So a company insider has decided to sell a bunch of shares in the company they’re helping run — is it time to run for the hills?
The Appendix 3Y is one of the most curious documents a company has to lodge with the ASX. It is when a director’s interest in a company changes.
Sometimes they might be meaningless, like a transfer from one super fund to another or performance options lapsing.
Sometimes directors will be granted shares as remuneration, which can’t happen without shareholder consent.
Alternatively, they may decide to ‘exercise their options’, which means buy shares at an agreed upon price.
In an ideal world the real share price will be several times higher and they can sell for that price straight away.
But when they put their own money into a company, or sells out, it is particularly interesting to observe.
But, it’s not always as simple as saying ‘if they buy they’re confident, and if they sell they’re not’.
Why would directors buy or sell?
Beyond confidence they may hold in the company, directors may feel it is more tax-effective to hold their investments in shares because of the discounts you can get on capital gains tax.
Sometimes they may sell to pay tax debts and it is much quicker than selling other assets such as a car or home.
There have even been cases where directors sell shares as part of a divorce proceeding.
It is not unusual for directors to be representatives of big fund managers who are substantial holders who often trade on a regular basis.
When this happens, directors still have to submit substantial holder notices even if it is the fund who directly owns the shares and they may have had no say in the decision to buy or sell.
Even if they do not sell all their shares, it is possible directors may sell because they feel their tenure is coming to an end, that they deserve a reward for their efforts or both.
Whatever the reason, directors trade knowing they are under constant scrutiny from the ASX, shareholders, ASIC and their company.
Securities trading policy
ASX-listed companies will have a trading policy which may restrict the trading of shares, particularly during certain periods such as around quarterly announcements.
While these don’t just apply to directors, they will be the most scrutinised because of the stringent reporting requirements.
Let’s consider the Securities Trading policy of Woolworths (ASX: WOW). It has a useful summary in bullet points which notes:
- No insider trading
- No trading during black out Periods
- No short-term or speculative trading
- Restrictions on the use of derivatives
- Specified individuals must obtain prior written approval to deal and comply with a number of additional requirements
In this context ‘black out periods’ are prior to any quarterly reports as well as the half and full year reports and any time the company’s legal officers consider appropriate.
Simply put, all employees and contractors of Woolworths (including directors) cannot trade shares at all during those periods.
They also cannot use derivatives (such as options or futures) just to get around these rules.
Employees cannot trade shares multiple times in six months and cannot short sell under any circumstances — that is selling stock they do not own with the aim of buying it back (in effect betting shares will fall).
The key management personnel, along with the the CEO and directors, have to confirm they know this policy and can comply with it and need prior written approval from the company’s Secretary or Chief Legal Officer prior to any trading whatsoever.
Can directors’ trades tell you anything else?
Yes, directors’ trading can also say something about the company’s administration.
In addition to submitting forms when director’s interest changes (no matter how small), companies must report interests when directors are appointed and depart.
In all cases, the deadline is five working days after the director’s interest changes or is welcomed or leaves.
If they fail to meet the deadline the ASX will send them a please explain notice, asking why it was late and about processes it has in place to make sure it follows its rules.
While there is no precedent for a firm being delisted just for late directors’ interest reporting, when firms are kicked off for several listing rule breaches it is not unusual to find the company has been lazy on reporting directors trades.
The companies will sometimes blame an ‘administrative oversight’.
At other times they might come out and admit their policies are inadequate, especially when it is just telling directors and asking them to self-report when they trade.
Also, when directors buy stock in a capital raise, it will be particularly fascinating when they make up a high proportion of the capital raise. Perhaps the investment only occured to spare the company embarrassment of raising little or no money.
So when directors trade their own stock it is interesting to observe, but there are implications beyond whether or not they’re confident in the company they’re helping.