Improper communication in M&A leads to trouble

By Iqbal Khan and Ambarish, Shardul Amarchand Mangaldas & Co.

The restrictions on sharing unpublished price sensitive information (UPSI) are strict and not typical of the way such information is dealt with globally. However, by now, most stakeholders are comfortable with the standard requirements concerning board resolutions, confidentiality agreements and structured digital databases.

Iqbal Khan, Shardul Amarchand Mangaldas & Co., Improper communication in M&A leads to trouble
Iqbal Khan
Shardul Amarchand Mangaldas & Co.

In recent times, the Securities and Exchange Board of India (SEBI) has focused on alleged violations where there was no actual trading in securities, but only an allegation of improper communication of UPSI. Several of these cases are not settled and will run their course within the Indian judicial system. However, the approach of SEBI in such prosecutions is worthy of consideration in the context of how UPSI is received and shared in M&A transactions.

SEBI uses the preponderance of probability standard and generally is not required to prove beyond reasonable doubt that UPSI was improperly communicated. SEBI’s preponderance of probability standard has been approved by the Supreme Court. SEBI need only prove that on the basis of available facts there is a preponderance of probability that a violation occurred.

In one case, SEBI used the call data records of the telephone communication between two persons, to conclude, in the context of surrounding facts, that such persons must have communicated UPSI. In such cases, there was no wire-tap for SEBI to know exactly what was communicated, and the conclusion that UPSI must have been shared was based on the preponderance of probability. In some cases, in addition to call data records, SEBI has looked at social media profiles, bank accounts, family relationships and other available information to connect various persons in achieving its evidential standard. Once SEBI concludes that UPSI must have been shared, and finds that none of the exceptions applies to allow such sharing, it may impose penalties.

In the context of M&A, this means that stakeholders have to be extremely careful about such matters as receiving and sharing UPSI strictly in compliance with, and following the requirements of the applicable regulations. They should use general communications carefully while in possession of UPSI, although it is difficult to set out general guidelines, as the standard is subjective and varies from case to case.

Ambarish, Shardul Amarchand Mangaldas & Co., Improper communication in M&A leads to trouble
Shardul Amarchand Mangaldas & Co.

In Balram Garg v SEBI, on 19 April 2022, the Supreme Court rejected SEBI’s argument that immediate and relevant facts could lead to a presumption of violation. The court held that foundational facts should first be found before an inference could be drawn. It is yet to be seen how SEBI implements the foundational facts requirement in insider-trading prosecutions.

It is becoming increasingly common for SEBI and stock exchanges to ask for information regarding M&A transactions involving a listed company. A typical request may seek such information as when the M&A transaction commenced and the identities of all persons who were aware of it. In making such enquiries, SEBI and stock exchanges may expect specific dates and a list of individuals with their particulars. If such a request is received after the close of an M&A transaction, stakeholders may find it difficult to collate and provide all the information for that prior period. It is easier to provide such information, and useful from a record-keeping point of view, if such information is recorded at the commencement of an M&A transaction, and periodically updated.

Most M&A transactions include a confidentiality agreement between the corporate entities. However, in the past, SEBI has questioned the sharing of UPSI by individuals with other people even within the same organisation, on the grounds that such sharing was not permitted under the regulations. It is therefore essential that each person handling UPSI is made aware of the applicable obligations and the restrictions on communication.

Consequences for breaches of the insider trading regulations are severe and include being debarred from the securities market and being fined. While the rules around communication of UPSI may appear severe and subjective, a careful approach to communication in M&A transactions involving listed companies will avoid subsequent troubles with SEBI.

Iqbal Khan and Ambarish are partners at Shardul Amarchand Mangaldas & Co.

Shardul Amarchand Mangaldas & Co

Express Towers, 23rd Floor,
Nariman Point, Mumbai,
Maharashtra – 400 021.
Executive Chairman:
Shardul Shroff
Managing Partner:
Pallavi Shroff and Akshay

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Tel: +91 22 4933 5555


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