#3321 - Insider Dealing Crib Sheet - Public Companies and Equity Finance

Insider Dealing

1. Rationale

   1. Lord Lane in Attorney-General’s Reference (No1 of 1988) – “the clear intention is to prevent, as far as possible, what amounts to cheating when those with inside knowledge use that knowledge to make a profit in their dealings with other”

      1. A company cannot commit the offence directly
         

2. Offences

   1. Primary Offence

      1. 52(1) CJA 1993 an individual who has inside information as an insider deals in securities that are price-affected securities in relation to the information and the dealing occurs on a regulated market

         1. 60(1) defines a regulated market by referring to the Insider Dealing (Securities and Regulated Markets) Order 1994

            1. Regulated market includes the Main Market and AIM

         2. 54(1)(a) Securities are those which fall within Schedule 2 CJA

            1. INCLUDES SHARES

         3. 56(2) Securities are price affected securities in relation to inside information and inside information is “price sensitive information” in relation to securities if the information would, if made public, be likely to have a significant effect on the price of the securities

   2. Secondary Offences

      1. 52(2)(a) CJA 1993 an individual who has inside information as an insider encourages another person to deal in securities that are price affected securities in relation to that information knowing or having reasonable cause to believe that they would deal in them

      2. 52(2)(b) CJA 1993 an individual discloses the information, otherwise than in the proper performance of the function of his employment, office or profession to another person

3. What is inside information?

   1. 56 CJA 1993 inside information is information which

      1. Relates to particular securities or to a particular issuer of securities

         1. Includes information which may affect a company’s prospects

         2. 60(2) an issuer means any company by which securities have been or are to be issued

            1. 60(3)(a) a company means any body which is not a public sector body

      2. Is specific or precise

      3. Has not been made public

         1. 58(2) information is made public if

            1. It is published in accordance with the rules of a regulated market for the purpose of informing investors and their professional advisers

            2. It is contained in records which by virtue of any enactment are open to inspection by the public

            3. It can be readily acquired by those likely to deal in any securities to which the information relates or of an issuer to which the information relates

            4. It is derived from information which has been made public

      4. If it were made public, it would be likely to have a significant effect on the price of any securities

4. Who is an insider?

   1. 57(1) CJA 1993 a person has information as an insider if

      1. He knows it is inside information; and

      2. He has it from an inside source

         1. 57(2) a person has information from an inside source if he has it through being a director, employee or shareholder of an issuer of securities or having access to the information through his employment, office or profession, or the source of his information falls within one of these categories

5. 52(1) CJA 2003 The Dealing Offence

   1. 55(1) dealing is widely defined and includes

      1. Acquiring or disposing of securities

      2. Any agreement to acquire securities

      3. Any agreement to create securities whether as a principal or agent

      4. Procuring directly or indirectly an acquisition or disposal by another person

         1. Does not matter if someone “deals” through a broker

            1. Broker may also be guilty of insider dealing depending on his state of knowledge that the information was inside information

   2. 59(1) a professional intermediary is a person who carries on a business of acquiring or disposing of securities or who otherwise acts as a professional intermediary between persons taking part in any dealing in securities

      1. 59(3) a person will not be treated as carrying on a business consisting of an activity mentioned in 59(2) if the activity is merely incidental to some other activity not falling within 59(2) or merely because he occasionally conducts one of those activities

   3. 62(1) A person is not guilty of the dealing offence unless he was within the UK at the time of the dealing or the market is a UK regulated market

6. 52(2)(a) CJA 1993 The offence of encouraging another to deal

   1. It is not necessary for the person who encouraged the deal either to actually deal or to realise the securities are price-affected

   2. A simple statement such as I cannot tell you why, but now is a good time to buy shares in X plc could be caught by the provision

   3. 62(2) A person is not guilty of the offence unless he was within the UK at the time of the encouragement or the recipient of the encouragement was within the UK when he received the encouragement

7. 52(2)(b) CJA 1993 The Disclosing Offence

   1. Prohibits any individual from disclosing inside information to another person other than in the proper performance of the functions of his employment, office or profession

   2. 62(2) A person is not guilty of the offence unless he was within the UK at the time of the disclosure or the recipient of the information was within the UK when he received the information

8. Defences

   1. Need to be able to show in relation to dealing & encouragement offences that

      1. 53(1)(a) no advantage was gained, OR

         1. That he did not expect the dealing or encouraging to result in a profit, or the avoidance of loss, attributable to the fact that the information he possessed was price-sensitive information in relation to the securities

      2. 53(1)(b) adequate disclosure was made, OR

         1. He must prove that he believed on reasonable grounds that the information had been widely enough disclosed to ensure that no one taking part in dealing would be prejudiced by not having the information

      3. 53(1)(c) he would have traded anyway

         1. He must prove that he would have done what he did even if he had not had the inside information

   2. In relation to the disclosure offence, an individual needs to prove that

      1. 53(3)(a) he did not expect dealing to occur, OR

         1. He did not expect any person to deal in securities as a result of his disclosure

      2. 53(3)(b) he did not expect profit to result

         1. Although he had such an...