Imagine that you took part in a negotiation for company A (where you work) to be bought by company B, a market and technology leader, and you are sure that when the market becomes aware of the operation, the stocks of Company A are expected to rise, as the know-how of Company B will favor the performance of the acquired entity.
So there is nothing more reasonable than buying shares in company A before the deal is announced and making money on the deal, right? Actually, it is wrong.
In short, the case above describes a typical situation of insider trading, which can occur when dealing with publicly-traded companies.
In this scenario, insider information is used to make profits and gain advantages in the financial market, especially when relevant information is available before it is officially announced. The idea is to anticipate market movements with information not yet known to the public.
It is worth saying that access to this information can be gained through different channels, either by participating directly in a transaction (either on the buyer’s side or on the seller’s side in a sale, merger or joint venture), or by providing services to interested parties (e.g. auditing companies, law and accounting firms, etc.), or even in an informal conversation with people involved, who may let this or that piece of information slip.
The fact is that the use of this information is a serious non-compliance indeed and should be included as a guideline in the company’s internal rules—Code of Conduct and policies—as something expressly prohibited.
In fact, it is much more than an administrative infraction, it is a crime under the Brazilian legislation. See article 155 of Law 6404/76 (Corporations Law): “The director must serve the company loyally and maintain reservations about its business, and is forbidden to: (…) Paragraph 4. The use of privileged information that has not yet been disclosed, by anyone who has had access to it, for the purpose of gaining an advantage, for themselves or for others, in the securities market, is prohibited.”
Anyone who takes this action—defined by Law 6385/76, which governs the securities market and established the Brazilian Securities and Exchange Commission (“CVM”), as “the use of privileged information not yet disclosed to the market, of which a certain person is aware and must keep secret, capable of providing, for themselves or for others, an undue advantage, through trading, on their own behalf or on behalf of a third party, in securities”—may be sentenced to between 1 and 5 years in prison and a fine of up to 3 times the value of the illicit advantage obtained or the loss avoided.
In addition, the use of insider information can also cause asymmetries in the market and thus lead to indirect gains for those who, in a way, have acted to manipulate values and interests, a situation that can also have an impact on competition, which is equally reprehensible.
Thus, warning the management of a company that is going through a negotiation phase about the care that should be taken with regard to internal information, or the team of service providers supporting an operation, is an important preventive measure, and it is even recommended to sign a non-disclosure agreement (“NDA”) in order to avoid any setbacks.