1 The legal concept of insider dealings
Insider –dealing is a concept that has been subjected to public scrutiny and the dealing is the trading in securities while in possession of price sensitive information which is not available to the person with whom one is contracting or other participants within the market. Need for control measure has been brought to light within the European states. (Gower’s 1997). In view of the question at hand it involves either the buying or selling of securities at their current price before either the information is made known to the public or their value falls upon publication of such information to the public.
As a result of the foregoing, the law gives provisions as to distinguish between legitimate and illegitimate information advantage and thus permit trading on the basis of the former and not the latter. The government being a social politic on a contractual basis with the citizens is obligated to promote the publics confidence and security in the investment markets. The criminal Justice Act of 1993 thus was enacted for the purpose of controlling the insider dealings, which deploys purely criminal sanctions to backup its prohibitions or restrictions.
In most cases, the directions of a company normally get first hand information with regard to price sensitive information of the company. But such directors while in access of such critical information should not use such information to benefit their own self-interest as this will be in breach of the company’s fiduciary duties. The case of Industrial Development Consultants Ltd is Vs Cooley1 established that in the case of an illegitimate insider dealing by one of the directors, the other directors may cause the company to take action on him. This is in consistency with the provisions of the company being a separate legal entity and thus having the power to sue or be sued.
It is also subject to criminal liability for a recipient to accept information from the sender, which they otherwise know, is in breach of the rules of confidentiality. This position was held in the case of Schering Chemical Ltd Vs. Falkman (1982) Q.13-1 C.A. where it was established that the fiduciary duties owed to the company by its directors also extends to the recipient of the information who would be regarded as to be in breach of duty by using or disclosing the information if they are aware that it had been communicated in breach of the duty of confidence.
Thus I concede with Gower that in view of the above case, the holder of the information may not use it by selling of securities or disclose it to a person so that such person may trade unless and until the confider permits them to do so.
The stock exchange’s model code for securities transaction by directors appended in the Stock exchange’s listing rules provides that if there is a breach of duty as stipulated in the above sections, the duty breached is one owed by the directors to the company and not to the stock exchange. According to Gower, the duty owed to the stock exchange market is that of enforcing the code which a duty is owed by enlisted companies within the stock exchange market.
For that reason in Chase Manhattan Equities Ltd –V, Goodman2 Knox J. refused to hold that the directors who sold shares in breach of his company’s code incurred for that reason any liability towards the market maker, which purchased the shares. It is also note worthy that directors are prohibited from performing illegal insider dealings within a period of two months preceding the preliminary announcements of the company’s annual results and should in relation to dealings give notice before hand to the board or a committee of directors.
The original British legislation on insider dealing was contained in the companies Act 1980 and was later consolidated in the Company Securities (Insider Dealing) Act 1985. As a result of the adoption of the European community of Directive 89/592 the Criminal Justice Act 1993 came into play. Section 52 (i) states that an individual who has information as an insider is guilty of insider dealing if, in the circumstance mentioned, he deals in securities that are price-affected securities in relation to information. It’s however, note worthy that pursuant to the provisions of sec-52 (3).
The Act does not aim to control all dealings in shares but only dealings that take place within the regulated market. Regulated market according to the Insider Dealing (Securities and Regulated markets) order 1994 stipulates that in United Kingdom, such markets comprise of the London Stock Exchange, the London securities and Derivatives Exchange and Trade Point and the London International Financial and Future exchange.
The general principle while examining the insider dealing is that investor confidence in security markets depend on the assurance afforded to investors that they are placed on an equal footing and they will be protected against the improper use of insider information. Section 56 defines inside information as information which: relates to particular securities or to a particular issuer of securities is specific or precise; has not been made public and if made public would have a significant effect on the price of any securities.
The tension between the policy of encouraging communication and the stimulation of analysts and other view of the best interest of the public company and shareholders on the one hand should be barked on that of selective disclosure of significant information that would otherwise be on the detriment of all the parties. Sec.58 establishes that information is derived from information, which has been made public.
This test of information being public has been clearly elaborated in sec 58(2), which states that public information is such information can readily be acquired by the persons investing. Section 57(2) (a) defines two categories of insider as being: those who obtain information through being a director, employee or shareholder of an issue of securities and the second category is that stipulated under sec.57 (2) (a) where the individual with inside information, through having access to the information by virtue of his employment office or profession whether or not the employment relationship is with an issues. Thus an insider in this category may amount to a person employed by a professional adviser to the company.
This in my view may include outsiders who have no connection with the company but who as a result of their relationship with the shareholders manage to get information that relates to the company Graham in the case at hand falls under this category. Thus in proving the criminal liability the accused as under sect. 57 (2) (b) must be proved to have known that the information in question was inside information and that such information came from an inside source. Thus the mens rea amounts from foregoing proof.
According to sec.52 (1) once there is existence of inside information, there follows that there must be no dealings in the relevant securities. In this instance, many breached this prohibited act. Secondly the insider is prohibited from procuring directly or indirectly the acquisition or disposal of securities by any other person3. Thirdly other individuals are prohibited from encouraging other persons to deal in price-affected securities4. Finally an individual must not disclose the information otherwise than in the proper performance of the function of his employment, office or profession. This was an unlike case with many who breached the provisions of this rule.
