THE APPLICATION OF INSIDER TRADING LAWS TO CORPORATIONS This chapter will consider the theoretical basis for applying insider trading laws to
corporations. I will do this by first considering the manner in which Australian insider trading laws apply to corporations and, in particular, whether a corporation is a ‘person’ caught by the prohibition of insider trading. A comparative review of the positions taken in other jurisdictions will also be undertaken. Australian cases which have focused on insider trading issues relevant to corporations will be discussed. This chapter will also consider the
historical and theoretical bases for applying insider trading laws to corporations, as well as whether it is appropriate for corporations to continue to be subject to the prohibition of insider trading in Australia.
Is a Corporation a ‘Person’ Caught by the Prohibition of Insider Trading?
The elements of insider trading have already been considered in detail in chapter 2 of this thesis, but it is important to recall that under s 1043A of the Corporations Act it is an offence for a ‘person’ to engage in insider trading. The Corporations Act does not state whether a ‘person’ includes a corporation, as the term is not defined. However, there are several factors which make it clear that corporations are intended to be regarded as persons subject to the prohibition of insider trading – firstly, the operation of applicable principles of statutory interpretation; and secondly, the content of other relevant provisions within the Corporations
Act which specifically refer to corporations.
General principles of statutory interpretation can assist in this context, as s 2C(1) of the Acts
Interpretation Act 1901 (Cth) clearly states as follows:
In any Act, expressions used to denote persons generally (such as "person", "party", "someone", "anyone", "no-one", "one", "another" and "whoever"), include a body politic or corporate as well as an individual.1
Despite a difficult legislative history for corporations legislation in Australia, the Corporations
Act is quite clearly a Commonwealth statute, aided by the referral of powers to the
Commonwealth by State Parliaments. Additionally, s 5C of the Corporations Act specifically states that the provisions of the Acts Interpretation Act 1901 (Cth) apply to the Corporations
Act. Thus, when the term ‘person’ is used in the Corporations Act, it will include a
corporation (as a body corporate), unless a contrary intention is indicated.
Such a contrary intention is not indicated in the Corporations Act as, while the term ‘person’ is not defined, and the sections of the Corporations Act which specifically provide for the offence of insider trading do not expressly refer to corporations, it is clear from the nature and scope of other provisions of the Corporations Act that the prohibition of insider trading is intended to apply to corporations as well as natural persons. This is evident for the following three reasons:
Firstly, there are specific exceptions to the insider trading offence which are relevant only to corporations: for example, s 1043F of the Corporations Act provides an exception for bodies corporate which enter into Chinese Wall arrangements,2 and s 1043I of the Corporations Act provides a specific exception for a corporation in relation to ‘knowledge of its own intentions’ when proposing to acquire or sell shares in another corporation.
Secondly, s 1042G of the Corporations Act specifically sets out circumstances in which a corporation will be considered to possess information that is possessed by an officer of the corporation.3
1 Emphasis added. Of course, the overall context is a relevant consideration and a presumption that the term
‘person’ includes a body corporate can be rebutted if a court finds that there is a contrary legislative intention: D C Pearce and R S Geddes, Statutory Interpretation in Australia (LexisNexis Butterworths, 8th ed, 2014) 305. 2 The application of s 1043F of the Corporations Act is considered in detail in chapter 6 of this thesis. 3 The application of s 1042G of the Corporations Act is considered in detail in chapter 5 of this thesis.
70
Thirdly, the maximum penalty which may be imposed under the Corporations Act for insider trading differs between corporations and natural persons.4 Five years ago, the maximum penalties were increased as a result of amendments made to the Corporations Act by the
Corporations Amendment (No 1) Act 2010 (Cth) – the maximum penalty for a corporation is
a fine of $45,000 penalty units (currently $4,950,000),5 three times the total value of the benefits obtained that are reasonably attributable to the offence, or 10% of the corporation’s annual turnover for the twelve month period in which the offence occurred, whichever is the greater;6 the maximum penalty for a natural person is ten years’ imprisonment, or a fine of the greater of $4,500 penalty units (currently $495,000) or three times the total value of the benefits obtained that are reasonably attributable to the offence, or both.7
The existence of such provisions indicates that corporations are intended to be ‘persons’ subject to the prohibition of insider trading and that there is no ‘contrary intention’ in the
Corporations Act, which might otherwise provide evidence that the broad definition of
‘person’ in the Acts Interpretation Act was not intended to apply. Thus, these provisions offer support for the adoption of that definition in the context of insider trading. Therefore, under the current regulatory regime, the Australian prohibition of insider trading contained in the Corporations Act applies equally to corporations and natural persons.
