Exploring Corporate Governance Around the World

By Allison Garrett, Senior Vice President for Academic Affairs at Oklahoma Christian University

Monday, August 28, 2006

Keeping Secrets: Insider Trading and M&A Deals

A New York Times article yesterday discusses a NYT-sponsored study on trading in advance of billion-dollar-plus merger deals over a twelve-month period. Out of 90 deals, the study concluded that there was suspicious trading activity in 37.

In Britain, companies must specifically inform those in the loop about their obligation not to engage in insider trading. In the U.S., while documentation of communication about the obligation is not required, it is certainly a good practice.

Here are suggestions for protection of the security of a transaction:

1. Use code names for the project and the acquirer and target. If a document is misdirected or mislaid, it is less likely to cause harm if the acquirer and target names are in code.
2. Advise employees never to discuss the transaction in any public place. Remember Barry Switzer's insider trading case? He was sitting in the bleachers and overheard others discussing a transaction.
3. Keep the information on a "need to know" basis within the organization.
4. Password all documents.
5. Assure that only authorized individuals have access to documents. For example, never send an email to someone connected to a transaction unless you are certain that his or her assistant does not have access to the email or that the person has specifically explained the obligation of confidentiality to the assistant.
6. Consider sending a memorandum from counsel to those who are in the loop advising them of their obligations. You might even ask each recipient to acknowledge receipt and intent to comply in writing.
7. Shred all documents that are no longer needed.
8. Do not keep confidential documents out for prying eyes to see. Lock up documents and offices.

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