Insider dealing: A transaction involving a company or a person who has a specific responsibility within the company and which affects either directly or indirectly the interests of the company is called an insider dealing.
Since the person or company involved in the transaction should represent both their own interests and the interests of the company or the other shareholders, it is a type of conflict of interest.
If a director of a company purchases a property that was previously offered for sale by the company without informing the other directors or shareholders, this would be an example of an insider transaction.
Insider dealing is often considered unethical and in certain cases illegal, as it can jeopardise the reputation of a company and the happiness of its shareholders. In several countries, insider dealing is restricted or prohibited altogether by laws and regulations.
It is essential that you inform yourself about the laws and regulations on self-dealing that apply in the country where you do business.
Table of Contents
- What is an insider transaction under section 181 of the Civil Code?
- Is an insider transaction legal?
- What is the relationship between an insider transaction and a general power of attorney?
- What is the verification scheme for an insider transaction?
- What are the exceptions to an insider transaction?
- How can a GmbH enter into an insich transaction?
- Insider dealing between parents and children
- What are the penalties for an insider transaction?
What is an insider transaction under section 181 of the Civil Code?
A contract in which a contracting party transfers a right to an asset to itself is called an insider transaction under section 181 of the Civil Code (BGB). Neither private individuals nor companies may engage in insider dealing.
Typically, in this type of loan, the creditor forces the debtor to give him the right to an asset. Collateral is provided in return for a payment to the creditor.
For example, a loan where the company uses itself as collateral could be considered an insider transaction.
Is an Insider dealing legal?
Depending on the specifics of the transaction and the relevant German laws and regulations, an insider transaction may be legal or illegal. The German Commercial Code and the German Stock Corporation Act regulate insider trading in Germany.
If an insider transaction was concluded on honest and reasonable terms without giving an unfair advantage to one party, it may be legal.
Furthermore, it must be ensured that the transaction does not violate applicable rules or regulations or harm the interests of the company or the other shareholders.
It is important to remember that insider transactions in Germany are not always morally or legally acceptable and must always be reviewed by the relevant authorities and other shareholders. A professional or lawyer should be consulted before undertaking such a transaction.
What is the relationship between an insider transaction and a general power of attorney?
A general power of attorney is a legal document that gives the principal’s agent the authority to negotiate and sign contracts on behalf of the principal. A general power of attorney allows the principal to choose another person (the attorney-in-fact) to represent him or her in all situations covered by the power of attorney.
An insider dealing may occur in a company when an agent with a general power of attorney acts independently and makes decisions that are solely in his or her interest and not in the interest of the company or the other shareholders.
For example, a corporate proxy could engage in a transaction that benefits him personally financially without informing the other owners. Companies and individuals granting general powers of attorney must be careful that proxies do not abuse their powers or jeopardise the interests of the company or other shareholders.
One way to achieve this is to clearly define the power of attorney and to regularly update and monitor the performance of the proxies.
What is the review scheme for an insider dealing?
As the criteria and rules may differ from one jurisdiction to another, there is no universal review scheme that can be applied to all insider dealing.
However, certain measures are usually taken to ensure that an insider transaction is morally and legally correct. The following measures may be considered when examining an insider transaction:
Checking the law: To ensure that the insider transaction does not violate applicable laws, it is important to check the laws of the country in which the transaction is made.
An analysis of potential conflicts of interest should be carried out to determine whether the insider transaction gives rise to conflicts of interest and whether the interests of the company or other shareholders will be adversely affected.
Disclosure: Measures should be taken to ensure that all parties involved are aware of the insider transaction so that they can make an informed decision.
Obtaining approval: Approval should be obtained from the relevant authorities or other shareholders before any insider dealing is undertaken.
It should be ensured that insider dealing is routinely checked for its moral and legal propriety.
It should be noted that the conditions and procedures to be considered when reviewing an insider transaction may vary from country to country, so it is essential to know the relevant laws and regulations of the country in which one is conducting business.
What are the exceptions to insider dealing?
There are some exceptions that apply to insider trading in Germany. For example, in Germany there are some possible exceptions to the prohibition of insider trading:
- Minor matters: The guidelines do not apply to minor matters that do not affect the interests of the company or the other shareholders.
- Shareholder approval: Insider transactions that have received the approval of the other shareholders are exempt from the rules.
- Insider transactions that are made under clear and reasonable terms and circumstances and do not give any party an unfair advantage are exempt from the rules.
- Duty of disclosure: Insider transactions must be reported to the company and the parties involved before they are concluded.
It is crucial to remember that these exemptions are not absolute and that the other shareholders and the relevant authorities must constantly review the insider transaction to ensure that it complies with the law and ethical principles.
Before entering into such a transaction, it is advisable to seek advice from an expert or a lawyer, as insider transactions in Germany are also subject to stock corporation and commercial law.
How can a GmbH enter into an Insider dealing?
A limited liability company (GmbH) can enter into an “insider transaction” to manage its assets. When a company supplies goods or services to itself, this transaction is referred to in the business world as an “insider transaction”.
Such a transaction must be justified by the GmbH managing director and the GmbH shareholders must approve it by resolution. The transaction must then be documented in the GmbH balance sheet to comply with applicable laws.
Insider dealings between parents and their children
There are no explicit laws in Germany governing insider transactions between parents and their children. However, this type of transaction is also subject to the usual rules and restrictions that apply to insider transactions.
For example, if a parent owns a company and a child holds a key position there, it may be an insider transaction between parents and children. When a child makes decisions that affect both his or her own interests and the interests of the company, conflicts of interest may arise.
It is vital that parents and children are honest about their preferences in these circumstances and that decisions are made in the best interests of the whole family and the business.
Establishing independent oversight committees or developing policies and procedures that control children’s behaviour within the company are two ways to achieve this.
It is critical that both parents and children are aware of and comply with applicable laws and rules regarding self-dealing.
What are the penalties for unlawful self-dealing?
Insider dealing or Self-dealing, also referred to as “self-purchase”, refers to transactions made by a company or a person within the company without informing the other party.
This is a form of breach of trust, which can have both civil and criminal consequences. Criminal law may result in a conviction for fraud or breach of trust. Under civil law, damages can be claimed.
There may also be consequences under professional law, such as a revocation of the licence as a management consultant or a suspension as a board member.
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