Reminders on director trading during COVID-19
7 May 2020
We have recently seen significant volatility in financial markets in response to the uncertainty and rapidly changing situation surrounding COVID-19.
During this time, investors understandably have a heightened interest in information and signals relating to the impact of the current operating conditions on their company or scheme. This includes a sharpened focus on direct and indirect trading in securities and other financial products related to a listed entity by directors of that entity and other ‘insiders’.
Directors may decide to buy or subscribe for shares or other financial products to indicate positive support for their listed entity at a time of uncertainty. Conversely, a change in personal or financial circumstances may underpin a decision to sell. Regardless of their motivation for trading, before doing so directors must be mindful of:
- the legal restrictions that may apply to their ability to buy and sell
- 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 entity and, more broadly, information asymmetries between insiders and other investors in the entity.
The below guidance sets out important considerations for directors (including directors of the responsible entity of a listed managed investment scheme) regarding the acquisition and disposal of securities and other financial products issued by their listed entity. These considerations are particularly relevant in the current market environment created by COVID-19. Some of these considerations are also relevant to other ‘insiders’, such as other company officers and key management personnel (KMP), as well as to responsible entities.
1. Consider your entity’s trading policy
All listed entities should have a share trading policy that regulates trading by KMP, including directors, in listed securities and other financial products of the entity. This policy should be designed to minimise the potential for trading to occur while the person is in possession of price-sensitive information that is not generally known.
Before trading in securities in which a direct or indirect interest is held, consideration should firstly be given to whether a listed entity’s trading policy restricts that trade. For example, the policy may prohibit trading during a specified period (a “blackout period”), or allow trades during a specified period (a “trading window”).
If a request for prior written approval is made to trade during a “blackout period” or in other circumstances then it is important that a person in a position of appropriate authority carefully and fully assesses the circumstances of the proposed trade. Under the ASX listing rules it is expected that such requests will be made only in ‘exceptional circumstances’ specified in the trading policy. ASX has indicated that it expects approval to be granted sparingly and with caution. For more information see ASX’s Guidance Note 27 Trading policies (GN 27).
2. 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 the listed entity’s 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, or their listed entity’s standing or reputation; 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.
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, 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.
However, this is particularly so during COVID-19, which has resulted in uncertain, challenging and continuously-changing business and trading environments. As circumstances rapidly evolve, directors and other insiders may more frequently come into possession of information that they may need to consider before trading. Some of this information may be of greater materiality in the present environment than it might at other times.
As such, when considering the materiality of information to which they have access, directors and other insiders should factor in (among 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
- any reliance on disclosure exemptions or carve-outs by the entity (particularly where this represents a change in historical disclosure practices by the entity).
Trading that appears to others in the market to be contrary to the letter and/or spirit of the law or the entity’s published trading policy can have a significant impact on the reputation of the individuals and listed entities involved. Directors and others should carefully consider the impact that perceptions of trading may have on their standing and the integrity of the market for securities and other financial products relating to the listed entity.
In some cases trading may even risk contravening the insider trading provisions or the statutory duty of officers not to use information acquired by their position to gain an improper advantage. It should be remembered that compliance with the entity’s trading policy is not a defence to such contraventions.
If information known to a director or other insider may risk their or their listed entity’s reputation, or may give rise to a contravention, they should not seek to trade. Instead, they should obtain appropriate legal advice.
These considerations also apply to participation in an issue of securities or other products by a director or other insider of a listed entity. The challenging operating environment means that many listed entities are seeking additional funding via an urgent capital raising.
There will often be a ‘heightened disclosure environment’ during capital raisings as the requirements of the fundraising provisions may require additional information to be provided to the market via prospectuses and cleansing notices. Notwithstanding this directors and other ‘insiders’ who are considering participating in a fundraising being conducted by their entity should still carefully consider the matters mentioned above regarding relevant laws, trading policies and reputational risk before deciding whether to subscribe.
3. Notify the market
Disclosure of directors’ interests, and trading in those interests, is a fundamental part of ensuring the integrity of financial markets and informed decision-making by investors.
Directors of listed entities (and of the responsible entities of listed entities) must ensure the relevant market operator is notified of their relevant interests in securities of the listed entity or a related body corporate, including changes to those interests, for example, those resulting from a trade.
Directors must also notify the market of any contracts to which they are a party or entitled to a benefit and that confer a right to call for, or deliver, securities of the listed entity or a related body corporate.
Under ASX Listing Rule 3.19A this notification must be made by the listed entity within five business days. If it does so, this notification will also generally satisfy any corresponding obligation to notify the market of this information under section 205G of the Corporations Act.
Directors who have, or will have, a substantial holding in a company or listed managed investment scheme may also need to comply with a separate obligation to file a substantial holding notice. This will be the case if, as a result of the trade, the director’s ‘voting power’ in the company increases above or below 5%, or changes by more than 1% from that previously notified. The listed entity’s filing of a notice under ASX Listing Rule 3.19A relating to the trade will not satisfy this requirement.
Directors should be mindful that in many cases, the details relating to the trade and the directors’ interests that are required to be disclosed in the substantial holding notice may be different from that under the Listing Rule 3.19A filing. For example, specific information regarding holding entities and matters such as restrictions on the ability to vote, or dispose of the securities directly or indirectly held by the director, may need to be included in a substantial holding notice. Documents relating to the trade may also need to be attached. For more information see:
- ASIC Regulatory Guide 193 Notification of directors’ interests in securities: Listed companies
- ASIC Corporations (Disclosure of Directors’ Interests) Instrument 2016/881 (replaced ASIC Class Order 01/1519)
- ASX Guidance Note 22 Director Disclosure of Interests and Transactions in Securities – Obligations of Listed Entities
- ASIC Regulatory Guide 5 Relevant interests and substantial holding notices.
4. Consider conflicts and disclosure obligations arising from margin loans and similar arrangements
Potential conflicts of interest can result from directors using securities or other financial products related to their listed entity to finance other investments via margin loans and similar arrangements. This is even more so in times of increased volatility when margin calls may be more likely to occur.
Arrangements of this kind may create an incentive for the director to seek to ensure security prices remain at a level that avoids a margin call. This incentive can encourage the director to prefer a course of action that provides short-term gains for the company at the expense of the longer term outlook. This may result in a misalignment between the interests of investors and directors who enter these arrangements. Actions of this kind may not be consistent with the duty of directors to act in the best interests of the company. It could even amount to market manipulation, a serious offence.
In some cases, trading or other internal policies of an entity may set out specific rules around margin loans and similar arrangements. However, directors should not necessarily rely on the existence or absence of such rules alone in considering their obligations.
In a review of the trading policies of 21 large ASX-listed companies in 2019, ASIC found that the majority did not prohibit outright the use of margin loans over the entity’s shares. While some of those did impose conditions (such as obtaining prior consent or requiring disclosure), a number of trading policies contained no restrictions at all.
Directors should also be mindful that the fact they have entered into these arrangements can create adverse market perceptions. For these reasons ASIC does not consider it to be good practice for directors, officers and executives to enter into margin call arrangements over their own listed entity’s securities or other financial products.
Directors and listed entities should also be mindful that margin loans and similar arrangements over a material number of securities may also trigger disclosure obligations under the general continuous disclosure obligations (see ASX Listing Rule 3.1). In some circumstances, information regarding these arrangements such as key terms, trigger points and the right of the lender to sell the securities unilaterally, may need to be disclosed.