When Should You Abstain? A Call for a Global Rule of Insider Trading

35 Pages Posted: 13 Oct 2021

See all articles by Ido Baum

Ido Baum

Haim Striks Faculty of Law - College of Management; Peking University - Peking University School of Transnational Law

Dov Solomon

College of Law and Business - Ramat Gan Law School

Date Written: December 5, 2019

Abstract

The picture is so pervasive in the financial media—the CEOs of two major public corporations announcing the closure of a cross-border mega-merger—that one might be led to believe that securities regulations around the world, which govern the timing at which the information about the merger becomes material, are identical. However, this is an optical illusion that hides existing crucial differences in the determination of what constitutes material information. Although securities regulations tend to be generally harmonized, this Article sheds light on significant differences in the rules governing the definition of what is material information with regard to unfolding future events. Most notably, these rules determine the timing at which information about a potential future event becomes inside information and triggers insider trading prohibitions.

In the U.S., the probability/magnitude test has been developed to determine when a developing event becomes material information. In the E.U., a bright line test applies. The different tests imply that the same information can potentially be classified as material at different times depending on the applicable rule. Ultimately, the European regulation is more relaxed and consequently European insiders have the opportunity to trade in corporate securities based on their private information, thereby gaining an unfair advantage over uninformed market players. This Article shows that the interjurisdictional differences create a propensity for undesirable arbitrage and insider trading and undermine cross-border financial investments, as well as optimal corporate governance in transnational corporations. The Article also explains why a global test is much needed and why the U.S. probability/magnitude test should be adopted because it is the superior rule in terms of increasing investor confidence in the integrity of stock markets.

Keywords: insider trading, securities regulation, materiality, disclosure, cross-border mergers and acquisitions, corporate governance

Suggested Citation

Baum, Ido and Solomon, Dov, When Should You Abstain? A Call for a Global Rule of Insider Trading (December 5, 2019). 88 University of Cincinnati Law Review 67 (2019), Available at SSRN: https://ssrn.com/abstract=3938239

Ido Baum

Haim Striks Faculty of Law - College of Management ( email )

7 Rabin Blvd.
Rishon Lezion
Tel Aviv, 75190
Israel

Peking University - Peking University School of Transnational Law ( email )

Peking Univ. Shenzhen Campus
University Town, Xili, Nanshan District
Shenzhen, 518055
China

Dov Solomon (Contact Author)

College of Law and Business - Ramat Gan Law School ( email )

26 Ben-Gurion St.
Ramat Gan
Israel
972-3-6000800 (Phone)

HOME PAGE: http://www.clb.ac.il/english/lectures/dov_solomon.htm

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