Company Law Essay Help : Insider Dealing and Market Abuse

Cases referred to in thissection
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 marketare susceptible to manipulation. This can lead to the creationof a false market by the creation of false prices, which maydisadvantage those who deal in shares who are unaware thatthe price is artificially being manipulated.

Insider dealing occurs when an individual or organisationtakes advantage of their inside knowledge of the company'saffairs when deciding to buy or sell securities in the company.If the insider has a fidiciary duty to the company, such asthat held by a director, the company may claim any profitshe makes from abuse of his position. The duty is held to thecompany, rather than to individual members and so a memberwho sold his shares to directors who had information affectingthe future value of those shares was unsuccessful in a claimagainst those directors (Percival v Wright (1902) 2 Ch 421)- directors may purchase shares in the company without disclosingto the vendors advantageous prospects of the company.

Insider dealing is a criminal offence by the Companies Act1980 (the provisions are reenacted in the Companies Securities(Insider Dealing) Act 1985). In order to comply with EC Directive89/592/EEC (Insider Dealing) the Companies Securities (InsiderDealing) Act 1985 was repealed and replaced on 1 March 1994by Sections 52 to 54 of the Criminal Justice Act 1993.

Under that Act, an individual who has information as an insideris guilty of insider dealing if in the specified circumstances(as defined by s 52(3)) he deals in securities that are price-affectedsecurities in that if the information in question would, ifmade public, be likely to have a significant effect on theprice of the securities - s56(2).. An individual who has informationas 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 ordisposal in question occurs on a regulated market or thatthe person dealing relies on a professional intermediary oris himself acting as a professional intermediary.

The provisions described above do not apply to anythingdone by an individual acting on behalf of a public sectorbody in pursuit of monetary policies or policies with respectto exchange rates or the management of public debt or foreignexchange reserves; and no contract is void or unenforceableby reason only of these provisions.

A person has information as an insider if and only if itis, and he knows that it is, inside information and he hasit, and knows that he has it, from an inside source. A personhas 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:

there is a close link between the disclosure and the exercise of his employment, profession or duties, and
that disclosure is strictly necessary for the exercise of that employment, profession or duties.

As part of its examination, the national court must, in thelight of the applicable national rules, take particular accountof:

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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