The recent European Court of Justice decision regarding the interpretation of insider dealing under the European Market Abuse Directive (MAD) has prompted the UK Financial Services Authority to amend UK insider dealing rules and put the offence of insider dealing back in the spotlight. The offence of insider dealing under the Irish legislation which implements MAD, the Market Abuse Regulations 2005 (the Regulations), has not yet been tested. However, it seems that it would have to be interpreted such that there is now a presumption that a person who is in possession of inside information who deals in financial instruments to which the information relates, used that information in contravention of the insider dealing prohibition.
Current Irish Position on Insider Dealing
In respect of companies listed on the Main Market of the Irish Stock Exchange, insider dealing is prohibited in Ireland under the Regulations. Regulation 5 prohibits persons who possess price sensitive information not in the public domain, from using that information to acquire or dispose of, or to attempt to acquire or dispose of, financial instruments to which the inside information relates, either on his own account or that of a third party.
Financial instruments includes shares, bonds, futures, derivatives and options to acquire or dispose of any of these which are admitted to trading, or in respect of which a request has been made for admission to trading, on a regulated market in any Member State. The prohibition extends to any person who possesses inside information by virtue of his connection with a listed company or any person who possesses inside information which he knows or ought to know is inside information.
Insider dealing is an offence, which on conviction carries serious penalties, including fines of up to €10,000,000 and imprisonment.
EU Position
The interpretation and scope of the insider dealing prohibition contained in MAD has been given more clarity by the decision made by the European Court of Justice in the December 2009 Spector Photo case.
In Spector Photo, a publicly traded Belgian company (“Spector”) carried out a market purchase of its own shares in order to be able to satisfy rights of employees under an employee share option plan. It subsequently made announcements about a proposed takeover of a rival company and released its financial results. These announcements, the details of which Spector had been aware at the time of the share purchase, resulted in an increase in the company’s share price. The Belgian financial regulator found the company to be guilty of insider dealing. The decision was appealed and a number of questions were referred to the ECJ. The ECJ was asked how the expression “use” of inside information in the context of MAD, which has been transposed into the Regulations, should be interpreted. In particular, was the mere fact of possession of inside information while trading in financial instruments to which the information relates sufficient to signify “use”, or must a deliberate decision to use the inside information have been taken.
The ECJ decided that if a person in possession of inside information deals in a related financial instrument, they may be presumed to have used the inside information for the purpose of the dealing. This strict approach was adopted as the ECJ took into consideration the purpose of MAD which in its opinion is “to protect the integrity of the financial markets and to enhance investor confidence, which is based, in particular, on the assurance that investors will be placed on an equal footing and protected from the misuse of insider information”. The ECJ noted that the wording of the current Directive had replaced an earlier Directive which had prohibited any person who possessed inside information from entering into a market transaction in relation to the transferable securities concerned “by taking advantage of that information with full knowledge of the facts.” The ECJ noted that the objective of the wording in the new Directive had been to remove an element of purpose or intention from the definition of insider dealing.
The ECJ noted that it is possible for a defendant to rebut the presumption of insider dealing by demonstrating that the transactions were entered into legitimately. There are a number of statutory exemptions to the offence of insider dealing under the Regulations. They include, transactions undertaken in conformity with takeover rules (i.e. having access to inside information relating to another company and using it in the context of a public takeover offer for the purpose of gaining control of that company, or proposing a merger with that company in conformity with Irish Takeover Rules) and transactions in a company’s own shares by way of a buy-back programme or stabilisation measure, provided that such trading is carried out in accordance with the Regulations and the Companies Acts.
UK Position on Insider Dealing
The Spector Photo decision resulted in some uncertainty, particularly in England, where the offence of insider dealing is defined in Section 118(2) of the Financial Services and Markets Act 2000 (the “FSMA”), as dealing “on the basis” of inside information, rather than “using” the inside information as is the case in MAD and in the Irish implementing Regulations.
The uncertainty has now been largely resolved by the FSA which published guidance on the matter in October last year. The FSA decided that the definition of insider dealing in the FSMA is consistent with the decision in Spector Photo. However, it decided to amend the English Market Abuse Rules which included the opinion that if the inside information was the reason for, or a material influence on, the decision to deal, this indicates that the person’s behaviour is on the basis of inside information. In light of the Spector Photo decision, the FSA has taken the view that it is not necessary to provide evidence of a person’s intention to prove insider dealing, and has therefore found it appropriate to delete that opinion.
Effect on Irish Position on Insider Dealing
This clarification by the FSA constitutes useful guidance for the interpretation of the Regulations. In the absence of any Irish authority to the contrary, it would appear that there is no requirement to prove intention to use inside information and the mere fact of the possession of inside information while trading in relevant financial instruments may lead to a presumption of insider dealing. This serves to show how strict the market abuse regime is. Persons who are exposed to inside information should therefore be aware of the insider dealing rules and the presumption set out in Spector Photo, and should carefully consider any potential transaction before proceeding to deal.
Contributed by Susanne McMenamin.
