Introduction

ASIC’s recent investigations into the conduct of two of David Jones’ directors, Mr. Leigh Clapham and Mr. Steve Vamos, relating to allegations of insider trading has emphasised the importance of considering corporate governance and other legal issues from both a legal and commercial perspective.

Executive summary

When the person(s) responsible for administering a share trading policy is notified by a director or other member of key management personnel that they propose to trade in an entity’s securities, regard must be had to both the legal application of the entity’s share trading policy and the commercial implications arising from such dealing.

The relationship between a listed entity and its directors is subject to a number of separate regulatory requirements under the Corporations Act 2001 (“Corporations Act”) as well as the ASX Listing Rules.

The David Jones case provides an example of the potential impact of failing to adequately consider the commercial implications in the application of an entity’s share trading policy. Whilst strict legal compliance is often the paramount consideration, the Board of a listed entity must also have regard to external factors, such as how the market will view a transaction involving a director.

Background

On 29 October 2013, just one day after David Jones had received a confidential $3 billion takeover proposal from rival Myer, and three days before David Jones released favorable quarterly sales results, non-executive directors Mr. Leigh Clapham and Mr. Steve Vamous collectively purchased 32,500 David Jones shares.

David Jones’ share trading policy permitted directors to trade in the company’s securities throughout a “window period” which permitted trading within 6 weeks after the date of release of the company’s half-year and annual results to the ASX. Under the policy the Board had the discretion to determine that, notwithstanding share trades may be permitted during a “window period,” if there were unusual circumstances that applied directors and key management personnel could be prohibited from trading in the company’s securities.

The share purchases in question were within a window period, and the directors had advised the Chairman of their proposed share purchases as required under the policy.

Notwithstanding that the share purchases by Mr. Clapham and Mr Vamos had been notified to the Chairman, it was alleged that the directors were aware of unpublished price sensitive information giving rise to a contravention of the prohibition on trading shares while in possession of inside information prescribed by section 1043A of the Corporations Act.

At David Jones’ annual general meeting, then Chairman, Mr. Peter Mason, apologised to the shareholders of David Jones for any concerns relating to the controversial share purchases by Mr. Clapham and Mr. Vamous.

ASIC commenced an investigation into the allegations of insider trading, however subsequently concluded that there was “not sufficient evidence to take enforcement action”. On 4 February 2014, in an unusual public announcement disseminated through YouTube, ASIC sought to explain why no further action would be taken, noting that proving all the elements to establish insider trading is “generally a very hard thing to do”.

The ASIC announcement sought to assure the public that the decision not to take enforcement action at this stage “was not an exoneration or a tick of approval and if new evidence comes to light the matter can always be reopened”. With strong media attention surrounding the controversial share purchases by the David Jones directors, ASIC went on to reiterate that “where there is evidence, we (ASIC) will pursue insider traders no matter who they are, from the chairman of the Board through to junior staff”.

Regulatory intervention

A roundtable forum was convened by ASIC on 14 March 2014 to explore how to more effectively implement the existing framework relating to corporate governance and to consider:

  1. current market practice regarding director share trading in Australia and related aspects of market integrity; and  
  2. forthcoming ASIC findings regarding the handling of confidential information by listed companies.

Having regard to ASIC’s recent investigation into David Jones’ share trading, the findings of the roundtable forum, which are scheduled to be provided to the Assistant Treasurer in late April 2014, will be highly anticipated.

Issues to be considered in the context of share trading policies

  1.  Share Trading Policies

Pursuant to ASX Listing Rule 12.9, a listed entity must maintain a share trading policy which complies with the requirements of the ASX Listing Rules. At a minimum, an entity’s trading policy must include the following information:

  1. the entity’s closed periods;   
  2. the restrictions on trading that apply to the entity’s key management personnel;   
  3. any trading which is not subject to the entity’s trading policy; and  
  4. any exceptional circumstances in which the entity’s key management personnel may be permitted to trade during a prohibited period with prior written clearance and the procedure for obtaining such clearance.

It is important to note that an entity’s share trading policy will not displace the Corporations Act, and therefore, notwithstanding that a particular trade of an entity’s securities may be permitted under its share trading policy, regard must be had to the prohibition on insider trading prescribed by the Corporations Act. In administering a share trading policy the persons responsible for determining whether a trading blackout should apply, as well as directors and key management personnel that wish to trade in an entity’s securities, should consider how the trades will be viewed from a corporate governance perspective by the market as well as the public at large.

  1. Insider trading

Notwithstanding any provision of a entity’s share trading policy, the Corporations Act  prohibits insider trading, where:

  1. a person possesses inside information;  
  2. that information is not generally available;  
  3. if that information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular security products (for example share price); and  
  4. that person knows, or ought reasonably to know, that the information was not generally available and it was material.

To the extent that an entity has disclosed the relevant information, such information will unlikely be considered inside information, and will not give rise to the insider trading provisions. - See more at: http://www.gadens.com.au/publications/Pages/David-Jones---open-for-trading.aspx#sthash.02T0frdS.dpuf