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Prohibition On Stock Exchange Deals By Insiders, Etc

Volume 980: debated on Monday 3 March 1980

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I beg to move amendment No. 106, in page 78, leave out line 18 and insert:

'in those securities, knowing or having reasonable cause to believe that that person would deal in them on a recognised stock exchange'.

With this we may take Government amendments Nos. 107, 108 and 110.

These amendments are necessary to correct a technical defect in clause 65, making it an offence where an individual is prohibited from dealing on a recognised stock exchange to counsel or procure such dealing.

We are not convinced that this is a technical amendment. We are not very happy about the addition. I hope that the Minister will give a clearer explanation. We recognise the difficulty and technicality of such legislation. How important is the further provision in the subsection that the insider knows or believes that the person to whom the information is passed is likely to deal? What will be the effect of the addition? We are not convinced that it is necessary.

Presumably the Government's argument is that there is insufficient mens rea and that that adds to the guilty mind. However, sufficient mens rea has already been established. The individual insider, according to clause 65, has to know that he is prohibited. He has to know that he is in possession of unpublished price sensitive information.

We commend a possible alternative to the Government. If the Government argue that there is an insufficient test of mens rea in the present wording, why not create a rebuttable presumption, that by communicating the information to an outsider evidence has been given of the intention that the outsider should act on that information?

The other consideration is that by the addition of this phrase to the subsection the Government are putting an additional fence in front of the prosecution in the steeplechase that they have created. It adds to our fears that the legislation will be ineffective in leading to convictions, whatever may be the deterrent effect of the new insider provisions.

The insider could say "I gave him the information but it was up to him whether he acted on it. How was I to know?" That would be a clear defence and a further large hole in the net. It makes one wonder whether the fisherman is serious about catching the fish.

The accountancy profession has told us that the new penal clauses in respect of insider dealing will slow down disciplinary proceedings within professions. If it is unlikely that a conviction will succeed the insider may be better off, particularly bearing in mind the rule of the DPP not to sanction prosecutions unless there is a SO per cent. chance of success. Against our views, the Government have not assisted the prosecution over detection with a cadre of inspectors on whom it can rely for pursuing offenders.

We fear that not only will prosecutions not succeed but, in view of the obstacle course created, they may not even be sanctioned. We are not happy about the erection of a further hurdle to the prospects of a successful prosecution.

The hon. Member for Swansea, East (Mr. Anderson) makes a serious point. In my brief introduction I said that the amendments correct technical defects to clause 65, which makes it an offence, where an individual is prohibited from dealing on a recognised stock exchange, to counsel or procure such dealings. By virtue of clause 67, it is similarly an offence to counsel or procure off-market dealing, where the individual is prohibited from such dealing. However, as drafted, there might be no offence if the individual counselled or procured another person to deal either on a recognised stock exchange or off-market or without indicating where the dealing was to be done.

These amendments remove that problem by making it an offence to counsel or procure dealing where the individual knows or has reasonable cause to believe that the dealing would be done on a recognised stock exchange, in the case of clauses 65 and 66, or off-market, in the case of clause 67. Therefore, where the procurer knew that the dealing would be either on a recognised stock exchange or through an off-market dealer, but did not know or care which would be used, he will not escape the provisions of the clauses as he might do as they are presently drafted.

Far from not seeking to tighten up that particular law, the amendments are a further earnest of the Government's intent to make sure that the law is as watertight as possible.

My hon. Friend the Member for Swansea, East (Mr. Anderson) does not dissent from the Minister's explanation. However, we are presented with a highly complex set of proposals in the Bill, which will shortly be enacted. I should like to take this opportunity—and I hope that I will not be ruled out of order—to suggest that it might be helpful if the Government, having regard to the substantial changes taking effect in the Bill, will publish a White Paper or some guidance on the purpose of the various provisions. I hope that the Minister will consider the possibility of making available some form of explanatory document relating to the Bill shortly after its enactment. Perhaps it might be possible to do this before the Bill is considered in another place. However, I concede that this might not be possible.

With the leave of the House, Mr. Deputy Speaker, I agree that the hon. Member for Hackney, Central (Mr. Davis) has made a fair point. I do not know whether it is practicable. I expect that when all these amendments are incorporated in the Bill and the Bill, as finally amended, is reprinted, the hon. Member will realise that it is a crystal-clear piece of legislation and that his proposal will be unnecessary. However, without giving any sort of undertaking, I note what he says and I shall consider the matter.

I am not thinking of the parliamentarians who have been involved in this Bill and its predecessor. I am thinking mainly of the public—the company directors and secretaries who will have to wrestle with these complicated problems. I am not suggesting that these people should not consult with lawyers and accountants with alacrity—indeed, I have a vested interest in seeing that they do, as has almost every other hon. Member in the House at present.

