Insider Trading in the Context of M&A Activity Part 1: A Cautionary Tale
A recent settlement agreement between Anthony Lambert ("Lambert") and the Alberta Securities Commission ("ASC") presents a cautionary tale for directors and officers of public companies who are considering trading in securities during the early stages of M&A activity. We'll discuss some of the key takeaways from this cautionary tale in our next post, but for now, here's an overview of the Lambert settlement.
In the settlement agreement, the ASC alleged that Lambert, then President and CEO of Daylight Energy Ltd. ("Daylight"), breached Alberta's securities laws and acted contrary to the public interest by purchasing Daylight's securities with knowledge of an undisclosed material fact – that Daylight had received an unsolicited expression of interest from Sinopec International Petroleum Exploration and Production Corporation ("SIPC") that discussed the possibility of "a major strategic investment transaction" by SIPC.
Upon receipt of the SIPC letter, Mr. Lambert sought advice from Daylight's general counsel, Daylight's external legal counsel and the chair of Daylight's governance committee. Each was of the view that the receipt of the letter was not material and that a trading blackout was not necessary. The factors they considered in making this determination were that:
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Daylight had previously received expressions of interest in significant transactions and none had proceeded beyond the early stages;
- the SIPC letter was unsolicited and did not include the price, terms or specifics of the potential transaction; and
- Daylight was not "in play" and had not hired any financial advisors to explore potential sale or partnership opportunities.
Daylight then sent a form of confidentiality agreement to SIPC along with a letter from Lambert stating that Daylight was interested in exploring potential opportunities. One day later, on the basis that the SIPC letter was immaterial, Lambert purchased $462,000 of Daylight's shares. Four months later, SIPC acquired, pursuant to a plan of arrangement, all of Daylight's shares at a substantial premium and Lambert made a profit of $129,000 on the impugned share purchase.
The ASC took the view that, notwithstanding the fact that Daylight had determined that the SIPC letter was not material, that the facts related to SIPC's interest in Daylight were separately and collectively "material facts" and that Mr. Lambert's acquisition of securities with the undisclosed knowledge of the SPIC letter was contrary to the prohibition against insider trading and contrary to the public interest.
In the settlement agreement, Lambert admitted that, although he did not believe that he was in possession of material undisclosed information at that time, as President and CEO of Daylight, "he occupied a position of high responsibility and trust" and that "he made an error in judgment in purchasing Daylight securities at that time." Lambert agreed to a fine of $229,000 and that he would not be a director or officer of a public company or trade in securities of a public company for two years.
Stay tuned for our next post on the key takeaways from the Lambert settlement and other recent decisions by Canadian securities commissions, which indicate that trading activity may need to be restricted at an early stage of potential M&A activity in some circumstances and that, in addition to considering when to publicly disclose a potential transaction, issuers should also carefully consider whether a formal trading blackout is appropriate.
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