Opinions clash on insider trading

Press, 6 October 1989, Page 3

Opinions clash on insider trading

By

PATTRICK SMELLIE

in Wellington

Doubts about whether new insider-trading laws can be made to work in their present form flared again yesterday with the release of conflicting official advice on their impact.

The Minister of Justice, Mr Jeffries, released papers from the Treasury and the Securities Commission strongly disagreeing with one another about the effects of the Securities Amendment Act 1988.

Included in the Treasury’s fears is potential for the Act to reduce the price for shareholding in State-owned enterprises being privatised. The act, which includes tough restrictions on what inside information can be divulged to whom where publicly listed companies are involved, has been widely criticised since its enactment last December.

The Treasury paper of May 17 found the Act presented problems for any major shareholder wanting to monitor the performance of its investment in a publicly listed company. In addition, it raised particular problems for the Crown in monitoring State-owned enterprises which were partially privatised, with shares listed on the Stock Exchange. “The Act may severely constrain the ability of a substantial shareholder in any listed company from obtaining price-sensitive, confidential information about the company in order to monitor its performance effectively, if the same information is not also made publicly available,” the report said. “From the Crown’s viewpoint, the Act could have a significant impact on its ability to monitor its interest in listed companies effectively.” It could also frustrate

majority shareholders’ ability to get the best possible price for their shares, and seriously questions whether a company can legally allow a due diligence process —. where prospective buyers go through a company’s books before final bids.

In its reply, on May 29, the Securities Commission said the Treasury appeared to have “some fundamental misconceptions” about the Act. It said insider trading occurred only where confidential information was used by someone to “deal or tip” for personal gain. It foresaw no difficulties for the privatisation process and only some difficult Court cases for publicly listed companies.

Dissatisfied with this, the Treasury sought a legal opinion from the law firm Chapman, Tripp, Sheffield, Young. In a report of August 29, the Treasury said that opinion found some of its fears well-founded. It had not “seriously misconceived the Act,” as suggested by the commission. “The Securities Commission may mislead in its summary of the law, and it does so in its dismissal of the seriousness of some implications,” the Treasury said. According to the Chapman Tripp opinion, the commission was wrong in some of its suggested methods for avoiding liability under the Act. It suggested also that the freedom to deal with a major stake in a publicly listed company held by a monitoring shareholder was significantly affected by the Act.