Consider this: a senior officer of a Canadian public company learns that the company has just received a significant, unsolicited bid, suggesting that the company could be in play. He calls his accountant and says: “Buy shares in my company today. Can’t say why but you won’t be disappointed.” Is this insider trading? Is it tipping?
Until July of this year, the answer was no. The insider trading rules in the Ontario Securities Act didn’t expressly deal with this scenario, and so the Ontario Securities Commission had to use its open-ended public interest power when it wanted to send a message that this behaviour was unacceptable. But this summer, the province’s insider trading rules were expanded to explicitly prohibit directors, officers, employees and others in a “special relationship” with a public company from recommending or encouraging a trade in the securities of that company while in possession of material, undisclosed information about the company.
The insider trading framework was also expanded to apply to trading in all securities, whether the issuer is public in Canada or not. Let’s say that now the hypothetical Canadian public company is quietly considering an acquisition of, or a joint venture with, a U.S. public company, and an employee, or even a consultant or adviser, who is working on the financial analysis or environmental due diligence for the company goes out and buys shares of this U.S. company. In such case, Canadian regulators can pursue enforcement actions against these individuals.
Our insider trading laws are premised on a level playing field: all investors in the Canadian capital markets should have access to the same information. Trading by insiders on material, undisclosed information about a company (or tipping others to it) undermines confidence in those markets. Allegations of insider trading can damage individual and corporate reputations and violations can result in up to five years of jail time and millions of dollars in fines.
In light of the latest changes, every public company should update—or establish—internal guidelines to manage trading in its securities by its directors, officers and employees. Here are 11 tips to ensure that you have leading-edge insider trading practices.
1. Have a written policy and disseminate it widely. Don’t stop there: educate your directors, officers and employees through workshops. This will facilitate and foster compliance with their legal obligations on insider trading and tipping and the company’s policies on trading.
2. Have broad reach. Your policy should apply to all directors, officers and employees, as well as their family members. But give some thought to how broadly you define family. Should spouses, children, stepchildren, grandchildren or parents be required to comply with your company’s policy? Does it matter whether these relatives live in the same household as the director, officer or employee? Companies may want the definition broad in order to discourage improper trading to the maximum extent possible, yet there are countervailing considerations if these parties are in fact economically independent.
3. Consider including consultants and contractors. While insider trading laws will apply to them regardless, binding consultants and contractors who have routine access to material, undisclosed information about the company to your policy will help mitigate reputational risk.
4. State the law clearly in your policy. If a director, officer or employee (or consultant or contractor) has material, undisclosed information about the company, neither the person nor their family members can buy or sell the company’s securities. Passing on the material, undisclosed information to a third party, other than in the necessary course of business, is also prohibited, as is the new offence of recommending or encouraging someone to trade under the circumstances.
5. Ensure wide dissemination of material information. See the sidebar (at bottom) for guidance on what information is material, and what the necessary course of business entails. Assume that information is undisclosed unless it is clear that it has been generally disclosed by press release. Posting it on your website is not enough.
6. Prohibit short selling of your stock. Though this is not a part of the insider trading framework, your directors, officers and key employees, particularly when receiving equity-based compensation, should not be short selling or hedging your stock under any circumstances. End of discussion.
7. Require written approval prior to trading. Have a process where directors and officers (and certain other employees such as country heads who have regular access to material, undisclosed information) are required to make a written request to trade in the company’s securities. It assists in preventing even the appearance of improper insider trading. Pre-clearance should also be required for their family members. Though not common, consider a pre-clearance requirement for trading in competitors’ securities and maintain a grey-list prohibiting trading without consent in the shares of companies that you are considering acquiring or with which you are considering to enter into material transactions. It goes to protecting the company’s reputational capital and integrity.
8. Establish scheduled blackout periods. Directors and officers (and certain other specified employees) should not be allowed to trade in the company’s securities during blackout periods around quarterly and year-ends. The period should begin when the visibility about financial results becomes available internally. This requires a judgment call. It could be 15 days before the end of quarter for one company and 10 days prior to the release of the financials for another. The period generally ends on the close of business on the first or second business day after the company releases its financials. Consider whether your business and activities warrant regularly scheduled blackout periods before board meetings, or discretionary blackouts when particular agenda items warrant it.
9. Ensure reports on SEDI are complete and accurate. Directors, officers and certain other members of a company have a short window to file a report on SEDI (System for Electronic Disclosure by Insiders) when they trade. Even changing direct or indirect beneficial ownership, control or direction triggers the requirement. In February of this year, the OSC completed a compliance review of 100 issuers and 1,500 insider reports and found that 70% of insider reports had material deficiencies. A regulator’s compliance check is often followed by increased enforcement activity, so this is a good time to ensure that your company’s insiders have fully and accurately reported their trades. While it is the insider’s responsibility to file their reports, many companies take on this task to help achieve compliance and avoid potential embarrassment and penalties down the road.
10. Violations should have consequences. Having a written policy is a first step. Aim for full compliance with your policy and effectively manage instances of non-compliance internally, including imposing internal discipline all the way up to dismissal and reporting to the regulator, where necessary. This is critical, especially in light of the OSC’s newly instituted whistleblower policy under which it will pay whistleblowers to come forward with allegations of wrongdoing.
11. If you are in doubt about trading, don’t. This is one of those areas of the law where there are many shades of grey and the application of the law to the facts can be hard to predict. Even if your conduct is technically legal, if it is perceived to result in some unfair advantage to you, there is the risk of reputational damage or even securities commission intervention based on its public interest jurisdiction.
Poonam Puri is a professor of law at Osgoode Hall Law School and an affiliated scholar at Davies Ward Phillips & Vineberg LLP and a respected adviser on issues of corporate governance, corporate law and securities laws. E-mail: email@example.com. Patricia Olasker is a senior partner at Davies Ward Phillips & Vineberg LLP in the M&A, capital markets and mining practices. E-mail: firstname.lastname@example.org.