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Australian Insider Trading Laws – Forever unclear and inconsistent?

Australian Insider Trading Laws – Forever unclear and inconsistent?

This Article provides a brief insight into the Australian insider trading laws and how their judicial application has been perceived as vague and complicated, hindering public confidence and market integrity.

Section 1042A of the Corporations Act 2001 (Cth) (“the Act”) defines information to mean:

“a)  matters of supposition and other matters that are insufficiently definite to warrant being made known to the public; and

b) matters relating to the intentions, or likely intentions, of a person”.[1]

It is not contended that this definition is ambiguous; however, case law has sought to extrapolate the meaning of Section 1042A of the Act. In Australian Securities and Investments Commission v Citigroup Global Markets Australia Pty Ltd (ACN 113 114 832) (No 4)[2] (“Citigroup”) the definition of ‘information’ was broadened to include “factual knowledge obtained by means of a hint or veiled suggestion from which the receiver of it can impute other knowledge”.[3]

But when is it ‘inside information’?

The realisation and acting upon any obtained information, understandably, does not necessarily negate the legality of resulting business. That is, unless it can be adduced that the means of which the information was obtained can be deemed as constituting ‘inside information’, namely whether:

“a)  the information is not generally available; and

b) if the information were generally available, a reasonable person would expect it to have a material effect on the price or value of particular Division 3 financial products”.[4]

So what constitutes ‘generally available’ information?

The Act tends to indicate that for information to be general available it must be readily observable or disseminated within a reasonable time period. More specifically, whether:

a) “It consists of readily observable matter; or

b) Both of the following apply:

i It has been made known in a manner that would, or would be likely to bring, bring it to the attention of persons who commonly invest in Division 3 financial products of a kind whose price might be affected by the information: and

ii Since it has been made known, a reasonable period for it to be disseminated among such persons has elapsed; or

c) It consists of deductions, conclusions or inferences made or drawn from either or both of the following:

i information referred to in paragraph (a);

ii information made known as mentioned in subparagraph (b)(i)”.[5]

‘Readily observable’ is described as “facts directly observable in the public arena”,[6] or with regard to (a)(i), whether the information has been made available to common investors regardless of the size of the respective sector and applicable to both listed and unlisted companies.[7]

It is noteworthy that the words ‘public arena’ have not been confined to matters within Australia, and ‘generally available’ and ‘readily observable’ information includes information that is available overseas[8] and information that is obtained whilst within a subsidiary of a non-Australian conglomerate.[9]

When is it deemed to have had a ‘material effect’?

Despite a lack of clarity in the Act, Jacobson J in Citigroup commented in the context of share prices, that there would need to be information that ‘would, or would be likely to, influence persons’ who commonly acquire shares in deciding whether or not to acquire or dispose of[10] said shares, and/or the potential influence on general investor behaviour[11] before such information would have a material effect on the share price. Hence, information is deemed to have a greater material effect when it is derived from a more credible source.

In R v Bo Shi Zhu[12] the seniority of an employee was deemed directly relevant in considering the serosity of the matter, It was stated that generally an employee in a higher position possessed greater better ability to hide a breach of insider trading.[13]

What if the information was factually untrue?

The High Court in Mansfield v R and Another[14] rejected that the information possessed must be of a factual reality,[15] false facts and stipulations of fiction would not be excluded, regardless of whether they were acquired knowingly or unknowingly.[16] Rather, greater focus is placed on the intent and use of said information rather than its underlying validity.

Insider trading laws in Australia

In the late 1980’s the Griffiths Committee report[17] established various policy objectives as a basis for addressing and hindering insider trading, including:

a. Market Fairness;

b. Fiduciary duty theory;

c. Economic efficiency; and

d. Misappropriation theory (corporate injury).