International Comparisons
It is useful when considering potential law reform to review the legal position adopted in other jurisdictions, as a comparison of Australian insider trading laws with those of other jurisdictions offers an opportunity to determine if there are common approaches taken in regulating this type of conduct, or if there are substantial differences in the system of
4 Set out in item 310 of Schedule 3 of the Corporations Act. 5 Each penalty unit equals $170.00: Crimes Act 1914 (Cth), s 4AA.
6 Previously, the maximum penalty for a corporation was a fine of 10,000 penalty units ($1,700,000.00). 7 Previously, the maximum penalty for a natural person was a fine of 2,000 penalty units ($340,000.00) or
imprisonment for 5 years or both.
71
regulation that would offer opportunities for appropriate amendment. While Australia’s insider trading laws do not mirror those of any other jurisdiction in their application to
corporations, it will be seen that there is no one uniform model amongst other jurisdictions in relation to the manner in which insider trading laws are to be applied to corporations, or the availability or requirements of a Chinese Wall defence to insider trading. While deficiencies and problems may be identified in the application of insider trading laws to corporations in Australia, such deficiencies and problems are unlikely to be rectified by simply importing the legal position adopted in another jurisdiction. However, some aspects of the approach taken in other jurisdictions may afford suggestions for improvement for the Australian position. A significant difficulty arises when attempting to compare the application of insider trading laws to corporations in a variety of jurisdictions – there is a notable absence of applicable case law or corporate prosecutions on which to base any resulting analysis. The wording of the legislation can be compared and contrasted, but without judicial interpretation of the various provisions, it is more difficult to make meaningful or informed comparisons.
Although, as has been noted, almost all countries with securities exchanges prohibit insider trading,8 there is no uniform application of such a prohibition to corporations. Of the jurisdictions reviewed in detail in this thesis,9 all prohibit insider trading,10 and all apply the
8 Franklin A Gevurtz, ‘The Globalisation of Insider Trading Prohibitions’ (2002) 15 Transnational Lawyer 63, 65-
66; as discussed in chapter 1 of this thesis.
9 It is clearly beyond the scope of this thesis to examine the laws of every regulatory regime which prohibits
insider trading – accordingly, I have conducted a review of the laws of a number of jurisdictions - the European Union, Germany, Hong Kong, New Zealand, Singapore, South Africa, the United Kingdom, and the USA. I have chosen to focus on these countries and jurisdictions because they represent a variety of nations with securities markets, with varying characteristics and attributes, in an attempt to ensure a degree of diversity - they include common law jurisdictions (the United Kingdom, South Africa, the USA, New Zealand, Hong Kong and Singapore) and civil law jurisdictions (Germany) - thus ensuring the laws do not all have the same common source; they include countries with well-developed securities markets which have long prohibited insider trading (the United Kingdom, South Africa, the USA, Hong Kong and Singapore) and those whose securities markets have only relatively recently criminalised or prohibited insider trading (Germany and New Zealand); and they include countries from a variety of continents and regions – Europe, the Americas, Asia and Australasia, and Africa. A number of these jurisdictions were analysed by CAMAC when it undertook a review of Australian insider trading laws, as set out in CAMAC, Insider Trading Discussion Paper (2001), although the 72
prohibition to corporations, as well as to natural persons, as either a civil or criminal offence, or both. Indeed, the United Kingdom is the only jurisdiction to apply only civil liability for insider trading to corporations.11 All the other jurisdictions examined apply criminal liability for insider trading to corporations as well as natural persons.12
laws in several of the examined jurisdictions have changed significantly since that time. The insider trading laws of these jurisdictions will be regularly referred to, where appropriate, throughout this thesis. For ease of reference, the relevant provisions of the insider trading laws of these jurisdictions discussed are also set out in full in Appendix 2 to this thesis.
