Wednesday, April 27, 2016

Due Diligence in Corporate Transactions and Insider Trading Laws

In corporate transactions involving shares of listed companies, the ability to conduct a detailed due diligence is constrained by laws that regulate insider trading. In a paper titled “Due Diligence in Share Acquisitions: Navigating the Insider Trading Regime”, I seek to examine this issue in detail. The abstract of the paper is as follows:

The goal of this paper is to unpack the underlying friction between the need to facilitate due diligence in share acquisition transactions that could place inside information in the acquirer’s hands, and at the same time to ensure that such information is not misused by the acquirer to the detriment of the other shareholders, a matter that insider trading regime regards as sacrosanct. In analysing and seeking to resolve this tension, this paper draws upon examples from three jurisdictions, namely the United Kingdom (UK), Singapore and India. The core argument of this paper is that from a theoretical perspective the due diligence objective of acquirers can be reconciled with the goals of the insider trading regime in order to preserve the interests of the target shareholder as long as certain restrictions are placed on the conduct of the acquirer.

A more general background note on insider trading regulation in India is available here, as part of the NSE CECG Quarterly Briefing series.


Anonymous said...

Sir - what are your thoughts on acquisition implemented through a scheme of arrangement (merger)? Can the transferor share UPSI for diligence purposes with the transferee? if yes, what would be the disclosure event under the Insider Regulations?

Umakanth Varottil said...

@Anonymous. This is an interesting question. There may have to be a slightly different approach for the communication offence and for the trading offence. The communication offence would be attracted in case information is provided for a transaction involving a scheme of arrangement. On the other hand, the trading offence may apply only if there is "trading" in the shares of the company, which may not be the case in a straightforward merger transaction (unless the party carrying out the due diligence also receives shares as part of the transaction). Ultimately, it depend upon the nature of the scheme of arrangement, which will have to be closely examined to determine if insider trading considerations are attracted in a same manner as a contractual acquisition of shares.