Insider Trading Laws and M&A: Legal Challenges and Measures to Avoid Potential Risks

Mergers and acquisitions give rise to numerous legal troubles for businesses regarding the leak of sensitive information. That’s when insider trading laws play a crucial role in preventing the use of inside information about the business in the trading of securities by those who have any such confidential data available. 

During the due diligence and negotiations for insider trading, the risk multiplies. To avoid them, various preventive measures for insider trading laws and M&A are discussed ahead. Let’s understand them in detail. 

How to Prevent Insider Trading During M&A Due Diligence and Negotiation Phases?

Due diligence and negotiations in an M&A may cause a leak of sensitive information regarding the company’s financial data, liabilities, equity, and other stakeholders’ information, etc. This opens unforeseen possibilities for insider trading. However, there are several preventive measures given below that the companies can establish and keep the integrity of the M&A transaction:

Educate Employees

Ensure all employees know the consequences of insider trading, including civil and criminal aspects. The companies can educate them about the legal limits, non-public information, etc. 

Background Checks

Regularly conduct background checks on applicants to make sure they are creating any trouble or corporate misconduct. 

Review and Update Insider Lists

Don’t forget to add new insider information lists and eliminate the old ones. Also, never share sensitive information with the whole team. Make a list of employees, advisors, and third-party stakeholders with whom the information has to be shared.  

Employee and Advisor Education on Insider Trading

To set up a compliance-based environment, M&A companies can give high importance to educating their employees and advisors such as accountants, legal & financial consultants, and others. Here are the solutions that can be used:

For Employee Education

• Compliance Training Programs

  To make employees educate of insider trading laws, regulations, and company policies, M&A  can conduct training sessions, online courses, seminars, and workshops. 

• Code of Conduct

  Companies can add insider trading policies in the code of conduct so that all employees can understand them clearly. 

For Advisor Education

• Engagement Letters

  Don’t forget to add all the insider trading policies and procedures in the engagement letter. 

• Training Sessions

  Various training sessions and workshops can be conducted for advisors as well to make them aware of insider trading laws, policies, and regulations. 

To educate employees and advisors, M&A companies can hire corporate lawyers who have expertise in law courses, promote the use of insider trading monitoring tools, and other ways. 

How can Confidentiality Agreements and Non-Disclosure Agreements be Strengthened to Mitigate Insider Trading Risks in M&A?

Confidentiality Agreements, or CAs, and Non-disclosure Agreements, or NDAs are like the guards who prevent the breach of a company’s confidential data. This helps to eliminate possible insider trading risks in M&A. For this, there are two primary steps given below that have to be followed:

1. Structure CAs and NDAs for M&A Transactions

While Structuring the Confidentiality Agreements and Non-Disclosure Agreements, ensure it has:

• Clearly define what information is confidential along with its purpose,
• Mention the duration of duties, 
• Add third-party disclosure policies, and return or destruction of confidential data,
• Limitations on the use of insider information, etc.

2. Monitor Compliance with CAs and NDAs

The next step includes monitoring the individuals or groups who have access to confidential information and conducting legal oversight and compliance audits to follow the updated agreements. The companies can also establish a reporting mechanism so that suspected breaches of confidentiality can be noticed easily. 

Implement Insider Trading Prevention Programs to Enhance Compliance During M&A

To protect sensitive information at all stages of M&A, it is necessary to implement an effective insider trading prevention program. A simple 5-step process has to be followed for this:

1. Establish a compliance program with proper written policies and code of conduct.
2. Figure out and manage insider trading risks via risk assessment and executing trading blackout periods. 
3. Giving training and education and making insider trading materials like FAQs or brochures readily available. 
4. Conduct regular audits and monitor the system.
5. Regularly review and update the compliance program.

An insider trading prevention program helps to deal with the potential threats of M&A. Various corporate law courses and business law courses give a great emphasis on these programs to ensure the utmost safety in transactions.

Conclusion

Insider trading laws help to avoid all the potential threats and breaches that may arise during mergers and acquisitions. Confidentiality agreements, restricted flow of information, secure communication channels, etc. are some most effective solutions to mitigate risks. 

If designed and implemented carefully, the companies can deal with all such issues and reflect a transparent financial environment. 

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