Share Trading During COVID-19: Caution for Directors, Company Insiders & Corporates

Both the ASX and ASIC have in recent times warned Australian corporates, and their Directors and Officers, of the need to be extra vigilant around disclosures and share trading controls during the daily (and at times hourly) changing corporate turmoil that is falling out of COVID-19.  Share trading during these times can be a particularly risky decision for any Director or company insider due to the fast-pace of change, the high degree of uncertainty and the unprecedented level and frequency of review by senior management and the Board of internal financial / business models and projections.

FOR DIRECTORS

ASIC’s Media Release on 7 May 2020, titled “Reminders on Director Trading during COVID-19”, sets out important reminders for Directors and other insiders who may be considering buying or selling shares. These include:

1.  An acknowledgment that a common driver for Directors wanting to purchase or subscribe for shares is their desire to show support for their listed entity during these uncertain times.  Another motivation not mentioned in ASIC’s release is that some Directors may still be working towards complying with their company’s minimum shareholding requirements. Equally, a change in personal or financial circumstances may underpin a decision to sell. Regardless of their motivation for trading, ASIC warns that before doing so Directors and company insiders must be mindful of:

a. the legal restrictions that may apply to their ability to buy and sell;

b. the impact their trading may have on both their reputation and that of the market – including any contribution it may make to investor perceptions about the company and, more broadly, information asymmetries between insiders and other shareholders.

2.  ASIC has reminded Directors to step through the following:

a.  Consider your company’s share trading policy

Before any share trade, you should first consider whether your share trading policy restricts that trade.  For example, are you in a “blackout period” that prohibits trading, or are you in a “trading window”? And, what processes do I need to follow to request approval to trade – for example, a written request for pre-clearance to trade. 

b. Consider the information in your possession – and account for the current uncertain and volatile market conditions.

Even if a proposed trade is not restricted by your company’s share trading policy (or prior approval for the trade is sought and granted in accordance with the policy) a Director or other insider should still consider whether they are in possession of any information which:

·  may give rise to perceptions that could adversely impact their personal standing or reputation, or that of their listed company; or

·  otherwise may mean the trade is prohibited – for example because the information is not generally available and could reasonably be expected to have a material effect on the price or value of the securities if it were made available (ie material non-public information (MNPI)).

Reliance should not simply be placed on information falling within a particular category of, or being similar to, information that had previously not presented a barrier to trading.  Even in ordinary operating conditions, ASIC cautions that this approach is not a substitute for fully considering the value of that information in terms of the effect it might have on price or value if generally known. This cautioning is even more applicable during COVID-19, as corporates find themselves in uncertain, challenging and continuously changing business and trading environments.

As circumstances rapidly evolve, Directors and other company insiders may more frequently come into possession of information that they may need to consider before trading.  ASIC cautions that this information may be of greater materiality in the present environment than it might in other times.   

Accordingly, when considering the materiality of information to which they have access, Directors and other company insiders should factor in (amongst other things):

·  the current uncertain and volatile trading environment

· the impact of the fast-changing events and market conditions on the currency and reliability of previous disclosures made to the market

Prudence and an extremely conservative approach is highly commended to Directors and other company insiders when considering whether to trade, noting the risks that come from the retrospective view of regulators and/or class action funders.

ASIC warns that compliance with their company’s share trading policy is not a defence to contraventions of the Corporations Act’s insider trading provisions or their statutory duty not to use information acquired by their position to gain an improper advantage.

FOR THE COMPANY

From the perspective of the Company and Management, it seems prudent that corporates:

1.  convene their Continuous Disclosure Committee, and consider:

a.  any upcoming trading windows – if you have a window opening up and the heightened uncertainty  of COVID-19 is persisting, you should consider whether there is merit in not opening up your next trading window to some or all of the people covered by the restrictions in your share trading policy. The rationale for considering this is that the existence of material non-public information (MNPI) is far more likely than normal in light of the disruptive force of COVID-19, along with the latent perception risk;

b.  whether the scope of who is caught by the restrictions in your share trading policy should be broadened during COVID-19 – i.e. do a broader sect of people have access to more sensitive information than is usual while we experience the “all hands on deck” realities of analysing the impacts of COVID-19?  If there is a broader group now privy to MNPI, you should formally add them to the list of people subject to trading restrictions (and don’t forget to inform them of this).

2.  document your Continuous Disclosure Committee meetings, and ensure the minutes of these meetings explicitly refer to COVID-19 issues being discussed and reflect the Committee’s thoughtful consideration of the above matters.

3.  ensure your people (including Directors) are refreshed on their requirements under your share trading policy, and the heightened need for personal reflection on what information you hold before trading.  Definitely use this opportunity to inform them of any change in approach to your share trading windows.

4.  if a request for prior approval to trade is made during a “blackout period”, ASIC gives caution to the person charged with considering and ultimately approving or declining that request to carefully and fully assess the circumstances of the proposed trade.  That person (typically the CEO or Chairman) should keep in mind the ASX’s emphasis that they expect any such approvals will be granted cautiously and sparingly - ie only in “exceptional circumstances”. It is probably fair to say that the bar for what “exceptional” means will be higher than usual during COVID-19 given the comparative level of personal hardship we are seeing across all geographies. Therefore, a company’s traditional approach and precedents may need to be re-assessed, and an individual’s circumstances will likely need to be interrogated more carefully to truly evaluate whether they are exceptional.

5.  ensure that any pre-trade approval processes under your share trading policy are strictly adhered to, and err against providing approval for trades outside of windows. If one of your staff is experiencing financial hardship, consider whether there is some other means your company can support them rather than them selling shares.

6.  if trading windows are to be permitted, consider reducing the length of the window from the typical four (4) weeks to something shorter, for example two (2) weeks. The rationale behind this that it counters the impact of the speed at which information and dynamics change.

7.  check and confirm that your share registry provider has trading blocks (or at the least flags) in place for your Directors and other company insiders caught by your share trading restrictions.

8.  ensure compliance with disclosure obligations if a Director or other company insider does trade – namely, the ASX provides a 5-business day window to advise the market via an Appendix 3Y of any Director share trades. Despite there being a 5-day notice period, it is advisable that market disclosures are made as soon as possible given the current daily volatility of share prices.

ASIC’s “reminder” to Directors and corporates should serve as a prompt for all to re-assess their share trades, and also their company’s internal share trading controls, while we continue to navigate through COVID-19. It is clear that close scrutiny will be paid to any Director or company insider’s share trades, and ASIC’s reminder is a signal that they intend to be vigilant against insider trading issues arising out of the COVID-19 pandemic.

Australia’s regulatory approach is consistent with what we have already seen during March and April 2020 from the FRC in the United Kingdom and the SEC in the United States, with each regulator having issued their equivalent “reminder” to Directors and corporates of their duties and the scrutiny the will be under. Clearly, globally, regulators are seeing the risk of insider trading breaches (or, at the least, market perception damage) as a big issue.

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