The $3.3 billion sale by Royal Dutch Shell of part of its shareholding in Woodside, and the complete exits of Nine Entertainment Co. and the Canadian Pension Plan Investment Board from their investments, respectively, in carsales.com and Transurban, demonstrate that block trades remain a viable option for substantial securityholders who are looking to sell down their investment. In each of those trades, the broker managing the sale also underwrote it.
Block trades offer to vendors the opportunity for a quick and, if underwritten, certain sale, typically at a smaller overall discount to market than a gradual sell down would achieve. Crucial to the success of the sale is secrecy about the vendor's intentions and for this reason, block sales are commonly arranged overnight (or a weekend) prior to market open. The broker finds buyers, usually large institutional investors in Australia or (if the sale is large) overseas, and arranges the sale off-market either at a fixed price or a price determined through a bookbuild process.
There are a number of legal issues that the vendor and broker will need to manage when undertaking a block trade including for example the need to obtain the target's cooperation to issue a cleansing statement to enable the on-sale of the sale securities where the vendor is a "controller" of the target.
However irrespective of the size or value of the block trade an important issue will be insider trading. A vendor who has sensitive non-public information about the target (for example through board nominees) should first consider whether it is in possession of inside information. One of the key legal issues relevant to all block trades is insider trading. It is an offence for a vendor to deal in a target's shares if it is aware of information that is not generally available but, were it generally available, a reasonable person would expect it to have a material effect on the price or value of the target's shares.
It is not unusual for a large shareholder to have special access to sensitive non-public information about the target. This may be because the shareholder has contractual rights to information or briefings from the target or obtains information through joint venture arrangements or other joint-operations with the target. A vendor may also hold sensitive non-public information about the target as a result of having a nominee on the target's board of directors.
A company is taken for the purpose of the insider trading provisions to possess any information which an officer (ie a director or senior executive) of the company possesses and which came into his or her possession in performance of their duties. This means that even if a nominee on the target's board, or an employee seconded to the target, complies with their duties of confidentiality to the target and do not disclose information to the vendor, the vendor is still deemed to hold the information when the nominee or secondee is an officer of the vendor.
To manage the risk of breaching the insider trading provisions, a vendor should consider whether to survey all officers and senior executives who may have information about the target prior to selling to confirm that there is no inside information in the vendor's possession.
Another way to manage the risk is to conduct a block trade for shortly after a results announcement by the target (although this would not assist if the target is withholding disclosure under an exception to continuous disclosure, for example, an incomplete and confidential potential acquisition).
This issue is also worth considering by an investor (and its advisers) before making a cornerstone investment into a target. To minimise the risk of being "tainted" with inside information, an investor could:
- Refrain from seeking bespoke information rights from the target.
- Ensure any nominees it appoints to the target board (if any) are not officers or senior executives of the vendor (or of the vendor's parent company) to reduce the risk of the Vendor ir its parent having deemed knowledge of inside information.
- Establish "information barriers" between any board nominees or other employees involved with the target and the vendor's officers and senior executives to reduce the risk of the vendor having actual knowledge of inside information.
In the event that a vendor is in possession of inside information, the vendor is likely to be restrained from conducting the block trade until the inside information has either ceased to be material price sensitive information or has become publicly available (for example through an announcement by the target). For that reason, any vendor contemplating a block trade should consider at an early stage whether they may be in a possession of information about the target that may be inside information as it may affect their ability to conduct the block trade.