The hon. Member is undermining that vested interest, especially if he writes articles. If the Department issues a circular it will take the ground away from under the feet of the person who writes articles.

Amendment agreed to.

I beg to move amendment No. 399, in page 78, line 29, at end insert—

'(a) entering into a transaction relating to the securities of a company with a person to whom he has disclosed his connection and the nature thereof with the company.'.

With this we may take the following amendments: No. 376, in page 78, line 30, at end insert 'solely'.

No. 375, in page 78, line 35, after 'as', insert 'mortgagee, chargee,'.

Clause 65 (1) forbids anyone connected with a company, dealing on a recognised stock exchange or through an off-market dealer in securities of the company with which he is connected, if he has, by virtue of that connection, any inside information which could affect the price of the securities and which he would not be expected to disclose to an outsider.

As clause 65(8) stands, the subsection provides for the lifting of the ban that I have mentioned when the person concerned is not dealing for profit-making, loss-avoidance or in certain other specified circumstances. There is an anxiety that directors will always be deemed to have both a connection and the information which could bring them within the prohibitions of clause 65(1). There is also anxiety that clause 65(8) provides no real escape even if a director is, for example, selling because he needs the cash. Is it possible for him to say that he has no view about profiting from that sale? It would be difficult for any director, even when acting quite genuinely, to bring himself within the terms of subsection (8).

9 pm

To make the proviso in subsection (8) a little more reasonable, I have proposed in amendment No. 376 that the word "solely" should be inserted into the paragraph, which would then read
"doing any particular thing otherwise than with a view solely to the making of a profit".
That would provide some relief, and would not be harmful to anyone who buys from or sells to the director the shares of a company.

Even if the House were to accept that modest amendment, I do not think that it would relieve the anxiety which is prevalent about the director being unable to buy or sell the shares of the company of which he is a director through stock exchange procedure. The essence of insider dealing is that it is fraudulent. One cannot be said to defraud a person if that person knows the facts and acts with his eyes open.

If it is possible to inform the other party in any deal that in such a transaction he is dealing with an insider, and inform him of the nature of that insider's connection with the company, there can be no misrepresentation either expressed or implied. If there is no misrepresentation, there cannot be any fraudulent misrepresentation.

Amendment No. 399 seeks to lift the ban in clause 65(1) if the person connected with the company discloses to the other party that connection. I recognise that the difficulty is to establish how a director can so disclose if he is dealing on the stock exchange and has put his shares on the market. He could not do so if he were buying securities in that company. In such a case he would not be able to bring himself within the terms of my proposed amendment, and he would have to seek a private deal.

I believe that the director who wishes to sell his shares, which he holds in his own company, would have to be given some escape clause to deal with those shares. The prohibition set by clause 65, if it remains as it is, so radically alters the present practice that some new practice must be devised. If a new practice can be based on the fact that the person selling the shares, if he be a director of the company, discloses that fact, there can be no essence of fraud in the deal which is implied by calling it insider dealing.

Perhaps in future it will be necessary—if a director puts his shares on the market—for those shares to be marked. It may be that he is thereby a second class shareholder. If there is some marking of the shares being offered for sale it will provide the director with an opportunity to sell his shares. By that means he would be disclosing to the other person in the deal his connection with the company and the fact that he might have information.

Amendment No. 375 deals with clause 65(8)(b), which lifts the ban on transactions in the course of the exercise, in good faith, of the functions of a liquidator, receiver or trustee in bankruptcy. Such persons have a duty to others to sell at the best price and if they do not do so, for fear that information that they have about the company may prevent their doing so, they are surely in breach of their duty to the beneficiaries for whom they are acting. That is the reason for the lifting of the ban on liquidators, receivers and trustees in bankruptcy.

However, a mortgagee of shares, if exercising his power of sale as a mortgagee also has a well-recognised duty in law. His duty is to the mortgagor and is to sell at the best price. If he is connected with a company and has information that may affect the price of the shares he may find a conflict between his duty to the mortgagor to sell at the best price and his obligations under the clause not to carry on insider dealings.

However, a mortgagee is in exactly the same position in this respect as a liquidator, a receiver or a trustee in bankrutcy and I submit that mortgagees and chargees should be specifically mentioned in the lifting of the ban.

My right hon. Friend's important group of amendments deals with a problem which we discussed at length in Committee and about which a number of people have since written to me.

I know that a number of directors feel that they would be unwise to hold shares in their own companies after the Bill becomes law. They feel that they will be in possession of almost the sort of information that might make them insiders. I believe that the fears can be overstated and the matter boils down to a debate about whether directors are regularly in possession of information that, if known, would move the price.

