Company Law Essay Help : Insider Dealing and Market Abuse
Cases referred to in this section
Case C-384/02 Criminal proceedings against Grongaard [2006] IRLR 214, ECJ
Percival v Wright (1902) 2 Ch 421
The price of a company's shares listed on the stock market are susceptible to manipulation. This can lead to the creation of a false market by the creation of false prices, which may disadvantage those who deal in shares who are unaware that the price is artificially being manipulated.
Insider dealing occurs when an individual or organisation takes advantage of their inside knowledge of the company's affairs when deciding to buy or sell securities in the company. If the insider has a fidiciary duty to the company, such as that held by a director, the company may claim any profits he makes from abuse of his position. The duty is held to the company, rather than to individual members and so a member who sold his shares to directors who had information affecting the future value of those shares was unsuccessful in a claim against those directors (Percival v Wright (1902) 2 Ch 421) - directors may purchase shares in the company without disclosing to the vendors advantageous prospects of the company.
Insider dealing is a criminal offence by the Companies Act 1980 (the provisions are reenacted in the Companies Securities (Insider Dealing) Act 1985). In order to comply with EC Directive 89/592/EEC (Insider Dealing) the Companies Securities (Insider Dealing) Act 1985 was repealed and replaced on 1 March 1994 by Sections 52 to 54 of the Criminal Justice Act 1993.
Under that Act, an individual who has information as an insider is guilty of insider dealing if in the specified circumstances (as defined by s 52(3)) he deals in securities that are price-affected securities in that if the information in question would, if made public, be likely to have a significant effect on the price of the securities - s56(2).. An individual who has information as an insider is also guilty of insider dealing if
- he encourages another person to deal in securities that are, whether or not that other knows it, price-affected securities in relation to the information, knowing or having reasonable cause to believe that the dealing would take place in the specified circumstances (s 52(2)(a)); or
- he discloses the information, otherwise than in the proper performance of the functions of his employment, office or profession, to another person (s 52(2)(b)).
The circumstances specified are that the acquisition or disposal in question occurs on a regulated market or that the person dealing relies on a professional intermediary or is himself acting as a professional intermediary.
The provisions described above do not apply to anything done by an individual acting on behalf of a public sector body in pursuit of monetary policies or policies with respect to exchange rates or the management of public debt or foreign exchange reserves; and no contract is void or unenforceable by reason only of these provisions.
A person has information as an insider if and only if it is, and he knows that it is, inside information and he has it, and knows that he has it, from an inside source. A person has information from an inside source if and only if:
- he has it through being a director, employee or shareholder of an issuer of securities or having access to the information by virtue of his employment, office or profession; or
- the direct or indirect source of his information is a person within head (a) above.
The most recent case on this area of law is Case C-384/02 Criminal proceedings against Grongaard [2006] IRLR 214, ECJ. The Judgement was a reference for a preliminary ruling under Article 234 EC. The judgment on 22 November 2005, was as follows:
"1. Article 3(a) of Council Directive 89/592/EEC of 13 November 1989 coordinating regulations on insider dealing precludes a person, who receives inside information in his capacity as an employees' representative on a company's board of directors or in his capacity as a member of the liaison committee of a group of undertakings, from disclosing such information to the general secretary of the professional organisation which organises those employees and which appointed that person as a member of the liaison committee, unless:
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there is a close link between the disclosure and the exercise of his employment, profession or duties, and
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that disclosure is strictly necessary for the exercise of that employment, profession or duties.
As part of its examination, the national court must, in the light of the applicable national rules, take particular account of:
- the fact that that exception to the prohibition of disclosure of inside information must be interpreted strictly;
- the fact that each additional disclosure is liable to increase the risk of that information being exploited for a purpose contrary to Directive 89/592, and
- the sensitivity of the inside information.
2. Article 3(a) of Directive 89/592 precludes disclosure of inside information by the general secretary of a professional organisation to colleagues, such as those referred to in the third and fourth questions, except under the conditions set out in the reply to the first and second questions.
As part of its examination, the national court must, in the light of the applicable national rules, take particular account of the criteria also set out in that reply." (Judgment of the Court (Grand Chamber) of 22 November 2005 in Case C-384/02: Reference for a preliminary ruling from the Københavns Byret in the criminal proceedings against Knud Grøngaard, Allan Bang (Directive 89/592/EEC — Insider dealing — Disclosure of inside information to third parties — Prohibition - Official Journal C 036 , 11/02/2006 P. 0001 - 0001)
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