The defenses that are promulgated within the Act is proof by the defendant that be/she would have done such act even without knowledge of such information5. This was established in the case of R.V. Cross (1991) BCLC 125. The second defense as established within the same section of the Act is that the accused did not expect the dealing to result in a profit attributable to the inside information.
The criminal sanctions imposed by the Act are on summary conviction; a fine not exceeding six months, on conviction on indictment the court may impose an unlimited fine so as to ensure recovery of unjust enrichments and on imprisonment for not more than seven years. In R V Goodman the court of Appeal upheld the crown courts decision to disqualify for a period of 10 years a managing director convicted of inside dealing. The court in this case distinguished disposal which could be in regard to management of the company and disposal in due regard of fraudulent misrepresentation.
2(a) The fiduciary duties of a director
The doctrine of separate legal entity as established in Salmon V. Salmon empowers the company to acquire human characteristics and therefore be able to carry out contracts thus acquire and sell property; sue and be sued just to mention but a few. However due to the limited physical nature of companies, the management of the companies affairs is entrusted to human beings – the directors –. Directors should thus not be viewed as servants of the company but as Geoffrey Morsel puts it, they are managers who in some respect are said to be quasi – trustees and/or agents for the company.
With such kind of a relationship, directors owe fiduciary duties and certain duty of care to the company. It is however note worthy that though the authority of directors to bind the company as agents is dependant on collective actions as a board, their fiduciary duties are owed by each director individually.
The fiduciary duties of directors are as established in the Companies Act (2006) as:-
- To exercise their powers for the purpose for which they were conferred and bonafide
- for the benefit of the company.
- Not to put themselves in positions in which their duties to the company and their personal interests may conflict7
In Re Smith and Fawcett Ltd8 the directors’ discretionary power to refuse to register a transfer of shares was held to be fiduciary power. The purpose of this fiduciary power is based on the trustee and/or agency relationship between the company and the agents.
It is however, not clear whether the exercise of fiduciary duties should be directed to the company’s best interest only or be inclusive of the shareholders interest. Some judicial rulings have ruled in favor of the former while others in favor of the latter. In Perciral V. Wright9 the directors purchased shares from their members without revealing that the negotiations were in progress for a sale of the undertaking at a favorable price. In this instance, the court viewed the fiduciary duties to be owed to the company alone with disregard to the interest of the shareholders.
But the Cohen committee10 established that the principle held in the above mentioned case impliedly connotes that the directors can never stand in a fiduciary relationship to the members. Other Judicial decisions seem to have departed from the decision in Persival’s case; as in Briess V. Wooley11 where it was established that directors stand in a fiduciary relationship to the members where they are authorized by the latter to negotiate on their behalf. Therefore it is in conclusion that the interest of the company and that of members should be equally balanced so as to facilitate a justifiable resolution of disputes.
2(b) The duty of disclosure as a fiduciary duty
The duty to disclosure any information that is directly linked to the transaction at hand by directors is imperative as it displays subjective good faith. The principle of disclosure is to the effect that the directors should always direct their minds to the question whether a transaction was in fact in the interest of the company or amounts to self-motivated directives. This was examined in Re W. & M. Roith Ltd12 where the controlling shareholder and director wished to make provisions for his widow. He therefore entered into a service agreement with the company whereby on his death she was to be entitled to a pension for life.
On being satisfied that no thought had been given to the question whether the arrangement was for the benefit of the company, and that indeed, the sole object was to make provision for the widow, it was established that the transaction was therefore not binding upon the company.
What then is meant by the best interest of the company? It is the action by the members of the company that is directed towards the economic advantage of the company and in my view as well as that of the shareholders. Directors may however, use their powers for improper purpose contrary to what is expressly provided in Articles of association and/or Companies Law Act. Often the improper purpose comes in view when such purpose is intended to further the directors’ own nests or to preserve their own control, in which event it will be a breach of the fiduciary duties13
However, this rule should be in tandem with the duty of director to disclose. To safeguard this balance the Companies Act 2006 makes provisions in schedule 3 with regard to an interest in shares. The schedule defines an interest in shares or debentures as including any form of interest in such shares or debentures.
This section also gives provisions to the effect that an interest of the spouse of, in this case even a boyfriend falls under this category or of a child under the age of majority of the director in shares is treated as the directors interest and as such an contract entered into by such parties should be brought within the notification of the company within five days of such directors knowledge. Failure to do so, investigations may be conducted.
The contravention of the above section leads to breach of the rule of natural Justice of nemo Judex in callsa sua which establishes that one cannot be a judge of is own case and thus where an interest of a director comes into play within a company in the case of conflict, the director may not be able to give transparent decisions without any bias. Thus the legal provisions have been effected to control this loophole.
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1 (1952)/W.L.R. 443
2  BCLC 897 3 Sec. 55(1) (b) 4Ibid (4)and (5) 5sec.53 7 A view held by Lord Cranworth L.C. in Aberdeen Riwy Co. V. Blaikie Bros (1854) 1. Macq 461 8 (1942) Ch. 304 (C.A.) 9 (1902) 2 Ch. 421 10 In Gower E. (1997) The Principles of Modern Company Law 11 (1954) A. G. 333 H.L. similarly in coleman V. Myers (1977) 2 N.Z.C.A. Mahon J. held the Percival V. Wright was wrongly decided 12 (1967) W.L.R. 432 13 Howard Smith Ltd. V. Ampol Ltd