Insider Dealing: Defences

Defence

Types/Limbs

Provision in SFO

1. The dealing, counselling or procuring was made:

a. directorship:
for the sole purpose of acquiring shares as a director or intending director of a corporation; or

s 271(1)(a)
s 292(1)(a)

b. underwriting agreement:
the transaction was entered into in the performance in good faith of an underwriting agreement for the listed securities or derivatives in question; or

s 271(1)(b)
s 292(1)(b)

c. liquidator, etc.:
the transaction was entered into in the performance in good faith of his/her role as liquidator, receiver or trustee in bankruptcy.

s 271(1)(c)
s 292(1)(c)

2. ‘Chinese wall’ which is established for a corporation when three elements are satisfied:

i) a director or employee of the corporation possessed the inside information but the person who made the decision for the corporation to enter into the transaction did not have the inside information; and

s 271(2)(a)

ii) arrangements are in place to ensure that:
the inside information was not communicated to any person who made the decision to enter into the transaction; and no advice concerning the decision to enter into the transaction was given to that person by a director or employee who had the inside information; and

s 271(2)(b)

iii) the inside information was in fact not so communicated to any person who made the decision and none of the directors or employees who had the inside information in fact so gave the advice to any person who made the decision.

s 271(2)(c)

3. No profit motive test

the transaction was entered into or the disclosure was made not for the purpose of securing or increasing a profit or avoiding or reducing a loss by using inside information.

s 271(3)
s 292(3)

4. Agency

The individual deals, counsels, or procures another person to deal as agent, and that he/she did not select or advise on the selection of the relevant securities or derivatives, and did not know that his/her principal was a person connected with the corporation or had inside information.

s 271(4)
s 292(4)

5. Off-market transactions between insiders

The individual and the other party to the dealing in question entered into the dealing directly with him/her, and at the time of the transaction, the other party to the dealing knew, or ought reasonably to have known, of the inside information. This defence is only available if at the time of the transaction, the dealing in question was not required to be recorded on the Stock Exchange or to be notified to a recognised exchange company under its rules.

s 271(5)
s 292(5)

6. Dealing with an insider

(i) at the time when the individual entered into the dealing, other than as a person who has counselled or procured the other party to the dealing to deal in the relevant securities or derivatives, the other party to the dealing knew, or ought reasonably to have known, that the individual was a person connected with the corporation; or

s 271(6)
s 292(6) 

(ii) the individual establishes that through his/her counselling or procuring another person to deal, the other person did not counsel or procure another party to the dealing in question to deal and at the time of counselling or procuring, the other party to the dealing knew, or ought reasonably to have known, that the other person was a person connected with the corporation.

s 271(7)
s 292(7)

7. Market information

The individual acted in connection with any dealing in securities or derivatives which was under consideration or was the subject of negotiation, or in the course of a series of such dealings, with a view to facilitating the accomplishment of the dealing or the series of dealings and the inside information was market information arising directly out of his/her involvement in the dealing or the series of dealings.

s 271(8)
s 292(8)

“Market information” means information consisting one or more of the following facts:

• that there has or is to be (or that there has not been or is not to be) a dealing in listed securities or their derivatives or that any such dealing is under consideration or negotiation;
• the quantity and price (or price range) of the listed securities or their derivatives; and
• the identity of the persons involved.

s 271(10)
s 292(10)

8. Market contract

The dealing is a market contract, which is a contract subject to the rules of a recognised clearing house entered into by the clearing house with a clearing participant pursuant to a novation which is both in accordance with those rules and for the purposes of the clearing and settlement of transactions in securities or futures contracts effected on a recognised stock market or a recognised futures market or subject to the rules of a recognised exchange company.

s 271(9)
s 292(9)
Sch 1, Pt 1, s 1.

9. Trustees and personal representatives

A trustee or personal representative has a defence if he/she can prove that he/she acted on advice obtained in good faith from another person and that other person appeared to him/her to be an appropriate person from whom to seek the advice. Furthermore, it did not appear to the trustee or personal representative that, if the other person had dealt in the relevant securities or derivatives, insider dealing would take place.

s 272
s 293

10. Exercise of a pre-existing right

The individual dealt in the relevant securities or derivatives by way of his/her exercise of a right to subscribe for or otherwise acquire such securities or derivatives and the right was granted or was derived from securities or derivatives that were held by him/her before he/she became aware of any inside information.

s 273
s 294