Appraising the regulatory framework for insider trading in mergers and acquisitions in South Africa

Abstract

The prevalence of mergers and acquisitions (M&A) leads to increased insider trading. This negatively affects companies’ chances of generating more capital and the liquidity of financial markets, thereby affecting the country’s economy due to a lack of investor confidence. Insider trading activity is more likely in M&A because it involves many insiders from the target and acquiring companies. According to the Financial Markets Act, the term “insider” would encompass officers, executives, board members, shareholders or employees directly involved in M&A, and persons such as negotiators who come into possession of the information intentionally or unintentionally during their duties. Inside information is sometimes leaked by financial and legal advisors, investment bankers, and business consultants who are retained by one of the parties to the transaction to assist in due diligence and complex negotiations. South Africa is one of the leading economies in the emerging financial markets. Therefore, effective regulation of insider trading in South Africa will promote stable and reliable economic growth through investment. This article addresses the following: (a) Is South Africa’s current legislative and regulatory framework adequate to curb the problem of insider trading in M&A? (b) Are there any identifiable strengths and weaknesses in the legislation of insider trading in M&A in South Africa? (c) Is there a need to enact laws specifically dealing with insider trading in mergers and acquisitions? (d) Are there any useful lessons South Africa can learn from the approach adopted in the United States? (e) To the extent that the South African regulatory framework on insider trading is inadequate, how can South Africa enhance its legal framework in combating insider trading in mergers and acquisitions?