Good Governance Guide Issues to consider in developing or reviewing the policy on trading in company securities

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1 Issues to consider in developing or reviewing the policy on trading in company securities It is an ASX Listing Rule requirement that listed entities have a policy on trading in company securities, and it is considered good governance for the board of listed entities not only to approve but also review regularly the entity s policy on trading in its own securities by directors and others. This Guide is intended to outline the issues to consider when doing so. Irrespective of the provisions of the policy, the policy must be subject at all times to the law on insider trading. any exceptional circumstances in which the entity s KMP may be permitted to trade during a prohibited period with prior written clearance, and the procedures for obtaining such clearance. Material changes to the policy require notification to the market within five business days. The policy must be released to the ASX and made publicly available. The policy should be tailored to the requirements of the entity concerned. What is suitable for a small start-up company may be quite different from what is suitable for a large corporate group. It is important to have a policy that is specific to the company and addresses the matters noted below, in order to develop a culture where trading in company securities and any prohibitions on such trading is understood and adhered to. Legal and regulatory context The policy should highlight the legal prohibition on trading or influencing trading in securities by any individual if they have inside information, at any time, which may have a material impact on the company s share price. The Corporations Act prohibits insider trading generally and the ASX Listing Rules and Corporations Act require notification to the market by directors where a dealing changes their relevant interest in the entity s securities. The ASX Listing Rules also require that each listed entity have a policy on trading in their own securities by the entity s key management personnel (KMP, as defined in the Corporations Act). Matters that must be covered in the policy: the entity s closed periods when trading is prohibited the restrictions on trading that apply to the entity s KMP any trading that is excluded from the entity s trading policy any approval processes in place for obtaining clearance to deal (at any time) by KMP Companies may also need to consider any additional legal and regulatory requirements in other jurisdictions if they are dual-listed or have overseas operations, and the extent to which these requirements might apply to joint ventures. Purpose of the policy The policy should explain how and why the company restricts trading in company securities that is in breach of: legal and regulatory requirements the company s policy. The board, senior executives and other internal or external persons who have access to inside information relating directly or indirectly to the entity need to be clear as to the risks that the entity s policy is meant to address. Issues to address in the policy It is good governance for the trading policy to address: The prohibition on insider trading The policy should provide an explanation of the prohibition on insider trading contained in the Corporations Act, which may include: an accessible and non-legalistic description of inside information examples of inside information a list of what may have a material impact on the price of the securities, including examples specific to the company clarification that the prohibition is absolute and not a matter of guidance

2 a non-legalistic explanation of what sanctions might apply to insider trading outline the potential consequences for directors, executives and employees from the company s perspective if either or both of the insider trading prohibition or the policy is breached an explanation that the prohibition on insider trading extends to trading in the securities of other companies that an individual has inside information about, which may include subsidiaries or associated companies or other companies such as suppliers, contractors and customers. The company s policy should set out any specific requirements about dealing in those types of securities that it considers appropriate. Exemptions Consideration should be given to whether any exemptions will apply as set out in the Corporations Act. Directors interests notification The policy should provide an accessible explanation of the legal requirements on directors to: notify the market of any trading, whether in company securities or otherwise notify the market of a substantial shareholding (more than five per cent) or any change(s) in that shareholding update the company s register of directors interests (or standing notices), which may be minuted at the next board meeting. The policy should also refer here to the relevant matters set out in the section below The company secretary. Restrictions on trading Restrictions on trading in trading policies can be expressed as either black out or closed periods, where the entity s policy stipulates certain periods where trading may not occur, or trading windows where trading is generally prohibited save for certain specified approved periods. Regardless of which approach is decided by the company, periods where trading is not allowed are black out or closed periods for the purposes of the ASX Listing Rules. It is good governance to ensure that the company clarifies which restrictions on trading are in place. A policy that does not include either, a closed period, trading windows or a black-out approach to restrictions will give rise to reputation and compliance risk, as the perception could arise that trading is permitted despite legal prohibitions on insider trading. Trading windows A policy based on trading windows can: provide greater clarity and certainty around when directors and executives are able to deal in company securities and can be easier to administer. As it is now common for corporate activity to occur throughout the year, it can become difficult to locate a period in which directors and executives can trade without insider trading occurring, or the perception that insider trading is occurring. However, the policy must be clear on the length of time for which the trading window operates, what triggers are appropriate to allow the trading window to operate, and be mindful of the continuous disclosure obligations to keep the market informed of price-sensitive information at all times give rise to a misunderstanding that trading is permitted during trading windows despite legal prohibitions relating to insider trading. It is important, therefore, that the policy clarifies that trading windows provide a conditional lifting of a blanket prohibition rather than permission and that any such lifting of the prohibition is subject to clearance procedures and the legal prohibition relating to insider trading. Closed periods before trading windows A policy based on closed (or black-out) periods can: clarify that restrictions and protocols are in place to counter any suspicion of insider trading provide reasonable (and easily defended) periods from balance date to results release for full and half-year results (and maybe quarterly blackouts for companies that report quarterly) give rise to a misunderstanding that trading is permitted in the period leading up to a black-out period despite legal prohibitions relating to insider trading. It is important, therefore, that the policy clarifies that black-out periods provide a conditional lifting of a blanket prohibition rather than permission