The fiduciary duty theory lost applicability with the introduction of insider trading laws in Australia which removed the requirement of a link between the ‘insider’ and ‘the corporation’ in order to constitute insider trading.[18]

Misappropriation theory refers to damage caused to a respective company as a result of having inside information,[19] yet lacks the consideration that price sensitive information in possession, whilst not generally available, without misappropriation, does not necessarily ‘injure’ a company.[20] Section 1043A[21] of the Act, sets out the prohibited conducted of a person in possession of inside information. The High Court in He Kaw Teh v R[22] noted that ‘possession’ requires a cognitive element of awareness that the information was “in fact in the possessor’s physical control”.[23]

As a result, market fairness and economic efficiency remain the accepted rationales for prohibiting insider trading according to The Companies and Securities Advisory Committee (CAMAC).[24] Market fairness (as the name suggests) proposes that the access to information should be fair and equal within the market place, whereas economic efficiency focuses on protecting investor confidence in the market.[25]

These two rationales have been the subject of debate by both academics and professionals, with arguments that they envision conflicting goals, and are incompatible with one another.[26]

Conclusion

Without divulging into deliberation on the apparent ‘legislative astigmatism’ between the policies, the effect of the current legislation on endorsing a benchmark for prohibiting insider trading with regard to both policies clearly demonstrate that there is a underlying consensus of the court’s need for increased efficiency in legislature interpretation.

Whilst the current legislation meets a satisfactory standard of these policy objectives, there still remains an inconsistency in common law decisions and conflicting interpretations between judges, which in return, hinders investor confidence.

The almost feeble attempts at reform have done little to assist with this longstanding problem which suggests that there is a need for redefined practical legislation before there can be a noticeable change in public confidence in the accessibility of price sensitive information by market participants.

This article is intended only to provide a summary of the subject matter covered. It does not purport to be comprehensive or to render legal advice. No reader should act on the basis of any matter contained in this article without first obtaining specific professional advice.

For any further information concerning this article, please contact JHK Legal.

 

Author: Matthias Klepper, Paralegal

Published: June 2015

 

[1] Corporations Act 2001 (Cth), s 1042A.

[2] (2007) 241 ALR 705.

[3] Ibid at 534.

[4] Corporations Act 2001 (Cth), s 1042A.

[5] Ibid, s 1042 C.

[6] Explanatory Notes, Corporations Legislation Amendment Bill 1991 (Cth) at 328.

[7] Ibid.

[8] R v Kruse [1999], (Unreported, O’Reilly J, Dec. 2, 1999) (District Court, NSW 1999).

[9] R v Bo Shi Zhu [2013] NSWSC 127.

[10] Ibid at [566].

[11] Hannes v DPP (No 2) (2006) 60 ACSR 1 at 9.

[12] R v Bo Shi Zhu [2013] NSWSC 127.

[13] Ibid at [190].

[14] (2012) 293 ALR 1.

[15] Ibid at [6].

[16] Ibid at [72].

[17] The Anisman Report in 1986; the Griffiths Committee in 1898; 2001 CASAC Discussion Paper on insider trading; The CAMAC Insider Trading Report (2003), and the Insider Trading Position and Consultation Paper (March 2007) (PCP).

[18] D. Pompilio. ‘On the Reach of Insider Trading’ (2007) 25 Company and Security Law Journal, 468.

[19] A. Jacobs. ‘Time is Money: Insider Trading from a Globalisation Perspective’ (2005) 23 Company and Security Law Journal, 237.

[20] D. Pompilio. ‘On the Reach of Insider Trading’ (2007) 25 Company and Security Law Journal, 469.

[21] Corporations Act 2001 (Cth).

[22] (1985) 60 ALR 449.

[23] Ibid at [450].

[24] The Hon Chris Pearce MP, ‘Insider Trading: Position and Consultation Paper 2007’.

[25] Simon Rubenstien, ‘The regulation and prosecution of insider trading in Australia: towards civil penalty sanctions for insider trading’ (2002) 20 Company and Securities Law Journal 89 at 93.

[26] R v Firns [2001] NSWCCA 191 at [53].

Why a Corporate Trustee is always a good idea

The trust is a commonly used asset protection mechanism allowing clients to quarantine assets from access by their creditors.  Whether to appoint a corporate trustee is often the subject of considerable contemplation by clients and in some circumstances clients’ determine that it will be more cost effective to act in their personal capacity as a trustee to avoid the yearly ASIC compliance costs and additional financial returns.

A trust, in its simplest expression, is a personal obligation binding on the legal owner of property to deal with that property for the benefit of the beneficiaries.  As the trust is not a separate legal entity and the trustee is the legal owner of the property held on trust for the beneficiaries, unless that trustee ensures that it incurs liabilities on the basis that only assets held on trust are available for payment of the debt, the trustee may be personally liable.