10 In the European Union, Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April
2014 on Market Abuse (Market Abuse Regulation) and the Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on Criminal Sanctions for Market Abuse, OJ 2014 L 173.179 (Market Abuse
Directive) set out a legal framework to be adopted by the Member States of the European Union as local legislation, prohibiting activities such as insider trading. As at the date of this thesis, the Member States of the European Union are Austria, Belgium, Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom. In Germany, insider trading is prohibited under s 14 of the Wertpapierhandelsgesetz (Securities Trading Act) (WpHG). In Hong Kong, insider trading (commonly referred to in that jurisdiction as ‘insider dealing’) is regulated under the Parts XIII and XIV of the Securities and Futures Ordinance (Hong Kong) cap 571. Section 241 of the recently implemented Financial Markets Conduct Act 2013 (NZ) prohibits insider trading. Division 3 of Part XII of the
Securities and Futures Act 2001 (Singapore) makes insider trading an offence in Singapore. In South Africa,
insider trading is prohibited under the Financial Markets Act 2012 (South Africa). In the United Kingdom, insider trading (commonly referred to in that jurisdiction as ‘insider dealing’) is prohibited as a criminal offence under Part V of the Criminal Justice Act 1993 (UK) c 36 and as a civil offence under Part VIII of the Financial
Services and Markets Act 2000 (UK) c 8. In the USA, the anti-fraud provisions in SEC rule 10b-5, promulgated
under s 10(b) of the Securities Exchange Act of 1934, 15 USC § 78a (1934) gives rise to the insider trading prohibition under USA law.
11 Kern Alexander, ‘UK Insider Dealing and Market Abuse Law: Strengthening Regulatory Law to Combat
Market Misconduct’ in Stephen M Bainbridge, Research Handbook on Insider Trading (Edward Elgar, 2013) 407, 412. In the United Kingdom, the criminal offence of ‘insider dealing’ applies only to ‘individuals’ under s 52 of the Criminal Justice Act 1993 (UK) c 36, thus limiting the application of the criminal offence to natural persons only, with no direct criminal liability for a corporation for insider trading. However, s 118B of the
Financial Services and Markets Act 2000 (UK) c 8 defines ‘insiders’ to include ‘any person’, and therefore
applies the civil prohibition to corporations: schedule 1 of the Interpretation Act 1978 (UK) c 30. It appears that in the United Kingdom, the original rationale underlying the limitation on the application of criminal insider trading laws to natural persons was to specifically avoid the difficulties large corporations (such as merchant
73
However, while all the jurisdictions examined apply insider trading laws to corporations as well as to natural persons in some form, there is no uniform manner in which those laws are banks) would face if they were subject to insider trading laws, and not because it was thought generally undesirable to make corporations criminally liable for insider trading: Paul Davies, Gower & Davies: Principles
of Modern Company Law (Sweet & Maxwell, 2012) 458. However, this reasoning now seems somewhat
incongruous given that corporations can still be subject to civil liability for insider trading, which therefore still necessitates merchant banks implementing Chinese Walls and other such arrangements in order to avoid conflicts of interest and prevent the flow of information.
12 In South Africa, insider trading is prohibited as both a criminal and civil offence under the Financial Markets
Act 2012 (South Africa), and s 78 of that Act provides that a person who is an ‘insider’ is prohibited from
engaging in insider trading. Although previous legislation in South Africa limited the application of insider trading laws to natural persons - under the Insider Trading Act 1998 (South Africa) – the current definition of ‘insider’ has been extended to include natural persons, legal persons and other entities: Financial Markets Act
2012 (South Africa), s 77. In the European Union, the Market Abuse Directive provides in recital (18) that
Member States should extend liability for the offences provided for in this Directive to legal persons. In Germany, both natural persons and legal persons are subject to the prohibition of insider trading contained in the Securities Trading Act (WpHG): The British Institute of International and Comparative Law, Comparative
Implementation of EU Directives (I) – Insider Dealing and Market Abuse (2005) 41. In Hong Kong, the insider
dealing provisions of the Securities and Futures Ordinance (Hong Kong) cap 571 apply to any ‘person’ who is ‘connected with’ a corporation under s 270, which includes both natural and legal persons, such as
corporations: s 3 of the Interpretation and General Clauses Ordinance (Hong Kong) cap 1. Section 247(2) of the Ordinance also expressly states that a corporation can be a person connected with another corporation. Section 241 of the Financial Markets Conduct Act 2013 (NZ) prohibits insider trading by any ‘information insider’, which is defined in s 234 of that act to be a ‘person’ in possession of inside information. The reference to a person includes both natural persons and legal persons, such as corporations: Interpretation Act 1999 (NZ), s 29. Section 234(2) of the Financial Markets Conduct Act 2013 (NZ) also provides that ‘a listed issuer may be an information insider of itself.’ Section 218 of the Securities and Futures Act 2001 (Singapore) prohibits a ‘person’ from engaging in insider trading, which includes both natural and legal persons:
Interpretation Act 1965 (Singapore), s 2. In the USA, the insider trading prohibition applies to natural and legal
persons, as evidenced by the applicable penalties under the Insider Trading and Securities Fraud Enforcement
Act of 1988 P.L.100-704 - the maximum fine for insider trading by legal persons such as corporations is
$USD25 million, although a further penalty representing three times the profit made or loss avoided can also be imposed. Additionally, the first case brought against a corporation for insider trading was the case of Merrill
Lynch, Pierce, Fenner and Smith, 43 S.E.C. 933 (1968) in the USA. This case will be discussed in detail in
chapter 6 of this thesis.