3 and that any such lifting of the prohibition is subject to clearance procedures and the legal prohibition relating to insider trading. It is good governance to note in the policy that a blackout period exists following the close of books until at least one trading day after the release of interim and full year results (to allow time for the market to digest the results). There may also be black-out periods imposed by a company at any time without explanation to those affected, including if the company is involved in corporate transactions that might have a material impact on the share price. It is essential that the policy clarify that, irrespective of whether trading occurs in a trading window or outside a black-out period, no trading can occur if it involves the use of inside information. The restrictions on trading should also clarify to whom the restrictions apply. The ASX Listing Rules, as a minimum, require the policy to cover KMP. Many companies, dependent on the size and nature of the organisation, also restrict others from trading at certain times. Trading excluded from the policy It is good governance for companies to also consider whether any types of trading in the company s securities by an individual covered by the policy should be excluded from the prohibitions on trading in the policy (although still being subject to the law on insider trading unless specifically excluded by regulation). Some of the situations that may be considered are set out below and normally involve situations where the trading is passive, outside of the individual s control or there is no underlying change in beneficial owner: transfers of company securities already held by the individual into a superannuation fund or other saving scheme in which the individual is a beneficiary an investment in, or trading in units of, a fund or other scheme or arrangement (other than a scheme only investing in the company s securities) where the assets of the fund or other scheme are invested at the discretion of a third party where an individual is a trustee, trading in the company s securities by that trust where the Individual is not a beneficiary of the trust and any decision to trade during a prohibited period is taken by the other trustees or by the investment managers independently of the individual undertakings to accept, or the acceptance of, an announced takeover offer dealing under an offer or invitation made to all or most of the security holders, such as a rights issue, a security purchase plan, a dividend reinvestment plan and an equal access buy-back, where the plan that determines the timing and structure of the offer has been approved by the board. This may include decisions relating to whether or not to take up the entitlements and the sale of entitlements required to provide for the take up of the balance of entitlements under a renounceable pro rata issue bona fide gifts of the company s securities to an individual by a third party where the beneficial interest in the relevant company security does not change transactions conducted between an individual and their spouse, civil partner, child, step-child or other close family member cancellation of the company s securities as a result of failure to vest or other forfeiture of securities received by Individuals as part of performance based remuneration, and vesting (but not any subsequent sale) of the company s securities as a result of meeting performance hurdles or release of the company s securities from holding lock or holding term in respect of securities received by individuals as part of performance-based remuneration. Exceptional circumstances It is good governance that companies consider for inclusion in their policy whether there are any circumstances where trading (not excluded by the policy) may be carried out during a period that is otherwise prohibited. Some companies may consider that where an individual who is not in possession of inside information is in severe financial difficulty or if other exceptional circumstances apply, they may request and be given

