A few days ago we told you about the recent settlement agreement between Anthony Lambert and the Alberta Securities Commission. If you missed that post, you can check it out here for background or read on for our key takeaways on insider trading in the M&A context from the Lambert settlement and other recent decisions by Canadian securities commissions.
Insider Trading in the M&A Context
The timing of public disclosure of a potential M&A transaction has always been a tricky issue, with issuers often giving careful consideration as to the appropriate point at which there is sufficient certainty about a transaction to warrant its public disclosure as a “material change”. Although both public disclosure obligations and the insider trading prohibition are based on the concept of a “material change”, insider trading is also prohibited when a person in a special relationship with an issuer has knowledge of an undisclosed “material fact” and recent decisions by Canadian securities commissions indicate that the commissions are of the view that a different threshold of materiality may apply to the insider trading prohibition than to the public disclosure obligation. In its 2008 AiT decision, the Ontario Securities Commission (“OSC”) stated that:
“…in a negotiation for a merger transaction, such negotiations may be material at a very early stage and for the purpose of insider trading laws, persons aware of such “material facts” should be prohibited from trading on this information. However, this may be well before the negotiations have reached a point of commitment to be characterized as a change in the issuer’s business, operations or capital, and therefore, before public disclosure of the information would be appropriate.”
In its news release regarding the Lambert settlement, the ASC stated that:
“[i]t is important that senior company officials – insiders – understand that insiders cannot trade while in possession of undisclosed material information; whether or not that material information must yet be disclosed under our continuous disclosure regime…if in doubt, insiders should always err on the side of caution and not trade.”
In its 2012 Re Donald decision, the OSC confirmedthat the Canadian securities commissions may use their broad public interest powers to fulfill the spirit of the insider trading prohibition to protect the capital markets. The panel noted that “the failure of the Commission to address trades that are based on information obtained as a result of a person’s position or relationship that has not been made available to the market calls into question the very integrity of our capital markets.”
Lessons from Lambert
In recent years, Canadian securities commissions have been giving increased scrutiny to insider trading in the M&A context. Although it is not certain that any and all potential M&A activity will be considered material, recent securities commission decisions and statements indicate that in certain circumstances, early stage M&A activity, even unsolicited expressions of interest, can be a “material fact” for purposes of the insider trading prohibition. Furthermore, a good faith determination by an issuer that the “letter of the law” has been complied with, as some may argue was the case in Lambert, may not be enough, as the commissions have shown a willingness to rely on their broader public interest jurisdiction to enforce a higher standard for the insider trading prohibition.
The Lambert settlement creates some uncertainty as to the exact standard that insiders will be held to when considering insider trading in the M&A context. Given this uncertainty, it would be prudent for issuers to consider taking some or all of the following steps when faced with potential M&A activity:
- ensure that directors and officers are made aware that they may be prohibited from trading in securities of the issuer during very early stage M&A activity and well before the issuer may be required to disclose a potential M&A transaction;
- when faced with unsolicited expressions of interest or when planning for an expected M&A transaction, an issuer should make a point to consider at each stage of the process whether the facts and circumstances of the particular potential transaction amount to a “material fact” that warrants a trading blackout being imposed on insiders or other employees;
- in determining whether potential M&A constitutes a “material fact” at an early stage as opposed to a later stage when a transaction is more certain, an issuer should consider all circumstances relevant at an early stage, including the nature of the counterparty and the likelihood that they have a serious interest in a transaction and the issuer’s suitability for, and interest level in, a potential M&A transaction; and
- implement procedures to restrict knowledge of early stage or unsolicited M&A activity to a core team of selected management, directors and advisors as a way to control information while materiality is being assessed and avoid potential inadvertent trading offences.