It is incontrovertible that directors know more about their businesses than does anyone else, but the number of occasions in a year when directors have the sort of information that, if known, would move the price are few. Since the Committee stage I have discussed the matter actively with a number of business men. I ask them "Is your business doing quite well?" and they reply "Yes, quite well." When asked, "Well enough that, if known, the price would move?" they say, "Oh, no. The price does not move because I know the business is doing well. The price moves in certain circumstances that I know full well—when there is a bid, when we suddenly discover an asset that we did not think was worth very much is suddenly valuable".

That sort of thing, when we know it—we know it very rarely—moves the price. I should, therefore, like to take this opportunity to repeat what t said in Committee. It is difficult not to repeat oneself at this stage of the Bill. I believe that, in practice, the difference between the sort of information that would move the price and the general information that directors, by their very position, inevitably possess will not be difficult, over a period of time, to define. I believe that it will be possible, but there is a real fear. My right hon. Friend, in typically thoughtful fashion, has tried to find three ways to help. I must tell him, however, that I do not find his arguments as acceptable as his ambitions.

I should like to deal with the individual amendments. Amendment No. 399 is something of a left-over from the 1978 Bill, where it was envisaged that transactions would take place off the market and that there would be face-to-face transactions. This was built into the 1978 Bill as a defence against face-to-face transactions where a person said "I am selling something to you. You should know that I am a director of this business, and I have some pretty hot information." If he said that, the person with whom he was dealing was put on notice.

My right hon. Friend alluded to the difficulty about his amendment in his opening speech. The difficulty arises in applying that type of defence to a market arrangement. My right hon. Friend said that they would have to move these deals off the market and that they would have to do them in some other way. We have thought about the matter carefully. I must tell my right hon. Friend that, for the reasons I gave in Committee and to which I have alluded today, it would be a very difficult defence to apply. In the circumstances, we cannot accept it.

Amendment No. 376, again, would remove the word "solely" from the Bill If a person therefore had mixed motives, that would be a complete defence. It is a very difficult area to define how one absolves a person because, like the curate's egg, his motives are good in parts. I believe that the introduction into the legislation of mixed motives would present a lot of difficulties. I would find it hard to accept my right hon. Friend's amendment if he pressed it.

My right hon. Friend moved on to a third category of transaction. Here, again, I cannot accept his amendment. I can, however, say something that I hope will be encouraging. We believe that, in the clear-cut situation where the decision can be justified separately from the inside information, there is already the defence available in clause 65(8), since the individual will not be realising the security with a view to making a profit or avoiding a loss by the use of the information. We consider that there is no need for the special provision in such cases. I hope that my right hon. Friend will feel that he does not need to press his amendment.

I should like to deal with the last point first. Surely, if there is a profit that can be made when the mortgagee is exercising his power of sale, he is under a duty to the mortgagor to take that profit. He will, therefore, be selling with a view to making a profit. I cannot feel that he comes within the other paragraph about not making a profit. If there is a profit, he should take it in order to benefit his mortgagor. I cannot feel that my hon. Friend has been well advised on that point.

9.15 pm

On the main point of my amendment No. 399, I can only hope that the courts will be better convinced by my hon. Friend's argument than I am. We must remember that, if a director does deal in his own company's shares, he is not just running the risk of the deal being declared void or voidable: he is running the risk of criminal prosecution, of committing an offence. I would not dare deal in shares in a company of which I am a director as the clause stands.

My hon. Friend's argument may be perfectly right but some judges sometimes give strange judgments—although they may be perfectly right—and I can imagine that some would not accept his argument. I would not risk it. I would not sell any shares under the clause in a company of which I am a director and thus risk being prosecuted. I fear that many directors of companies will feel the same when they deal in their own shares in those companies.

Amendment negatived.

Amendments made: No. 107, page 79, line 20, leave out

'on a recognised stock exchange'.

No. 108, page 79, line 22, leave out so'.—[ Mr. Parkinson.]

I beg to move amendment No. 109, in page 79, line 24, leave out from 'who' to end of line 29 and insert—

  • '(a) appeared to him to be an appropriate person from whom to seek such advice and
  • (b) did not appear to him to be prohibited by this section from dealing in those securities.'.
  • The Law Society of England and Wales has suggested to us that, as presently drafted, subsection (10)(b) might require a trustee to have some evidence that the adviser from whom he was seeking advice was not prohibited from dealing before he could obtain the benefit of the presumption. This would have the undesirable consequence that the trustees would need to ask the adviser for confirmation that he was not a prohibited person, which inquiry would almost inevitably suggest to the adviser that price-sensitive information was in existence in relation to the shares.

    The amendment therefore makes it clear that what is necessary in this context is that the adviser should not appear to the trustee to be prohibited by the clause from dealing.

    Amendment agreed to.