74
applied. As will be discussed in detail in chapter 5 of this thesis, Australia has a set of statutory provisions in the Corporations Act which specifically set out the manner in which the elements of the insider trading laws are to be applied to corporations. However, most of the examined jurisdictions do not have such statutory provisions within the relevant
legislation prohibiting insider trading and, as a result, the general principles of corporate criminal liability which are applicable in the relevant jurisdiction must be relied upon to determine the manner in which corporations may be found liable for insider trading.13 The exceptions are South Africa,14 where the relevant statute provides that principles of vicarious liability are to be used to determine corporate liability for insider trading, and Singapore,15 where the relevant statute adopts specific statutory rules to apply the elements of the insider trading offence to corporations.16 Additionally, even though corporations are subject to
13 Jurisdictions which do not have statutory provisions specifically providing for the application of the insider
trading prohibition to corporations include the European Union, Germany, the United Kingdom, the USA, New Zealand and Hong Kong.
14 Section 82(8) of the Financial Markets Act 2012 (South Africa) states that, in connection with liability for
insider trading, ‘the common law principles of vicarious liability apply’.
15 Section 226(1) of the Securities and Futures Act 2001 (Singapore) specifically provides that:
(a) a corporation is taken to possess any information which an officer of the corporation possesses and which came into his possession in the course of the performance of duties as such an officer; and
(b) if an officer of a corporation knows or ought reasonably to know any matter or thing because he is an officer of the corporation, it is to be presumed, until the contrary is proved, that the corporation knows or ought reasonably to know that matter or thing.
Section 236B of the Securities and Futures Act 2001 (Singapore) also provides that:
(1) Where an offence of contravening any provision in this Part is proved to have been committed by an employee or an officer of a corporation (referred to in this section as the contravening person) —
(a) with the consent or connivance of the corporation; and (b) for the benefit of the corporation,
the corporation shall be guilty of that offence as if the corporation had committed the contravention, and shall be liable to be proceeded against and punished accordingly.
16 These provisions will be returned to in chapter 5 when the application of insider trading laws to corporations
in Australia is analysed in detail.
75
insider trading laws in most jurisdictions, a Chinese Wall defence for corporations17 is not available in all jurisdictions – there is no Chinese Wall defence to insider trading in the European Union, Germany or South Africa. A number of jurisdictions do have a Chinese Wall defence available for corporations in respect of liability for insider trading,18 but as will be seen in chapter 6, those defences are similar to the Chinese Wall defence found in s 1043F of the Corporations Act, but with a number of points of departure.
The Historical and Theoretical Basis of the Application of Insider Trading Laws to Corporations
In Australia, it was originally unclear as to whether insider trading laws were intended to apply to corporations. The original prohibition of insider trading under the State Securities
Industry Acts focused on a ‘person-connection’ rather than an ‘information-connection’, with
primary liability for insider trading depending on a person being ‘connected with a body corporate’. This approach resulted in a distinction between ‘primary insiders’ - those who possessed inside information and had a connection with the relevant corporation (such as