Out-Law Guide | 02 Jan 2011 | 9:08 am | 2 min. read
This guide is based on UK law as at 1st February 2010, unless otherwise stated. It is part of a series on the FSA and Securities Regulation.
In order to reduce the risk that directors and senior managers of quoted companies might be thought to be taking advantage of inside information (see: Insider dealing, an OUT-LAW guide), both the Listing Rules and the rules of AIM require that companies restrict the times at which their directors and senior managers can deal in the company’s shares. In the case of fully listed companies, the Listing Rules contain a ‘Model Code’ on share dealing by directors and senior employees that companies are required to adopt in full (though they may impose more onerous restrictions if they want).
Like the rules for disclosures in relation to shares (see: Disclosures in relation to shares, an OUT-LAW guide), the Code applies to both directors and other PDMRs and defines ‘dealing’ widely. If there is any doubt as to what is caught, seek advice.
Directors and other PDMRs must not deal in shares during a ‘close period’, that is the period of 60 days before the announcement of annual results or the publication of the annual report (or, if shorter, the period from the end of the financial year to the announcement or publication). In the case of half-year results, it is the time between the end of the half year and the date of publication. If a company reports quarterly, the close period is 30 days before each announcement or, if shorter, the period between the end of the quarter and publication. (The same restriction does not apply to the company’s interim management statement, though a cautious approach would impose a similar 30-day ban on dealing.)
This is a simple prohibition: it is taken as read that, during those periods when financial results are being prepared, senior personnel are likely to have price-sensitive information.
Outside those periods, directors and other PDMRs are still prohibited from dealing if there is undisclosed inside information. (See: Disclosure of price-senstive information, an OUT-LAW guide.) This might be news of a possible takeover, a significant share issue or a big contract win or loss.
Directors who want to deal in their company’s shares must first get consent from their chairman or from another director appointed for the purpose. The same rule applies to the company secretary. If the chairman wants to deal, he should seek permission from the chief executive, and vice versa. Other PDMRs must apply to the company secretary or a director designated for the purpose. In each case, consent should not be given during a close period or when inside information exists, even if the person wanting to deal has no knowledge of it.
In any event, directors and other PDMRs should not deal in their company’s shares on considerations of a short-term nature. An investment of less than one year’s duration will be considered short-term, and consent to deal should always be refused in such a case.
These rules can be broken only where the person wanting to deal does not in fact have any inside information and can show they are in severe financial difficulty or there are other exceptional circumstances (such as a legal requirement to sell). In that case, the FSA has to be consulted before permission is given.
Requests for clearance and the consent or refusal should be in writing, and records should always be kept. Having been given clearance, you should deal as soon as possible and, in any event, within two business days. Miss that time limit, and you have to re-apply.
Directors and other PDMRs need to ensure that people connected with them, such as family members, and investment managers making investment decisions on their behalf, are aware of and follow these restrictions.