4 clearance to sell (but not purchase) the company s securities when they would otherwise be prohibited by the policy from doing so. The company needs to consider how the policy will address the situation of a KMP who may be in severe financial difficulty due to a pressing financial commitment that cannot be satisfied otherwise than by selling the company s securities. A liability to pay tax would not normally constitute severe financial difficulty. A circumstance will be considered exceptional if the KMP in question is required by a court order to transfer or sell the company s securities or there is some other overriding legal requirement for them to do so (eg a family law settlement). The policy should not be silent on the issue of exemptions in relation to KMP. Clearance to deal procedures The policy should include: clearance or notification procedures for allowing trading in company securities, including information on who must be contacted within the company to provide such clearance; in what circumstances clearance will be supplied or denied; and forms of notification before trading takes place. Where a request involves the consideration of exceptional circumstances, justification for a sale as the only reasonable course of action, and particulars of those exceptional circumstances must accompany the relevant clearance request how many days are available for trading once clearance has been provided details of who is covered by the company rules on trading in company securities, with clarity on how the policy may apply beyond the employment contract to spouses, dependents and external consultants and advisers. Other policy considerations It is also considered good governance to consider including the following matters in the policy: whether lending of the company s securities is included in the definition of trading or is a prohibited practice whether Individuals are able to undertake any form of short-term trading in company securities, or if not, what the company considers to be short-term whether margin lending over the company s securities is allowed and if so, whether there any additional disclosures required by the company to be made to it the company s policy on prohibiting hedging and an explanation of how the company prevents executives from dealing in unvested entitlements to company securities, or vested entitlements subject to a holding lock. Awareness of and compliance with policy Training and education should be provided for employees and directors to make them aware of and compliant with the policy. There should also be processes included for certifying that such training and education has taken place. The policy should also include: information on how the entity approaches the development of a culture of awareness of the policy, and the matters it covers, for example, induction when commencing with the entity; and ongoing training who is responsible for providing training on issues relating to trading in company securities how the company ensures the policy is communicated to all persons subject to it (including those external to the company) confirmation that ASX, ASIC and governance advisers take an interest in whether or not companies are complying with their share trading policies. Style Consideration of the following matters may assist in clarifying the terms of the policy to those to whom it applies: a summary of the main issues dealt with in the policy a glossary, including a clear definition of dealing (note that a poor definition of dealing will render the policy ineffective) and securities a set of questions and answers (Q & As) in relation to company rules for trading in company securities a process chart setting out clearance procedures and opportunities for trading a link to the board charter and code of ethics the details of the person who needs to be contacted if there are any queries.

5 Each company needs to decide if it will cover all of the issues noted below in the policy itself or in a supporting document provided to the directors and senior executives and other internal or external persons who have access to inside information relating directly or indirectly to the entity. In such cases, the published policy would need to set out the core intent of the restrictions on trading in company securities and the supporting document would set out the internal administration details. The policy must, however, include all issues required by the Listing Rules. The company secretary It is good governance for the company secretary to: ensure that any letter of appointment for directors includes a requirement that, in addition to obtaining clearance, the director must immediately and where practical in advance notify the company secretary of any trading in company securities (see Listing Rule 3.19B). The letter should clarify that directors are obliged to notify the market of any trading in company securities under s 205G of the Corporations Act (14 days) and Listing Rule 3.19A (five days) set up a process for directors to advise the company of indirect interests, including their SRNs and HINs. Trustees may deal in securities in which a director has or is deemed to have an interest (for example, a family trust or outsourced superannuation fund), without the director making a decision to trade, but the director maintains the legal obligation to notify the market (whether the securities are company securities or otherwise). Alternatively, directors may hold shares through a broker, with the financial adviser controlling the holding, and the director again is not the person making the decision to trade set up an alert service through the share registry, to notify the company of any changes in the number of company securities held by directors in any one or more of their holdings, whether directly or indirectly immediately circulate all Appendix 3X (initial) or 3Y (change) announcements to all directors, so that the board as a whole is kept informed of all trading by directors implement a reminder system, for example via or the company intranet, to alert directors, executives and employees when trading windows and black-out periods open and close. References: Corporations Act ss 1042 to 1043 (insider trading) Corporations Act s 300A(1)(da) (hedging policies) ASX Listing Rules chapter 12 (rules relating to trading policies) ASX Listing Rules 3.19A & B and Appendices 3X, 3Y and 3Z and Corporations Act s 205G (directors interests notifications) ASX Guidance Note 27 Trading policies.