Sections 126 and 127 of the Companies Act 1997 deal with directors and employees dealing in the company’s own securities.
Section 126 — disclosure of share dealing
(a) disclose to the board —
(i) the number and class of shares in which the relevant interest has been acquired or disposed of; and
(ii) the nature of the relevant interest; and
(iii) the consideration paid or received; and
(iv) the date of the acquisition or disposition; and
(b) ensure that the particulars are entered in the interests register.
Both obligations fall on the director: disclosure to the board, and ensuring the entry is made in the interests register — one of the company records under section 164. A director who tells the board but leaves the register to someone else has not complied with paragraph (b).
A director who acts in contravention commits an offence, with the penalty in section 413(2) (s 126(2)).
Because section 124 defines relevant interest so widely — beneficial ownership, power to vote, power to control the vote, power to acquire or dispose, powers held through a 20 per cent stake in another holder, and powers arising under arrangements the director is not even party to — the disclosure obligation reaches far beyond shares in the director’s own name.
Section 127(1) — the insider dealing restriction
(a) in the case of an acquisition, the consideration given is not less than the fair value of the shares or securities; or
(b) in the case of a disposition, the consideration received is not more than the fair value.
Section 127 does not ban dealing while in possession of inside information. It requires the insider to deal at fair value — paying at least what the shares are worth when buying, and taking no more than they are worth when selling.
The effect is to strip out the advantage. An insider who knows of good news not yet public must pay the price that reflects it; one who knows of bad news must not take a price that ignores it.
Note the reach: it covers employees as well as directors, shares or other securities, and information held in relation to the company or a related company.
The fair value is determined on the basis of all information known to the director or employee or publicly available at the time.
So the yardstick includes the inside information itself, together with everything already public. Section 127(3) excludes from the section a share or security acquired or disposed of by a director or employee only as a nominee for the company or a related company.
Sections 127(4) to (6) — the consequences
(4) Where a director or employee acquires in contravention of subsection (1)(a), they are liable to the person from whom the shares or securities were acquired for the amount by which the fair value exceeds the amount paid.
(5) Where a director or employee disposes in contravention of subsection (1)(b), they are liable to the person to whom the shares or securities were disposed of for the amount by which the consideration received exceeds the fair value.
(6) A person who acts in contravention of subsection (1) commits an offence, with the penalty in section 413(4).
This is unusual in the Act. Most director liabilities are owed to the company — sections 54, 348 and 350, for example. Section 127(4) and (5) give the right of recovery to the seller or buyer personally, measured exactly by the shortfall or excess.
That means a shareholder who sold to a director at an undervalue can sue in their own name for the difference. No leave under section 143 is needed, and the company’s attitude is irrelevant.
How the provisions interact
| Provision | What it requires or prohibits |
|---|---|
| s 126 | Disclose forthwith to the board and enter in the interests register |
| s 127 | Deal only at fair value where holding material inside information; personal liability for the difference |
| s 123 | Do not disclose, use or act on company information except for the company’s purposes, as required by law, or with board authorisation |
| s 112 | Act in good faith and in the best interests of the company |
| s 115(2)(b) | The business judgment rule is unavailable where the director has a material personal interest |
| s 57(2)(c) | Before a buy-back, the board must resolve it is not aware of undisclosed information making the terms unfair to accepting shareholders |
| ss 57(3)(b), 63(5)(b) | Disclosure documents must state the nature and extent of any relevant interest of any director |
A company whose shares are subject to a listing agreement with a stock exchange is also subject to the Capital Market Act 2015 and the regime administered under the Securities Commission Act 2015, and to the Takeovers Code in force under the Securities Act 1997 — which section 57C(2) expressly picks up. Those regimes impose their own continuous disclosure and market conduct obligations, and they are not displaced by sections 126 and 127.
Practical rules for directors
- Disclose every dealing forthwith, including dealings by entities in which you have a 20 per cent or greater stake.
- Check the interests register entry was actually made — section 126(1)(b) puts that on you.
- Do not deal while holding material information unless you can demonstrate the price was fair value on all information known to you and publicly available.
- Document the valuation if you must deal — an independent valuation is the practical answer to a later section 127(4) or (5) claim.
- Adopt a trading policy with blackout periods around results, major transactions and capital raisings.
- Remember section 123. Even where a dealing is at fair value, using the information may still breach the restriction on use of company information.
Sources
- Companies Act 1997 — ss 54, 57, 57C, 63, 107, 112, 115, 123–127, 143, 164, 348, 350, 413
- Securities Act 1997
- Capital Market Act 2015
- Securities Commission Act 2015
Before relying on anything here, read the current text of the Companies Act 1997 and check for later amendments. If a decision matters to you, get advice — start with the Office of the Public Solicitor, or find a firm in the law firms directory.