Topic 6 Investor Protection

1 / 54
About This Presentation
Title:

Topic 6 Investor Protection

Description:

A statement of opinion Aaron's Reefs Ltd v Twiss (1896) (Opinion misrep if no grounds) ... v De Mare (1959); Peek v Gurney (1873); Andrews v Mockford (1896) ... – PowerPoint PPT presentation

Number of Views:2340
Avg rating:3.0/5.0
Slides: 55
Provided by: nbs8

less

Transcript and Presenter's Notes

Title: Topic 6 Investor Protection


1
Topic 6Investor Protection
2
Investor Protection
  • Companies may raise capital by
  • Loans
  • Shares

3
Investor Protection
  • Loans
  • Unsecured Bank Loans
  • Secured Loans
  • Mortgages
  • Debentures

4
Investor Protection
  • Shares
  • Protecting Investors When Raising Capital by
    Securities
  • Protecting Investors in Subsequent Dealings in
    Securities

5
Investor Protection
  • A Registered Company Limited by Shares is
    financed by shares and debentures which are known
    collectively as securities

6
Investor Protection
  • Shareholders and debenture holders are investors
    and subscribe because
  • 1. Obtain a dividend (interest) and involvement
    in management by a vote in the general meeting
  • 2. Can sell the shares (debentures) at a profit
    on the market.
  • It is therefore important that securities are
    marketable. Therefore investors need to be
    protected.

7
Investor Protection
  • Shares Debentures - Protecting Investors When
    Raising Capital by Securities
  • Public Private Companies
  • Requirements for Listed and Unlisted Securities
  • Exceptions to the use of Listing Requirements or
    Prospectus
  • Remedies for non-disclosure under the Listing
    Requirements or Prospectus

8
Investor Protection
  • Shares Debentures - Protecting Investors When
    Raising Capital by Securities
  • The following are a number of regulations
    intended to protect investors

9
Investor Protection
  • Private Companies
  • A private company cannot (with exceptions) sell
    its shares on the stock Exchange or advertise
    them to the public.
  • It can only issue shares by
  • 1. A rights issue
  • 2. A private placing
  • 3. offering to existing shareholders etc.
  • 4. an employees' share scheme.

10
Investor Protection
  • Public Companies
  • Public company may offer shares to the public by
  • 1. Direct offer to the public
  • 2. Offer for sale
  • 3. Rights issue
  • 4. Placing
  • 5. Offer by tender

11
Investor Protection
  • Public Companies
  • In offering securities to the public a public
    company will either seek to have them listed on
    the Stock Exchange or seek to sell them unlisted.
    Listing makes the shares freely marketable which
    enhances their initial value to subscribers who
    can sell them on the Stock Exchange more easily.

12
Investor Protection
  • Requirements Relating to Listed Securities
  • To be on the Official List of the Stock Exchange
    must comply with Council of the Stock Exchange
    rules s 142 Part IV Financial Services Act The
    main requirements of the listing rules are

13
Investor Protection
  • Requirements Relating to Listed Securities
  • The main requirements of listing are
  • A company must publish particulars or prospectus
    which must disclose all the information with
    respect to the assets and liabilities financial
    position profits and losses prospects of the
    securities and rights attached to the securities
    as an investor and his or her advisers would
    require in order to make an informed assessment.

14
Investor Protection
  • Requirements Relating to Listed Securities
  • Adequacy of disclosure depends on
  • a) the nature of the securities and the issuer
  • b) the nature of the prospective buyers
  • c) that professional advisers
  • d) any information s 146(3)

15
Investor Protection
  • Requirements Relating to Listed Securities
  • The Stock Exchange may exempt information from
    disclosure if that information
  • a) would be contrary to the public interest
  • b) seriously detrimental to the issuer of the
    securities
  • c) unnecessary for the specialised market in
    which the securities are to be issued.

16
Investor Protection
  • Requirements Relating to Unlisted Securities
  • For unlisted securities to be offered to the
    public they must comply with the Public Offer of
    Securities Regulations 1995.

17
Investor Protection
  • Requirements Relating to Unlisted Securities
  • These Regulations require
  • A prospectus registered with the registrar of
    the Stock Exchange be issued referred to in all
    advertisements.
  • Further regulation govern issue to the European
    Union under the Mutual Recognition of
    Prospectuses Directive

18
Investor Protection
  • Exceptions to the issue of listing particulars or
    a prospectus
  • This list includes offers
  • to the government or a local authority,
  • in connection with a take-over offer,
  • in connection with a merger,
  • of bonus shares,
  • to employees, former employees and their
    families.
  • by charities and non-profit making bodies.

19
Investor Protection
  • Remedies for non-disclosure and misrepresentation
    in Listing Particulars and Prospectuses
  • Civil Liability
  • Misrepresentation
  • Voidable
  • Repudiate and Rescind /or damages

20
Investor Protection
  • The listing particulars or prospectus must
    contain a false statement of fact which induced
    him or her to subscribe for share in the company.

