Timely disclosure is a cornerstone policy of securities regulation.  It stands for the proposition that investors and shareholders in public companies are entitled to equal access to material information that may affect their investment decisions.  Timely disclosure requirements in provincial securities laws were written with material changes in the business and affairs of a listed company in mind. The disclosure laws were not written with takeover and merger transactions in mind. M&A transactions generally involve an offer to shareholders rather than the listed company so they do not fit neatly into the concept of disclosure relating to the business and affairs of a listed company.

M&A Insider Trading Commonplace

It is generally acknowledged that illegal insider trading in advance of formal M&A announcements is common place in Canada. Prior to a formal announcement, knowledge of the impending takeover or merger may have expanded to include senior management of the bidder, its directors, lawyers, financial advisors, bankers, support staff and other service providers. Sometimes the board and management of the target and its advisors are also aware of the price sensitive information.

Enforcement actions by regulators (including the recent OSC charges against a partner of a major law firm and prior OSC charges against directors, lawyers and investment bankers) demonstrate that most M&A activity is not kept confidential prior to an announcement and that regulators are only detecting a small percentage of insider trading related to M&A activity. Furthermore, failed prosecutions for insider trading show that regulators have a difficult time proving the offence under a criminal standard of proof.

Disclosure Requirements Deficient

FAIR Canada believes that the current timely disclosure requirements for M&A transactions are deficient. As a result, investors often do not have equal access to price sensitive information on takeovers and mergers in Canada. The basic disclosure requirement is flawed when it comes to takeover bids. Here are two examples of problems with existing laws. First, Canadian timely disclosure requirements do not require disclosure of an intention to make a formal offer made to the board of a listed company even though this is clearly price sensitive information. Second, our disclosure requirements do not mandate disclosure by a bidder or target when trading activity (often with media coverage of the impending bid) clearly suggests that information of an impending bid has not been kept confidential and some people are trading with inside information.

 (1)   Serious Offers Not Required to be Disclosed – There have been a number of instances in Canada where companies were approached with a serious offer by a serious bidder.  The offer was rejected by management or the board but the shareholders and investing public were not informed (remember Dofasco). The shares continued to trade with insiders being aware of this price sensitive event. Given that the senior management and board of directors of the bidder and target and their respective lawyers, investment banks, banks and others may be involved, it is highly likely that information about the proposed offer was not limited to a small group of people who would keep knowledge of the proposed offer confidential. In other cases directors and senior management of the target company either traded on the market or were granted stock options subsequent to the approach by a serious bidder or initiation of merger discussions, even though they had price sensitive information that was not public.

 (2)   Unusual Trading while Negotiations Underway Suggest Leaks – There have been many instances of rumours or speculation of a possible offer (often the bidder is identified by name in the media or details of the bid leaked) where the rumour or speculation is confirmed by a formal takeover announcement days or weeks later.  More often than not, a takeover bid announcement in Canada is preceded by undue movement in the share price and significant increases in volume of share trading.  These price movements and increases in volume of trading are often the result of leaks and insider trading. Public shareholders are not on an equal footing with insiders and tippees.

Clearly, our disclosure requirements for M&A transactions are deficient if they do not mandate disclosure (1) of a serious offer to a listed company and permit insiders to trade with price sensitive information that has not been made public and (2) when insiders and tippees are trading with public investors who are in the dark and either the bidder or the listed company (or both) are aware that illegal insider trading is likely taking place.

UK Takeovers Code

For many years, the UK Takeovers Code has required that an announcement be made when (1) a serious offer has been made to the board (regardless of the position of the board on the offer) or (2) where there are discussions underway that may lead to a takeover bid and where there is unusual trading activity suggesting that there has been a leak.  Several other common law jurisdictions have adopted the UK M&A timely disclosure requirements. The UK requirements are set out below.

Eliminate the Opportunity for Insider Trading

FAIR Canada believes that solution to the problem of widespread insider trading include timely disclosure requirements specifically targeted at mergers and takeover bids that mandate early disclosure of impending takeover bids. Timely disclosure will eliminate the opportunity to profit from insider trading and result in more transparent and fair trading in advance of takeovers and mergers.

Click here to view FAIR Canada Executive Director, Ermanno Pascutto on BNN SqueezePlay commenting on insider trading and defective disclosure rules on December 21, 2010.

Click here to view comments by FAIR Canada Executive Director, Ermanno Pascutto, given during a recent BNN interview (Rudyard Griffiths) on November 12, 2010.

Click here to view the Globe and Mail’s interview (Jeff Gray) with Ilana Singer about illegal insider trading in the legal profession.

Click here to view the Globe and Mail’s article (Martin Mittelstaedt) regarding leaks and insider trading in advance of mergers and takeover bids in Canada.

The Takeovers Code (UK)

The basic rule on when an announcement is required by The Takeovers Code is found in Rule 2:

2.2 WHEN AN ANNOUNCEMENT IS REQUIRED

An announcement is required:—

(a) when a firm intention to make an offer (the making of which is not, or has ceased to be, subject to any pre-condition) is notified to the board of the offeree company from a serious source, irrespective of the attitude of the board to the offer;

 (b) immediately upon an acquisition of any interest in shares which gives rise to an obligation to make an offer under Rule 9. The announcement that an obligation has been incurred should not be delayed while full information is being obtained; additional information can be the subject of a later supplementary announcement;

(c) when, following an approach to the offeree company, the offeree company is the subject of rumour and speculation or there is an untoward movement in its share price;

(d) when, before an approach has been made, the offeree company is the subject of rumour and speculation or there is an untoward movement in its share price and there are reasonable grounds for concluding that it is the potential offeror’s actions (whether through inadequate security or otherwise) which have led to the situation;

(e) when negotiations or discussions relating to a possible offer are about to be extended to include more than a very restricted number of people (outside those who need to know in the parties concerned and their immediate advisers); or

 (f) when a purchaser is being sought for an interest, or interests, in shares carrying in aggregate 30% or more of the voting rights of a company or when the board of a company is seeking one or more potential offerors, and:

(i) the company is the subject of rumour and speculation or there is an untoward movement in its share price; or (ii) the number of potential purchasers or offerors approached is about to be increased to include more than a very restricted number of people