There is a certain market expectation that, to align incentives with the shareholders, individuals would own shares in the listed companies they serve as board members. Therefore, it is also common that shares form a part of the board remuneration. As a board member, when can you trade on listed shares of your company without being tripped by the insider trading rules? A recent Supreme Court decision KKO 2024:25 highlights how tricky and case specific the answer to this rather fundamental question can be.
The judgement
Briefly, in KKO 2024:25 a CEO was sentenced for falling afoul of insider trading prohibition as he had acquired shares whilst being in possession of inside information (same outcome as in the District Court, whilst the Appellate Court had found in favour of the CEO). It was held that the CEO had unpublished and precise inside information about an order that was being negotiated at the time of the acquisition that was likely to materially affect the share price and that he had used this information when buying shares. Emphasis was also given to the fact that the expected volume of the order was higher than what was considered as a significant order in the company’s disclosure policy. The fact that the CEO had consulted the general counsel about the trade and that the company did not consider the orders as insider projects was considered irrelevant.
About the rules
A starting point for a well-meaning, law-abiding board member would naturally be to follow the trading rules of the company, to consult the insider manager and not to trade during the closed window or during insider projects. The above Supreme Court decision clearly points out how difficult it can still be to define whether a board member is in possession of inside information thereby prohibiting trading. Without going into legal small print and how the rules have evolved from the ones applicable at the time of the trades condemned in the above case, it serves to note that the disclosure and insider rules of the Market Abuse Regulation, the Financial Supervisory Authority and the Stock Exchange are not exactly worded the same and concepts like “precise” and “significant” are by nature open to interpretation. It also appears that the technical analysis of courts can appear to be partially remote from the realities of board work in fast moving businesses.
Where does this leave us?
For a lawyer, or indeed a board member, it is naturally not helpful to second guess Supreme Court decisions. Having said that, one cannot completely help wondering how these types of decisions would be affected by additional business and board work understanding. In the UK and US the crown of a successful private practitioner’s career can be a judicial appointment. The Delaware courts have a lion’s share of US listed company litigations.
A board member navigating on the one hand the need to own listed shares and having liquidity for board remuneration shares, and on the other hand abiding by the insider trading rules, needs to tread extremely carefully to avoid unintended, potentially career altering disputes. Being fully alert and well advised has rarely been in more demand.