If there is no express agreement between the trustee and the other contracting party, whether the trustee is personally liable is determined by looking at the transaction as a whole and the terms of the documents.  The general position is that a trustee has the right to be indemnified/reimbursed from the assets of the trust (this right is not removed on resignation of the trustee as the right of indemnity arises on the date the trustee incurs the liability to the third party, so the date of the debt).

Example: where a trust is being used to operate a business, if the trustee is lax and does not ensure that contracts with suppliers are limited to enforcement against the trust assets only, those supplier creditors are able to look to the trustee personally for payment.  This means that if an individual decides to be a trustee of a trust their personal assets may be at risk to claims by creditors.

So, when looking at the above example:

the trustee would be entitled to utilise the trust assets to pay the debts (or if a former trustee, to apply to the new trustee for the debts to be paid from the assets of the trust);

if the assets of the trust were insufficient to cover the liability and the relevant contract limited the other party’s right of action as against the assets of the trust, the other party would be unable to claim the balance owing from the trustee;

if the relevant contract was silent, the other party could proceed to seek to hold the trustee personally liable for the balance owing after the assets of the trust were used and the trustee would need to argue that the facts and circumstances warranted restricting the liability to the assets of the trust.

It should be remembered that provided a trustee has acted in accordance with its obligations, it should be entitled to a form of reimbursement or indemnification from the assets held on trust pursuant to the terms of the trust deed or under applicable trust law statute.

But it also means that a trustee may be left personally liable for the debts if:

(a)           the terms of agreements entered into as trustee are not limited to enforcement as against the trust assets; or

(b)           there are insufficient assets held in trust for the trustee to satisfy the debts; or

(c)           there has been a change of trustees and the new trustee has divested the assets of the trust (the trust property will vest in the new trustee as at the date of appointment and the former   trustee will need to apply to the new trustee for reimbursement from the trust property.  Liabilities incurred in relation to the trust property do not transfer to the new trustee but remain  with the former trustee as at the date they were incurred).

This personal liability of the trustee extends so far as allowing a creditor to seek to have the trustee wound up (in the case of a company) or bankrupted (in the case of a natural person) if the trustee has insufficient assets to satisfy the debts.

This is where the use of a corporate trustee is of benefit particularly given the modern commercial approach adopted by financiers where finance is provided to trustees on terms that the trustee is bound personally and in its trustee capacity for the debt.

A corporate trustee can be removed and subsequently wound up without the personal assets of the operators of the business being affected (unless they have provided guarantees).  In the instance of a corporate trustee, it allows families and businesses to asset protect by using the shareholder and director liability safeguards in the Corporations Act 2001 (Cth) and allowing, for instance, one party to a marriage to be asset rich and removed from the business transactions while the other takes on the financial risks associated with a business.

Considering the above, the risks of deciding to act in your personal capacity as trustee must be carefully weighed against the financial costs of establishing and administering a corporate trustee, which, over the life of the trust may be minimal in comparison to the monetary value of your personal assets being placed at risk by you being a trustee and your personal assets being considered accessible by a Court.

If you would like to discuss the above further please contact JHK Legal on 07 3859 4500.

Author: Belinda Pinnow, Associate

Published: June 2016

Foreign Judgments in Australia – Tips and Traps of the Statutory Regime

Sarah Jones, Legal Practitioner Director

In these days of close international relations, the need to enforce a judgment made by a foreign court against a person who has moved to or is residing in Australia is becoming more common. Australia has a statutory regime to assist with this: the Foreign Judgments Act 1991 (Cth) (“the Act”) and the Foreign Judgments Regulations 1992 (Cth) (“the Regulations”).[1]

Which judgments can be registered?

A money judgment that is final and conclusive and was given in a superior court of a county to which Part 2 of the Act extends may be registered in Australia.[2]

The Regulations list the superior courts of the countries with substantial reciprocity of treatment. Judgments given by those courts will be registrable in Australia via the Act. This includes higher courts (for example, Supreme Courts and/or High Courts) of 35 countries.[3]

Section 6 of the Act requires an applicant to bring the application to register the judgment (if it meets the requirements above) within 6 years of the date of the judgment.

