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Directors' dealings

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2. Distinction from insider dealing

Directors' dealings are legal. Insider dealing is an offence. But when does one become the other?

The test is whether the director was using unpublished price sensitive information which he has got from his job to reach his decision about buying and selling shares.

Note that there are three requirements:

• the information on which he relied is not in the public domain
• the information is price sensitive - i.e. of enough significance to affect the share price
• the director wittingly used the information to reach a decision about buying/selling

The importance of satisfying all three requirements, and the difficulties that directors face, is illustrated by this example.

Example

Tarmac Ltd in late 1999

The sequence of purchases followed by the sudden rise in share price prompted an investigation by the London Stock Exchange but the directors maintained they knew nothing of the bid until the day after the last purchase.

While directors do run some risk, examples such as this are quite rare.

Here, both the directors and the offeror recognised that the stock was cheap but the directors saw it first.

1. What are directors' dealings? 2. Distinction from insider dealing 3. Two premises and a fallacy 4. Size of transaction 5. Who knows best? 6. Safety in numbers 7. Dealings in the context of recent share price 8. The closed period 9. Follow the leader 10. Sales can sometimes be a good sign 11. Playing the percentages 12. Other factors 13. Conclusion

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