Changes have recently been made to the Model Code on dealings in securities to permit directors, and other senior executives bound by the Code, to enter into trading plans.
The Model Code applies to companies listed on the main market. It is not directly applicable to AIM companies, but most AIM companies have adopted their own share dealing code for directors and other senior employees and may wish to consider making similar changes to it.
The Model Code prohibits dealings in company shares during close periods in the run up to periodic results announcements and at any other time when there is inside information in relation to the company ("prohibited periods"). Its purpose is to ensure that persons discharging managerial responsibilities ("PDMRs") do not abuse, and do not place themselves under suspicion of abusing, inside information that they may be thought to have.
However, these restrictions on dealing mean that PDMRs have been prevented from engaging in long term trading strategies in relation to their company shares. To address this concern, the Model Code has now been amended to permit a PDMR to enter into a trading plan with an independent third party, who will be able to acquire and dispose of company shares on behalf of the PDMR even during prohibited periods.
Share dealings will only be permitted under a trading plan if specific dates, prices and quantities of shares that can be dealt in under the plan are agreed with the independent third party as part of the plan, or these parameters are to be determined by a written formula or computer program or are left entirely to the discretion of the independent third party. The trading plan must not allow the PDMR to exercise any influence or discretion over how, when, or whether to effect dealings under the plan.
The trading plan must be entered into outside of any prohibited period, and prior clearance must be obtained from the company before the plan is entered into in the same way as individual dealings must be cleared by PDMRs under the Model Code. The same procedures apply to any proposed variation of the plan.
Any dealings on behalf of the PDMR under the plan must be disclosed to the company in the normal way, and in addition the PDMR must disclose the fact that the dealing has been made in accordance with a trading plan and the date the plan was entered into. Rule 3 of the Disclosure and Transparency Rules now requires the company to include this information when it notifies the market of the dealing.
A trading plan may be cancelled outside of any prohibited period. A plan may only be cancelled during a prohibited period if the PDMR is in severe financial difficulty or if there are other exceptional circumstances. In this case, the PDMR must first get clearance from the company before the plan is cancelled, and the Financial Services Authority should be consulted at an early stage regarding any cancellation.
PDMRs must remember that compliance with the Model Code does not necessarily mean that they will not be in breach of the market abuse regime or restrictions on insider dealing. The Model Code deals with the perception of market abuse, not actual abuse. If a PDMR enters into a trading plan, or varies or cancels a plan, when in possession of inside information this may still lead to civil and criminal penalties even if the requirements of the Model Code have been observed. Similarly, market abuse may occur if a PDMR exerts his influence over the timing of the company's results announcements (within the flexibility allowed by the Disclosure and Transparency Rules) in order to maximise the benefits from dealings to be made under his trading plan.
For further information, please contact:
0330 222 1897
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