Insider trading in the news again.
The recent news that a Sydney financial personality was being sued for insider trading in relation to Qantas shares shows that this provision is alive and well in Australia. Whether the prosecution will be successful is another matter. But an interesting recent New Zealand decision shows that the section (or its equivalent) does have teeth. In Thexton v Thexton ((2002) 9 New Zealand Company Law Cases 262,777) the Court of Appeal had to deal with a civil case in relation to insider trading. Now while it is always easier to prove a civil case than a criminal case, the decision will be closely examined in evaluating this type of provision. The facts are taken from the CCH New Zealand Company Law and Practice notes. A director with inside information is prevented by section 149 of the New Zealand Companies Act 1993 from buying shares in the company for less than their fair value. The Court of Appeal has confirmed that the restriction applies even where the director has disclosed the information to the seller. David Thexton junior managed a company in which his father, David Thexton senior, had a minority shareholding. David junior successfully negotiated a merger with another company.
At about the same time, he agreed to buy his father" shares at a price that he later admitted was considerably less than their fair value. After David senior's death there was a dispute between David Thexton junior and his mother, Mavis Thexton, who was executrix and trustee of her late husband's estate. Among other causes of action, she claimed that the purchase price was less than the fair value of the shares. The High Court of New Zealand found that David junior had purchased his father's shares at less than their fair value. Section 149 of the New Zealand Companies Act required a director with inside information to trade at a price reflecting the true value of the shares, based on that information. It did not matter whether the relevant information was known to David senior or not. David junior appealed against the decision. In its judgment, the Court of Appeal analysed the provisions of section 149. It concluded that the High Court was correct in its interpretation that David junior contravened the section by purchasing the shares at a price less than their fair value when he knew they were worth more. It did not matter that the information was accessible to his father or that David junior had disclosed the information.
The decision shows that the law can be interpreted quite aggressively by courts in this day and age especially if civil suits are involved because of the issues that are being addressed. Where criminal sanctions are being sought, the court will be more cautious before it finds that a breach of the legislation has occurred. There is also a different standard of proof. It will be interesting to see what happens in the Australian litigation.
Professor Baxt is a partner of Allens Arthur Robinson
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