide range of unacceptable market practices and behaviours including insider dealing
The FCA may impose an unlimited penalty or censure, any person who has engaged in market abuse
As it is civil, not criminal, offence it is only necessary for the FCA o prove that a person's behaviour was illegal on the balance on probabilities as opposed to the beyond reasonable doubt test
Types
Engaging or attempting to engage in insider dealing, recommending that another person engage in insider dealing or inducing another person to engage in insider dealing. Insider ealing occurs where a person possesses inside information and uses that information to directly or indirectly acquire or dispose of financial instruments to which that company relates, whether in their own account or on behalf of a 3rd party
Unlawfully disclosing inside information. The unlawful disclosure of inside information arises where a person discloses the inside information to someone else, except where the disclosure is made in the normal exercise of an employment, profession or duties.
Engaging or attempting to engage in market manipulation. Covers activities such as
Placing market orders which give false or misleading signals as to the supply of, demand for or price of, a financial instrument
Disseminating information through the media, including internet rumours, whcih give such false or misleading signals
Insider dealing
Criminal offence
The criminal offence of insider dealing may take one of three forms
Dealing in securities on the basis of inside information
Encouraging another to engage in such dealing
Disclosing inside information otherwise than in the proper performance of one's employment, office or profession
To be found guilty of the offence, the defendant must be an individual who has, as an insider, information affection the securities concerned and must know that such information is inside information
The information must that been obtained by the defendant as a director, employee or shareholder of the company cocnerned or indirectly or directly from such a person
Inside information is information that relates to particular issues of securities or to a particular issuer or issuers of securities, which is specific or precise and would be likely, if made public, to have a signficiant effect on the price of any securities. Information that relates to securities or issuers only 'generally' is not inside information
Information may be treated as having been made public even if it can be acquired only by persons exercising diligence or expertise or by observation or if it is communicated only to a selection of the public or communicated only on payment of a fee or is published only outside the UK
It is a defence to the 'disclosing' offence to show that the defendant did not, at the time of the disclosure, expect any person to deal because of the disclosure or alternatively he did not expect any such dealing to result in a profit attributable to the price sensitivity of the information
It is a defence to the dealing offence to show that the defendant would have dealt in the same way even if he had not had the information. Thus a director who is under financial pressure to sell securities may possibly not commit an offence even though he is in possession of inside information. The defence would also be of assistance to trustees acting on advice
Dealings are covered only if they occur on a regular market or if the person concerned relies on or is himself a professional intermediary
Disclosure of inside information
Listed companies are required to inform the public as soon as possible of inside information which directly concerns them as an issuer
The inside information must be disseminated through a Regulatory Information Service (RIS
If their RIS provider is not open for business, the must distribute the information as soon as possible to at least two national newspapers and two newswire services operating in the UK
The CS is often involved in the dissemination of inside information either directly or in liaison with the investor relations department
Issuers are allowed to delay the disclosure of inside information where immediate disclosure is likely to prejudice their legitimate interests, this includes circumstances where the issuer is conducting negotiations whose outcomes would likely be jeopardised by immediate public disclosure
Any such delay must not mislead the public and the issuer must be able to ensure the confidentiality of the information
Insider lists and control of inside information
Listed companies should maintain a list of people who have access to any inside information (insider list) and make that list available to their competent authority on request (the FCA)
The CS is often responsible for keeping the insider list
The insider list must include
The identity of any person having access to inside information
The reason for including that person int he insider list
The date and time at which the person obtained access to inside infromation
The date on which the insider list was drawn up
The insider list must be divided into separation sections relating to different inside information, although one of these sections can contain details of individuals who have access at all times to all inside information (known as permanent insiders)
The purpose of the insider list to enable the FCA to conduct investigation regarding the source of any possible leaks
Issuers must take all reasonable steps t ensure that any person on the insider list acknowledges in writing the legal and regulatory duties entailed and is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information
Issues must also establish effective arrangements to deny access to inside information to persons other than those who require it for the exercise of their functions within the issuer
Dealings by directors and PDMRs
PDMRs as well as persons closely associated with them (PCA) are required to notify the issuer and the FCA of any dealings in its traded securities no later than 3 business days after the date of the transaction, in practice this notification will often be made by the issuer on their behalf
On receipt of such a notification, the issuer is required to make an announcement to the market no later than 3 business days after the transaction
A PDMR is defined as a person within an issue who is
A member of the administrative, management or supervisory body of that entitiy
A senior executive who is not a director but has regular access to inside information relating directly or indirectly to the issuer and power to take managerial decisions affecting its future developments and business prospects
A PCA is defined as
A spouse or a partner considered to be equivalent to a spouse in accordance with national law
A dependent child, in accordance with national law
A relative who has shared the same household for at least one year on the date the transaction occured
A corporate body, trust or partnership, the managerial responsibilities of which are discharged by a PDMR or family member, 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
PDMRs are prohibited from conducting any transactions in the company's securities on their own account or for a third party during a closed period of 30 calendar days before the announcement of the year-end results or any interim financial report which the issuer is obliged to publish
In certain exceptional circumstances, an issuer can allow a PDMR to deal during a closed period, such as where a director is in severe financial difficulty. A PDMR must submit a written report to the issuer before being given permission to deal under these rules, which must explain why the sale of shares is neccessary
Dealing code and policy
Listed companies used to be required under the Listing Rules to ensure that their directors and other PDMRs complied with a code of dealing known as the Model Code
The dealing code and policy document inlcudes
A specimen group wide dealing policy which companies could issue to employees as an introduction to the concept of market absue
A specimen dealing code that companies would be expected to issue to PDMRs and other individuals whom they wish to be covered by the company's process
A specimen dealing procedures manual for use by the CS or whoever else in the company is responsible for the implementation and management of the systems and procedures for the clearance of dealing by PDMRs and other individual to whom dealing restrictions apply
Inside information
Examples of unlawful disclosure
Disclosure of inside information by a director to somebody in a social context
Selective briefing of analyst by a director or other PDMR
The following would not involve unlawful disclosure
The disclosure of inside information to a regulator
The disclosure of inside information which is required or permitted by the Listing Rules