By-Laws Are Better For Stopping Insider Trading Than The SEC And Government Enforcement

From the very good article, "Inside Insider Trading" by Warren C. Gibson, who teaches engineering at Santa Clara University and economics at San Jose State University:

Shareholders who object to insider trading are usually thought to have no alternative but government regulation. That’s just not so. Insider trading could be prohibited or restricted by corporate bylaw provisions. Outside auditors would monitor management behavior, and suspected violations would be referred to arbitrators. It might seem inefficient for small shareholders to expend the time and energy necessary to get together and pursue possible corporate violations. But following David Friedman’s innovative ideas on law and economics, we can imagine shareholders selling in advance their rights to recover damages from possible future violations. Specialists could acquire these rights and pursue violations efficiently. Corporate management would be well aware of the watchful eyes of these specialists.

Read the complete article here.

The comment I posted to the above article on Freeman Blog:

There is no need to make a by-law exception for takeovers. Acquiring companies will not pay more than their valuation of the worth of the target company or their ability to make a profit and increase shareholder value at the acquiring price. If the market raises the stock price too high for the acquiring company, the buying company will walk away. If the price stays above the original target price, it is an indication that the target company is worth more to another acquiring company.

Earlier release of the information that there is a possible acquiring company buying up shares will prevent shareholders of the target company from selling prematurely, while the buying company is acquiring shares prior to announcement. Earlier release of takeover information will also allow other companies to evaluate a takeover of the target and it could result in another company that gets a greater economic benefit from the acquisition bidding a higher price than the original acquirer would.

While it is cheaper to acquire shares before an announcement and run-up in the share price, it is at the expense of the target shareholders of a potentially higher acquisition price and at the expense of target shareholders that trade in the short period prior to announcement. Additionally, allowing more time for other companies to evaluate and bid could result in a better economic allocation of resources.