Armoyan case a window on board trading challenges

In the absence of all the facts, it is impossible to have an opinion about the veracity of the complaint being made by the Newfoundland & Labrador provincial government to the Ontario Securities Commission against former FPI Ltd. (FPL:TSX) director George Armoyan.

Certainly, that the two parties don’t get along is well understood. But does that make their complaint a “vendetta”, as Mr. Armoyan has suggested to the Globe & Mail?

“It’s all disclosed information,” Mr. Armoyan said in an interview. “What the government and the Premier [Danny Williams] want is a vendetta.”

According to a Canadian Press wireservice report, there may have been a blackout period in place, as well, although this is denied by another FPI director (and Armoyan ally):

“Rideout said FPI imposed a blackout on the trading of shares as senior officials negotiated a sale of its assets to Ocean Choice International and High Liner Foods Inc. (TSX: HLF.TO).

But another director at FPI said there was no such blackout. “The company has a policy like every public company around trading in blackout periods if, in the event, there is material information which is known to insiders which is not known to the marketplace,” said John Risley, who sits on FPI’s board and owns close to 15 per cent of FPI’s stock.

For now, one should assume that Mr. Armoyan is served by some of Canada’s best lawyers and that his situation is pristine and his position is entirely well-founded.

But the topic is very relevant nevertheless.

Buying or selling the shares of a company is tricky business when you sit on the board. For all of the rules and regulations in the public markets, I must admit to wondering sometimes why there isn’t a simple manual that outlines the parameters, and obvious situations or case studies, particularly given the high expectations that both the public and regulators have regarding the conduct of public company directors.

Sure, the Securities Act advises you not to trade on “insider” information. And the TSX company manual outlines some good ideas regarding governance manuals. And companies themselves will have “blackout” periods, which usually straddle the financial reporting windows.

But if you’re a director, you’d be amazed how fuzzy the following areas are if you ask a securities lawyer:

– The annual budget: is this material non-public information (that being one of the insider trading tests in the Securities Act)? Certainly no one outside the company’s senior leadership team has access to it, other than the board. But is it “material information”? And does it get stale as the months progress following its approval by the board?

– Material division sales or corporate refinancings: Let’s say your company has announced that it plans to sell a division, or raise a very meaningful amount of equity capital to pay off debt that’s coming due shortly. While material info, does it prevent you from trading shares? And what if the public also knows about these events, but they just haven’t yet closed? Are directors any more aware of “deal information” than the rest of the trading public? And what if the director in question is the one charged with negotiating the deal that was announced and is still in due diligence, documentation, what have you. If that director is the one personally negotiating the previously announced deal, and that deal hasn’t yet closed, can they trade shares in the meantime on the basis that “everything is disclosed”, to quote the other FPI director above?

– The backout period: These are put in place at companies to ensure that directors and officers (and often employees) don’t trade the company’s shares for the period following the end of the quarter until 48 hours after the quarterly financial results are released. Surely, the blackout period is sacrosanct, right?

These are but three examples, but they’re not far fetched. I’ve wondered about each of them, and discussed each scenario with various securities lawyers. Both formally and informally. And, guess what, the answer depends on who you talk to.

Remarkably, few would say that having knowledge of the annual financial budget itself (public guidance or no public guidance) is a reason to not buy or sell shares.

Material transactions and equity offerings. Again, it depends on who you talk to. In the FPI case, it would appear that the fact that a corporate sale process was underway (although not concluded) – and disclosed – wasn’t in and of itself a reason for Mr. Armoyan to not trade securities as a director. In that light, can BCE directors be acquiring or selling shares now as well, assuming that all the information regarding that potential buyout is in the marketplace as well? And if they haven’t disclosed everything to the shareholders, won’t the OSC slap their wrists, as with the AIT Technologies case?

As for trading during a blackout period, you’d think that was the cardinal rule: Directors can’t trade during a financial reporting blackout period. But you’d be wrong. While it might seem improbable, there are actually real, live and recent situations where directors have traded securities during a formal corporate blackout period. The rationale? Tax loss selling. And they were filed on SEDI, as though that post-event action somehow speaks to the appropriateness of the trade itself.

Now, ask the chair of any Directors’ College if that’s proper, and they’ll probably send you home on the first day of the course. But that doesn’t mean a small subset of lawyers out there won’t tell you it’s ok. In writing.

The challenge with combining activist investing and merchant banking is coming clear to Mr. Armoyan. While he has referred to his investing activities in the same vein as Onex, the difference is (among others) that Onex directors don’t actively trade their investments:

“It’s not too dissimilar to Onex Corp., where we go and take investments in companies and try to help turn them around and unlock their value,” said Armoyan.

I’m all for fixing up companies. And improving shareholder value. And turning bright lights on sacred cows.

But this episode gives everyone some insight into how difficult it is to trade securities as a director of a public company. In the absence of a helpful set of real-world guidelines, and with conflicting legal guidance, perhaps each of us has to take the advice that my author/journalist father gave me went I went to Ottawa as a political staffer: there’ll be times when you are presented with a situation, and the best question to ask yourself is: “How would this look on the front page of the newspaper?”

For all the rules and legal advice and grey areas, that advice works every time.

MRM