On The Disgorgement Of Insider

The profits obtained through insider short-swing trading should be recovered by the issuer. This rule aims to prevent insiders abusing the information obtained because of their easy access to the company's inside information. After analyzing the supporting and opposing opinions on this rule, this paper concludes that the insider trading should be banned. Although the insider short-swing trading is not banned by law, the insider should not gain profits by taking advantage of his position and even if he does, according to the fiduciary duty and principle of agency law, those profits should be recovered by the issuer. Therefore, the rule on the disgorgement of insider short-swing trading is justified.From a comparative law point of view, this paper, by referring to Art. 42 of China's Securities Law, analyzes the composing elements of short-swing trading, the theory of disgorgement and its enforcement. Then it concludes that Art. 42 need to be improved. As to the regulated subjects in the insider short-swing trading, directors, supervisors and managers should all be included, as Article 147(2) of China's Corporate Law is unable to effectively regulate such subjects if short-swing trading occurs. Thus the doctrine of deputization and the concept of beneficial ownership in the American law should invite our attention. As to the definition of the subjects' "purchase" and "sale", a more strict explanation should be applied on the occasion of normal day-to-day cash for stock transactions. On other occasions, the pragmatic or subjective approach is more proper. This approach is adopted by the American laws when dealing with "unorthodox transactions" and according to this approach, the insider's possibility to make use of the inside information should be taken into consideration. As for the enforcement of the disgorgement, this paper comes up with the following suggestions. First, besides the board of directors, the supervisory board should also be entitled to enforce it in certain circumstances. Second, the shareholders' right of derivative suits should besupplemented. Third, conferring China Securities Regulatory Commission the right to deal with the insider short-swing trading is another possible solution. Forth, the limitation period of disgorgement should be regulated and finally calculating method of the short-swing profits should be fixed in law and, the "highest price out, lowest price in" rule is one possibility. In addition, the existing securities law should perfect the stipulations about the exemptions from disgorgement in order to collaborate with other related regulations such as legal provisions about the securities investment fund.Admittedly, the concept of disgorgement in the securities law is not identical with that in the corporate law; however, the fundamental legal rationale is inter-related. The disgorgement is, in nature, a right of formation and its limitation period, a scheduled period.This paper suggests that China should perfect the system of reporting requirements for insiders and their transactions in shares and establish the citizens' reporting system with the purpose of fully performing the inherent function of the disgorgement of insider short-swing trading system.