Director share trading notifications – an important obligation
John Price, Commissioner
This article was submitted to the Australian Institute of Company Directors for publication in the Company Director magazine in May 2017
If you are a director of a listed company, how well do you understand your obligation to notify the market about changes in your interests? This issue has been in the spotlight recently due to our criminal proceedings against a former director, Mr Angus Holt, who was convicted on numerous counts for failing to notify the market of his share trading.
To maintain the integrity of our markets and investor confidence in our listed companies, it is vital that directors are aware of their responsibilities under the Corporations Act, the ASX Listing Rules, and best practice guidelines. Directors need to take positive steps to ensure that they comply – this is not a trivial administrative step and being on time with notifications matters.
In the February edition of Company Director, we highlighted the importance of companies having robust share trading policies in place for key management personnel. Appropriate share trading policies help to minimise the risk of directors and employees being involved in insider trading, an offence which can carry significant penalties for those involved and create significant reputational damage for the company itself.
Our focus on this area continues this month with a look at another aspect of share trading by directors, namely directors' obligations to disclose their shareholdings to the market.
Why is notification of director share trading important?
Investors have a legitimate interest in the trading by directors in the company's shares. Directors of companies have access to significantly more detailed information about companies than shareholders do. Shareholders may be influenced by the actions taken by directors in relation to the acquisition or disposal of shares by them.
Shareholders are entitled to know, in a timely manner, whether directors are buying or selling shares in the company.
Particularly at times of share price volatility, price-sensitive announcements or takeover activity, the requirement for directors to lodge notices of changes in shareholdings in a timely way is an important measure to ensure the market remains properly informed.
Failure to appropriately comply may therefore reflect badly on a director's personal reputation.
When and what information is required to be provided to the ASX?
There are two obligations under the Corporations Act and ASX Listing Rules which require disclosure about directors' holdings:
- a director of a listed company must notify the ASX within 14 days of appointment or listing of the company, and thereafter of any changes in the relevant interests they hold in the securities of the company, or any related company - s205G of the Corporations Act; and
- listed entities must notify the ASX within five business days of 'notifiable interests' of directors - Listing Rule 3.19A.
The ASX Listing Rules also require listed entities to have arrangements with their directors for the directors to advise the entity of notifiable interests and any changes in these interests. This enables listed entities to comply with their obligations and will usually mean a director does not have to lodge a separate notice with the ASX to comply with s205G.
ASIC Regulatory Guide 193 Notification of directors’ interests in securities: Listed companies and ASX Guidance Note 22 Director Disclosure of Interests and Transactions in Securities – Obligations of Listed Entities have more information regarding these rules.
A director may have a relevant interest in securities even where they do not directly or indirectly own the securities. For example, a family trust may own the securities, a spouse or children may be the registered holder of the securities, or the securities may be held by a company in respect of which the director has direct or indirect control over 20 per cent of the voting power.
A director can also have an additional obligation to lodge a substantial holding notice if their voting power in the company's shares is five per cent or more.
ASIC enforcement action
ASIC recently took action against Mr Holt, who was a director and executive chairman of Optiscan Imaging Limited. He was convicted of 12 charges after pleading guilty to nine charges of failing to notify the ASX within 14 days of any change in the director's interest in a listed public company, and three charges of failing to notify the ASX within two business days of the changes in his substantial holdings in a listed public company.