What is the process to register?

The application to register should be made in the Supreme Court of the relevant state or territory of Australia where the applicant wishes to enforce.[4] The relevant factors to meet are included within each state’s legislation. For the purposes of this article, the New South Wales process is used, but it is generally referable in the different Australian states and territories.

In New South Wales, an originating summons, along with supporting affidavits must be filed with the Supreme Court in order for the application to be heard. The Registrars of the Supreme Court in New South Wales do not have delegated power to deal with the application where it is ex parte, and therefore it must be heard by a Supreme Court Judge.[5]

What factors must be met?

The New South Wales Uniform Civil Procedure Rules 2005 (NSW) includes a statutory list of evidence which must be provided to the Supreme Court in order to successfully register a foreign judgment.

This includes:[6]

  1. The judgment or a verified or certified copy of the judgment from the original court; As well as evidence that the judgment can be enforced in the country of origin and that, if it were registered by the Supreme Court, it would not be liable to be set aside;
  2. Advice where only some of the provisions of the judgment are the subject of the application;
  3. Evidence showing the amount originally payable;
  4. Evidence showing that the Supreme Court is the appropriate court pursuant to s 6 of the Act;
  5. Evidence of the name, trade or business, and the usual or last known address of both parties;
  6. Evidence showing that the judgment creditor is entitled to enforce the judgment;
  7. Relevant interest calculations;
  8. The extent to which the judgment is unsatisfied; and
  9. Any such other evidence as may be required.[7]

The evidence may be produced by way of the supporting affidavits.[8]

Calculations

It’s important when calculating interest that: the rate of interest, the amount of interest up to the time of the application, and the daily amount of interest sought thereafter are all attested to and calculated.[9]

Further, as the judgment will be in a foreign currency, within 24 hours before filing the application a currency exchange to Australian dollars should be calculated. Our view is that three (3) different exchanges should be considered, and the median should be used for the calculations.

Which orders should be sought?

The following orders ought to be sought:

Registration of a foreign judgment pursuant to part 2 of the Act and the relevant rule of the state legislation;[10]

An order that the summons/application need not be served on the judgment debtor;[11]

An order that, once the registration is completed, the judgment debtor will have a limited time to make an application to set it aside.[12]

As to point 3, it is appropriate to make this a timeframe that is reasonable in the relevant state (for example: 21 days).

How do you then enforce the judgment?

Once the order has been made by the Court, a Notice of Registration of Foreign Judgment, a copy of the orders made and a copy of the original judgment should be personally served on the judgment debtor (usually an individual for the purposes of registering a foreign judgment).

Once the timeframe to set aside the order has lapsed, if no such application is made, the applicant (judgment creditor) may seek a copy of the registered judgment from the Registrar of the Supreme Court,[13] and that judgment may be enforced as if it were an Australian money judgment.

 

Author: Sarah Jones, Legal Practitioner Director

Published: June 2016

 

[1] It should be noted that this article will not cover common law principles where there is no international agreement or the very specific laws which exist between New Zealand and Australia with respect to some judgments.

[2] Section 5 of the Act.

[3] Schedule to the Regulations.

[4] Section 6 of the Act and Rule 53.2 of the UCPR (NSW).

[5] Section 13 Civil Procedure Act 2005 (NSW).

[6] Rule 53.3 UCPR (NSW).

[7] For example, where a Plaintiff’s name has changed between instituting proceedings in the original court and bringing the application for registration of a foreign judgment, an affidavit annexing appropriate evidence showing the names are one in the same party, will be acceptable evidence: Bank of South Pacific Tonga (Formerly Westpac Bank of Tonga) v Tricia Emberson [2016] NSWSC 383.

[8] See, for example, Raffaele Viscardi SRL v Quality Centre Food Services Pty Ltd [2013] NSWSC 1104; Bank of South Pacific Tonga (Formerly Westpac Bank of Tonga) v Tricia Emberson [2016] NSWSC 383.

[9] Rule 53.3(i) UCPR (NSW).

[10] The Act.

[11] Rule 53.2 of the UCPR (NSW).

[12] Section 6(4) of the Act.

[13] Section 15 of the Act.