Inside information – when are you “infected”?

The relevant definitions set out in section 77 of the FMA are:

“inside information”, which means “ specific or precise information, which has not been made public and which-

(a) is obtained or learned as an insider; and

(b)   if it were made public, would be likely to have a material effect on the price or value of any security listed on a regulated market or of any derivative instrument related to such a security”; and

“insider”, which means “a person who has inside information –

(a)   through

(i)     being a director….of an issuer of securities listed on a regulated market…..to which the inside information relates; or

(ii)    having access to such information by virtue of employment, office or profession; or

(b)   where such person knows that the direct or indirect source of the information was a person contemplated in paragraph (a)”.

As an aside, one can separately debate whether projections and profit forecasts (listed companies’ boards and management will no doubt be running these on a constant basis, trying to predict the impact of the COVID-19 pandemic) are necessarily “inside information” in the first place, given the “materiality” and “specificity” requirements in the definition. For present purposes it should be accepted that forecasts can indeed be “inside information”, depending on various factors which we will not delve into right now. In order for dealing in securities to constitute the offence of insider trading in terms of section 78 of the FMA, the person who deals in the securities, whether directly or indirectly or through an agent, must be an “insider”. This by definition requires “knowingly” being “in possession” of inside information when trading. Accepting for present purposes that the offence can apply to juristic persons, when does a juristic person knowingly “possess” inside information in respect of another company?

This is an area of market abuse law which still needs to be fully thrashed out and developed in the courts. Considering that companies can only operate and acquire knowledge through natural persons, the applicable doctrine to answer this legal question is likely to be the tried and tested “directing mind doctrine”, which is applied in a wide range of areas of the law in determining whether acts, omissions or knowledge of information may be imputed to a corporate organisation. Whilst “Chinese walls” defences are not expressly recognised or regulated in the FMA, it is arguably the case that the directing mind doctrine leads us to substantially the same point, and that it will remain as important as ever that investor companies keep and observe their systems in place in this regard.

In terms of the directing mind doctrine, the acts and omissions, intentions, purposes and knowledge of particular natural persons are those of the company if, within their appropriate sphere, such persons are an “embodiment” of the company itself and accordingly their minds are the company’s mind, their knowledge is the company’s knowledge and their intention is the company’s intention. The question is, who was/were the directing mind of the company in relation to that matter – and indeed the last few words are apparently of key importance, as indications are that the doctrine is applied on an activity-specific and transaction-specific basis (e.g. Consolidated News Agencies v Mobile Telephone Networks 2010 (3) SA 382 (SCA)).  

The identification of the directing mind is primarily a constitutional question, depending in the first instance upon the powers entrusted to a person by the governance and internal decision-making documents and structures of an organisation.

Once the directing mind of a company in relation to a decision has been identified, the next question is whether the individual or group of individuals (e.g. board of directors or committee) which comprise the directing mind had knowledge of the information in question. Accordingly, if the individual or group of individuals who are the “directing mind” of the company possess certain inside information, the company can be deemed to have such possession of inside information. What about the case of a large board of directors where perhaps only one or two directors possess the inside information – is the whole board then “tainted”? This remains an intriguing and largely untested area. It seems perhaps intuitive that at least a majority of the directors need to possess the information before there is attribution to the board (and thus the company) as a whole, but this should certainly not be viewed as an immutable principle: in every case the particular director’s role, influence and input should be considered. Recusal of the relevant director(s) from any decision-making process in respect of dealing in the listed securities may be the best advice in most circumstances, to the extent practicable. 

Considering that there is no specific authority relating to this principle in the context of the market abuse provisions of the FMA, the directing mind doctrine must be cautiously applied on a case-by-case basis, as it is dependent on the applicable facts and decision-making structure and culture of the organisation. Therefore directors of investor companies who have cross-directorships in listed investee companies need to be wary of their potential insider status.