JAPAN BIZLAW LITE 4 GAIJIN
INSIDER TRADING
In recent years there has been an increase in newspaper articles about who is involved in insider trading. Insider trading involves insiders, such as company's employees who have access to internal information, not yet made public, engaging in trading in the company's shares. Such trading has clearly been made illegal by the 1988 amendment to the Securities Exchange Law. Even today many Japanese do not understand why this is illegal. Indeed, previously it was regarded as common sense to make a profit from your knowledge.
So what happens if one is a close friend of someone like a director of a company engaged in secret negotiations that could greatly affect the company's business and trades in the shares of the company after hearing the information? Previously there was no legal problem with this kind of trading. Today it is different. Even if you are not a direct insider to the company, but use such luckily obtained information for trading prior to the information being released to the public, you could be severely punished under the law. The employee releasing the information could also be severely punished by his own company.
Introduction of Insider Trading Controls.
Let us examine several elements involved in insider trading as a crime.
The trading must be in the securities of a publicly listed company traded on a stock exchange or over the counter markets. This is for the protection of public investors. If the company is a private company, the investing public is not likely to be endangered. But in contrast, as these regulatons have long been in place in Western securities markets, their introduction into Japan gave further credibility for Western investors.
The insider must have received the information directly from a party related to the company --- the first source of the information, who received the information in relation to his employment.
The information that was the basis of the trade must not have already been in the public domain, or released to the public.
The information must be material information.
Severe Penalties
Violators against the prohibitions on insider trading can be imprisoned for up to 3 years or fined up to 3 million yen, or a combination of the two.
Not only are the traders involved in the transaction subject to such criminal liability, but the parties who enticed them into the trade or otherwise abetted the transaction can be prosecuted for aiding and abetting.
When it is a company that engages in the inside trading of securities, not only the company can be prosecuted, but the individuals who carried it out as well.
Insider Trades Targetted for Regulation
What would happen for example if a student is working part-time in a company copying documents and he learns through his work that the company was going to be acquired by another company and the student calls his dad and tells him to buy the company's shares? Has there been a violation?
What about another case where a man is playing golf with a friend and he learns from the friend, who is an executive at his company, that that company would be selling a loss making subsidiary, and then the first man goes out and buys the shares before it becomes public information? Has there been a violation?
What is the scope of "party related to the company"
In legal speak, this concept is very broad. Of course employees of the company are included, full or part-time. even temp staff. Also included are retirees who have retired in the past one year. Also shareholders are included, but it is limited to shareholders who have more than 3% of a company's shares and have the right to look at the company's books. In addition, there are those who have contracts and other business relationships with the company, including accountants, lawyers and bankers. Finally, government employees who have the right to inspect a company and have jurisdiction over a company (as for example a Ministry of Finance official with respect to a bank, etc.) are within the controls of the legislation.
What is the scope of "in relation to his employment"
Another requirement for finding insider trading is that a "party related to the company" knows material information "in relation to his employment"
What if an employee of a company has obtained some important information in relation to his employment and on his way home goes out drinking with another employee of the same company and spills the important information. Although the second employee works in another department it can not be said that he acquired the information "in relation to his employment" directly. Nevertheless, working for the same company it could easily be found in violation. Thus this interpretation, like above, is also on the wide, not narrow side. But it does not stop there. Also, in addition to the employee from another department of the company, friends, family, guests, anyone basically who received the information from the first party who directly received in his employment, would be liable. Its a very very liberal interpretation.
What is Material Information?
Anyone experienced in US securities laws would recognize this legal dilemma, subject of many court cases. If the information is not material, there is no problem. If the company's janitor's dog dies, it is not likely to be material to the company unless the janitor was a major shareholder and inexplicably heart broken by the dog's death. Of course, if the company was a dog food company and the dog died following eating the company's product, that could be material. The basic standard is the information would be material information if it was likely to greatly affect investors, particularly affecting the value of the company's securities. Major activity conducted by the company, such as issuing new shares, a capital decrease, merger, transfer of business, business tieups, dissolution of a subsidiary, transfers of subsidiaries, bankruptcy or dissolution would most likely be material. Business developments such as new products, commercialization of new technologies or starting new businesses could also fall in the category.
The material information must be about "something that has happened". So what is that? This could be a major accident or natural disaster. a change in major shareholders, a court decision, an injunction to stop business, a banks dishonoring of a check or note (this is a very serious matter, as it usually means the company is very near bankruptcy), or the bankruptcy of an affiliate. Consideration should also be given to "major revisions of business results forecasts" or "major facts". These are matters relating not only to parent companies, but to subsidiaries as well. Generally speaking this should involve matters greater than 30% (on a parent company only or consolidated basis) with respect to net assets, recurring profits, net profits , or 10% for sales. Although numbers help, if the investing public would likely regard the information as likely to affect securities prices, it is likely to be considered major facts.
Another critical point is that the law prohibits these "insiders" from trading on this information until the information is made public. But even then the definition of what is made public may not be what one thinks. For example, if a person working for a company on a proposed merger with another company happens to mention it to a friend who works for a newspaper or news broadcaster who then "publishes" the information. Has it then become public such that everyone is now free to trade in the securities? No. There are also strict interpretations on this subject. The information has become public when the company officially publishes the information by filing it officially with the appropriate authorities, meaning the Ministry of Finance. The other alternative is for the company, itself, to arrange its publication in two public media such as newspapers, tv broadcasts, etc. Even then, you have to wait until 12 hours after it is made public.
