In brief

  • New Secretary to the Treasurer David Bradbury will revive legislative amendments to the insider trading regime not passed by parliament before the recent Federal Election.
  • New penalties for companies and individuals and new ASIC search and surveillance powers, including telephone taping.
  • Heightened focus on public M&A deal leak risk, due diligence and pre-bid stake building.  

Insider trading is high profile, criminal and a risk inherent in all M&A transactions. Recent analysis suggests that the share price of a takeover target will increase by as much as 10% in the five days before a takeover bid was announced. This has led the previous Labor Government to push for changes to the insider trading regime.

The proposed changes increase the penalties for insider trading and enhance ASIC’s investigatory powers. These changes would converge with ASIC’s new role as the market supervisor, a role it has just taken over from the ASX.

In January 2010, the then Minister for Corporate Law, Chris Bowen, announced the government would introduce legislation to dramatically increase the penalties for insider trading. The Treasury in May 2010 released a draft of the Corporations Amendment (No. 1) Bill 2010 (Bill), which proposed to more than double the penalties for insider trading offences from $200,000 to $450,000 for individuals and from $2 million to $4.5 million for corporations.

The Bill also proposed to introduce ‘an alternative penalties’ system more commonly seen in US securities and anti-trust regulation, whereby courts can elect for a range of alternative penalties depending on which is larger. A court can elect to impose a penalty equal to three times the profit gained or loss avoided by committing the insider trading offence, if that amount is greater than the penalties prescribed above. For corporations, a third alternative has been proposed which would allow a court to impose a penalty of 10% of the corporation’s annual turnover for the relevant period during which the insider trading offence occurred.

The maximum term of imprisonment which could be imposed on individuals for insider trading offences was also due to be lifted from five to ten years.

In recognition of its new market supervisor role, ASIC was also to be granted new investigatory powers. Under the current law, ASIC is required to serve a notice to produce documents on a party it suspects of committing insider trading offences and cannot seek a search warrant under the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) until a party fails to comply with such a notice. In recognition of the short window available for ASIC to collect the information required to establish a conviction for insider trading, ASIC would have been able to seek ASIC Act search warrants without serving such a notice.

The Bill, if enacted, would also allow ASIC and the AFP to work jointly on the investigation of insider trading offences. Importantly, this included the ability of ASIC and the AFP to jointly seek warrants to covertly record telephone conversations and use other listening devices to collect evidence of insider trading under the Telecommunications (Interception and Access) Act 1979 (Cth).

The Bill made it clear that the increased penalties above would also apply to other market offences including market manipulation, false trading, market rigging and making false and misleading statements.

As the Bill was not passed by the parliament before the recent Federal election, it must be reintroduced by the new parliament when it sits again. The Gillard Government recently announced that the Bill will be reintroduced in the first week that parliament returns, but sources close to the parliament have indicated that it is unlikely that the proposed legislation would be passed before the end of 2010. Given that this was a policy strongly pursued by the former Minister, it is likely that this will be top of the list of priorities for the new Minister.

In considering the Bill, it would be appropriate for the Minister to consider the recommendations made to improve the insider trading regime by the Corporations and Markets Advisory Committee (CAMAC) under the previous Coalition Government. The recommendations included facilitating the acquisition of pre-bid stakes by members of a consortium. CAMAC also recommended a tightening of the test of when information is ‘readily observable’ and therefore not ‘inside information’. The readily observable exception is widely considered to be a loophole in the legislation. This is so, particularly in relation to information disseminated through the internet, which was not considered at the time that the current insider trading regime was established.

In this new era of parliamentary unpredictability, the intentions of the Coalition, the independents and the minor parties in relation to the passing of any legislation are as relevant as the intentions of the government, and so it will be important also to monitor the attitudes, intentions and previous positions taken by those on all sides of politics.