Insider Trading

• Author: Christopher C. Nicholls, Jeffrey G. Macintosh
• Pages: 223-252

CHAPTER

8

INSIDER

TRADING

A.

INTRODUCTION

Corporate

insiders, such

as

officers

or

directors, regularly

buy and

sell

shares

issued

by

their companies

and are

generally permitted

by law to

do

so,

provided they comply with

two

sorts

of

rules. First, corporate

insiders must report their trades

to

securities regulators

in a

form

that

becomes available

as a

public record. Second, they must

not

trade

when they have confidential

inside

information.

There

are few

subjects

in

securities

law

that

attract

more public

attention

than insider trading.

Many

of the

villains

of the

highly publi-

cized

securities

scandals

of the

1980s

were

(or

were thought

to be)

notorious insider traders

who

used their informational advantages

to

scoop

up

hefty

(illegal)

profits.

Yet, despite

the

morality-play rhetoric

of

the

so-called "decade

of

greed,"

an

informed view

of

insider trading

requires

a

careful

analysis

of

detailed legislative

provisions

and

chal-

lenging questions

of

economics

and

public

policy.

In

this chapter,

we

consider some

of the

threshold issues surround-

ing

Canadian

insider-trading

regulation.

The

questions

we

address

here

include:

What

is the

precise

policy goal

of

laws restricting

insider

trading?

Whom does

the law

consider

to be

"insiders"?

What restrictions should

be, and

are, placed

on the

activities

of

such

people?

223

224

SECURITIES

LAW

B.

CORPORATE

LAW

PROHIBITIONS

ON

INSIDER

TRADING

The

discussion

of

insider

trading

in

this

chapter relates primarily

to the

rules contained

in

provincial securities legislation.

It is

also important

to

remember that many Canadian corporate

law

statutes contain insid-

er-trading

provisions. These corporate

law

rules should

not be

forgot-

ten.

Among other things, they

often

are not

limited,

in the way

that

securities laws typically are,

to the

trading

in

securities

of

reporting

issuers (i.e., public companies);

the

corporate

law

rules

may

also

extend

to the

purchase

and

sale

of

shares

of

private

companies.1

C. WHY

REGULATE

SECURITIES

TRADING

BY

INSIDERS?

It

is

useful

to

begin

by

reviewing

the

traditional rationale

for

imposing

legal restrictions

on the

trading

of

securities

by

insiders.

Although

a

myriad

of

very sophisticated justifications

for

insider-trading laws have

been debated

for

decades,2

at the

most basic level, there

are

three prin-

cipal concerns that

insider-trading

laws intend

to

address.

Unfairness:

Many commentators object

to the

perceived unfair

advantage

that insiders

of

corporations

enjoy

because special access

to

material inside information

is not

available

to

other investors,

regardless

of

whether

the

practice

of

insider

trading

has any

broad-

er,

adverse economic

effects.

Misappropriation/breach

of

fiduciary

duty:

Underlying this concern

is

a

theory that material

undisclosed

business

information about

a

firm

should

be

considered

to be an

asset

of the

firm

itself,

so

that individ-

uals

who

profit

from

the use of

such information

are

essentially

stealing

from

the

firm.

Economic

harm

to

markets

or

firms:

Some commentators

express

con-

cern

that widespread insider trading

may

undermine investors'

confidence

in the

capital markets

and/or

increase

the

cost

of

capital

for

issuers.

1

See, e.g.,

Canada

Business

Corporations

Act, R.S.C. 1985,

c.

C-44

[CBCA],

s.

131.

2 For a

review

of

many

of the

arguments both

for and

against

insider-trading

laws,

see

J.S. Ziegel

et

al.,

Cases

and

Materials

on

Partnerships

and

Canadian

Business

Corporations,

3d ed.

(Toronto: Carswell, 1994)

at

847-61.