In recent years there has been an increase in newspaper articles about who is involved in insider trading. Insider trading involves insiders, such as company's employees who have access to internal information, not yet made public, engaging in trading in the company's shares. Such trading has clearly been made illegal by the 1988 amendment to the Securities Exchange Law. Even today many Japanese do not understand why this is illegal. Indeed, previously it was regarded as common sense to make a profit from your knowledge.
So what happens if one is a close friend of someone like a director of a company engaged in secret negotiations that could greatly affect the company's business and trades in the shares of the company after hearing the information? Previously there was no legal problem with this kind of trading. Today it is different. Even if you are not a direct insider to the company, but use such luckily obtained information for trading prior to the information being released to the public, you could be severely punished under the law. The employee releasing the information could also be severely punished by his own company.
Introduction of Insider Trading Controls.
Let us examine several elements involved in insider trading as a crime.
The trading must be in the securities of a publicly listed company traded on a stock exchange or over the counter markets. This is for the protection of public investors. If the company is a private company, the investing public is not likely to be endangered. But in contrast, as these regulatons have long been in place in Western securities markets, their introduction into Japan gave further credibility for Western investors.
The insider must have received the information directly from a party related to the company --- the first source of the information, who received the information in relation to his employment.
The information that was the basis of the trade must not have already been in the public domain, or released to the public.
The information must be material information.
Severe Penalties
Violators against the prohibitions on insider trading can be imprisoned for up to 3 years or fined up to 3 million yen, or a combination of the two.
Not only are the traders involved in the transaction subject to such criminal liability, but the parties who enticed them into the trade or otherwise abetted the transaction can be prosecuted for aiding and abetting.
When it is a company that engages in the inside trading of securities, not only the company can be prosecuted, but the individuals who carried it out as well.
Insider Trades Targetted for Regulation
What would happen for example if a student is working part-time in a company copying documents and he learns through his work that the company was going to be acquired by another company and the student calls his dad and tells him to buy the company's shares? Has there been a violation?
What about another case where a man is playing golf with a friend and he learns from the friend, who is an executive at his company, that that company would be selling a loss making subsidiary, and then the first man goes out and buys the shares before it becomes public information? Has there been a violation?
What is the scope of "party related to the company"
In legal speak, this concept is very broad. Of course employees of the company are included, full or part-time. even temp staff. Also included are retirees who have retired in the past one year. Also shareholders are included, but it is limited to shareholders who have more than 3% of a company's shares and have the right to look at the company's books. In addition, there are those who have contracts and other business relationships with the company, including accountants, lawyers and bankers. Finally, government employees who have the right to inspect a company and have jurisdiction over a company (as for example a Ministry of Finance official with respect to a bank, etc.) are within the controls of the legislation.
What is the scope of "in relation to his employment"
Another requirement for finding insider trading is that a "party related to the company" knows material information "in relation to his employment"
What if an employee of a company has obtained some important information in relation to his employment and on his way home goes out drinking with another employee of the same company and spills the important information. Although the second employee works in another department it can not be said that he acquired the information "in relation to his employment" directly. Nevertheless, working for the same company it could easily be found in violation. Thus this interpretation, like above, is also on the wide, not narrow side. But it does not stop there. Also, in addition to the employee from another department of the company, friends, family, guests, anyone basically who received the information from the first party who directly received in his employment, would be liable. Its a very very liberal interpretation.
What is Material Information?
Anyone experienced in US securities laws would recognize this legal dilemma, subject of many court cases. If the information is not material, there is no problem. If the company's janitor's dog dies, it is not likely to be material to the company unless the janitor was a major shareholder and inexplicably heart broken by the dog's death. Of course, if the company was a dog food company and the dog died following eating the company's product, that could be material. The basic standard is the information would be material information if it was likely to greatly affect investors, particularly affecting the value of the company's securities. Major activity conducted by the company, such as issuing new shares, a capital decrease, merger, transfer of business, business tieups, dissolution of a subsidiary, transfers of subsidiaries, bankruptcy or dissolution would most likely be material. Business developments such as new products, commercialization of new technologies or starting new businesses could also fall in the category.
The material information must be about "something that has happened". So what is that? This could be a major accident or natural disaster. a change in major shareholders, a court decision, an injunction to stop business, a banks dishonoring of a check or note (this is a very serious matter, as it usually means the company is very near bankruptcy), or the bankruptcy of an affiliate. Consideration should also be given to "major revisions of business results forecasts" or "major facts". These are matters relating not only to parent companies, but to subsidiaries as well. Generally speaking this should involve matters greater than 30% (on a parent company only or consolidated basis) with respect to net assets, recurring profits, net profits , or 10% for sales. Although numbers help, if the investing public would likely regard the information as likely to affect securities prices, it is likely to be considered major facts.
Another critical point is that the law prohibits these "insiders" from trading on this information until the information is made public. But even then the definition of what is made public may not be what one thinks. For example, if a person working for a company on a proposed merger with another company happens to mention it to a friend who works for a newspaper or news broadcaster who then "publishes" the information. Has it then become public such that everyone is now free to trade in the securities? No. There are also strict interpretations on this subject. The information has become public when the company officially publishes the information by filing it officially with the appropriate authorities, meaning the Ministry of Finance. The other alternative is for the company, itself, to arrange its publication in two public media such as newspapers, tv broadcasts, etc. Even then, you have to wait until 12 hours after it is made public.
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