Whilst some commentators have intimated the buying of shares by two company directors just three days before the release of price sensitive sales results was on the limits of insider trading laws, ASIC has decided to issue David Jones with a ‘no further action’ letter. Despite ASIC’s decision to not take further action, the share trading has still resulted in the resignation of the relevant directors.
On 10 January 2014, less than two weeks after ASIC announced its conclusion of the two month investigation, accused directors, Steve Vamos and Leigh Clapham, and David Jones Chairman, Peter Mason, have announced their decision to resign from David Jones as part of a ‘board renewal process’. This news comes after significant pressure from shareholders to remove the directors, despite the fact ASIC’s investigation yielded no evidence to prove that the trades were made in violation of the insider trading laws.
The investigation was sparked after criticism emerged following the alleged approval of share trading by two non-executive directors, just three days prior to the release of unexpected positive sales results, and one day following David Jones receiving a scrip merger proposal from industry rival Myer. The directors, who bought a total of 32,500 shares were said to have made the trades to illustrate their long-term commitment to the company. This was said to be because CEO, Paul Zahra, had announced his intention to resign earlier that month under suggestion there were disagreements between various board members.
Peter Mason, who allegedly approved the trading, claimed the directors were not privy to any price sensitive information. Yet his defence became unhinged after both announcements caused share prices to spike significantly, despite the merger announcement also stating the proposal was rejected. Mason allegedly still claimed the directors did not previously obtain the quarterly sales data and that the merger was not materially price sensitive. If it was found the directors did not have the quarterly sales information and the merger proposal did not satisfy the definition of materially price sensitive information, the directors would not have violated the insider trading laws (amongst other possible defences).
For ASIC to successfully prosecute an instance of insider trading, investigators must be able to satisfy four key tests, proving: the directors actually possessed the information at the time of trades; the information was inside information that was not generally available; the information was price sensitive; and the suspected directors knew, or ought to have known, the information was material and not publicly available.
While ASIC has not publicly released any information as to why the investigation was dismissed, it is potentially relevant that investigators may not have formed the view that the directors knew the information concerning the quarterly sales and that the merger offer was price sensitive. While the announcement of the merger did result in an increased share price, the definitions given in the Corporations Act states that, ‘for information to be material, a reasonable person would be taken to expect that the information would, or would be likely to, influence persons decisions in deciding whether or not to acquire shares’. As this was a ‘merger of equals’ where David Jones would not have received any premium on their share price, the value of the company and shares arguably would not have increased, making it difficult to prove the information of the merger was, by definition, material.
Regardless of the findings of the ASIC investigation, the resignations of the directors highlights the ever increasing need for appropriate corporate governance and security trading policies. Particular care should be taken whenever a company is ‘in play’ or pending release of formal results, if management information is available.