21
Investor Protection
  • It must be a false statement of fact-
  • A statement of Intentions - Edgington v
    Fitzmaurice (1885)
  • A statement of opinion Aaron's Reefs Ltd v Twiss
    (1896) (Opinion misrep if no grounds)
  • Silence if misleading R v Kylsant (1932)
  • A company will be liable for a misrepresentation
    found in an expert's report that it has adopted
    Re Pacaya Rubber Co (1914)

22
Investor Protection
  • The statement must have influenced the
    plaintiff-
  • The misrepresentation must be material City of
    Edinburgh Brewery Co v Gibson's Trustee (1869).
  • It must have been a reason for the plaintiff to
    enter the contract Smith v Chadwick (1884).
  • The plaintiff is not obliged to make inquiries
    Redgrave v Hurd (1881)

23
Investor Protection
  • Types of Misrepresentation
  • Fraudulent
  • Statement is known to be false Derry v Peek
    (1889) Akerheim v De Mare (1959) Peek v Gurney
    (1873) Andrews v Mockford (1896).
  • Negligence
  • Negligent misstatement for damages. Hedley Byrne
    and Co v Heller and Partners Ltd (1964)
  • A duty of care is owed to subscriber but not to
    those who subsequently deal on the Stock
    Exchange Al Nakib Investments (Jersey) Ltd v
    Longcroft (1991). Now a statutory duty is owed
    under the Financial Services Act 1985.

24
Investor Protection
  • Types of Misrepresentation
  • Misrepresentation Act 1967
  • This is where a false statement of fact is made
    by a party to a contract to another causing that
    other to enter the contract and thereby suffering
    loss. This is an action in contract for
    rescission. The person making the statement may
    reduce his or her liability by paying damages in
    lieu of rescission if he or she can show that he
    or she honestly believed the statement to be true
    i.e. an innocent misrepresentation.

25
Investor Protection
  • Types of Misrepresentation
  • Persons liable may be
  • The issuer of the securities (the company)
  • The directors of the issuer
  • Any person authorised including promoters,
    issuing houses etc.

26
Investor Protection
  • Statutory Duty
  • Ss 150 to 152 Financial Services Act 1985 Regs 13
    to 15 Public Offers of Securities Regulations
    1995 provide a remedy for misrepresentations and
    omissions in listing particulars or prospectuses
    in relation to listed securities and unlisted
    securities. These remedies are available in
    addition to the above.

27
Investor Protection
  • Statutory Duty
  • The liability is as follows
  • Any person responsible for a prospectus or
    listing particulars shall be liable to compensate
    anyone who has acquired relevant securities and
    has suffered a loss as a result of any untrue or
    misleading statement or omission

28
Investor Protection
  • Statutory Duty
  • Defences are as follows
  • a) the defendant had made reasonable inquiries
  • b) the statement was made by an expert
  • c) the defendant took reasonable steps to bring a
    correction in an expert's statement to the
    attention of the investors
  • d) where the statement was from an official
    document
  • e) where the plaintiff acquired the securities
    knowing of the inaccuracy
  • f) where the change was such that supplementary
    listing particulars or prospectus were not
    required.

29
Investor Protection
  • Criminal Liability
  • It is an offence for a person to make a
    statement, promise or forecast which is or he
    knows to be misleading, false or deceptive to
    induce another person to enter or refrain form
    entering into an investment agreement.
  • It is also an offence to do any act or engage in
    any course of conduct which creates a false or
    misleading impression as to any investment in
    order to induce another person to acquire dispose
    of, subscribe for or underwrite investments, or
    to refrain from doing so.
  • Maximum penalty 7 years imprisonment.
  • s 47 Financial Services Act 1985

30
Investor Protection
  • Shares Debentures - Protecting Investors in
    Subsequent Dealings in Securities
  • Insider dealing
  • Take-overs

31
Investor Protection
  • Insider Dealing is where a person buys or sells
    securities when, because of some connection which
    he or his informant has with the company, he, but
    not the other party to the transaction, is in
    possession of confidential information which
    affects the value to be placed on those
    securities.
  • e.g. he or the informant is a director, employee
    or professional adviser of the company-White
    Paper , Cmnd 7037, 1977

32
Investor Protection
  • Insider Dealing is dealing which gives an unfair
    advantage
  • Prohibition
  • a) The moral reason - unfair on the person who
    deals with the insider.
  • b) The legal reason - potential conflict of
    interest between the insider (employee, officer,
    director etc) and the company.
  • May be in position to make a decision regarding
    information - company v self

33
Investor Protection
  • Offence for insider
  • 1. to deal in securities to which the inside
    information relates (dealing offence)
  • 2. to encourage another person to deal in
    securities to which the insider information
    relates knowing or having reasonable cause to
    believe that the other person will deal in such
    securities (encouraging offence)
  • 3. to disclose inside information to another
    person otherwise than in the proper performance
    of his or her employment, office or profession
    (disclosure offence).
  • S 52 Criminal Justice Act 1993 (CJA 1993) Part V
    (incorporates EU directive on insider dealing,
    89/592/EC)

34
Investor Protection
  • Burden of Proof
  • Beyond a reasonable doubt.
  • The dealing and encouraging offences are only
    committed if a transaction actually takes place
    either on a regulated market i.e. a stock
    exchange (SI 1994 No. 187) or with a person who
    is a professional intermediary such as a broker
    (s 59 of the CJA 1993). This means that private
    "one-off" transactions are not covered by the Act.

35
Investor Protection
  • Definitions
  • Securities
  • Dealing
  • Insider
  • Inside Information

36
Investor Protection
  • Insider a person who has inside information,
    knows it to be inside information and that it has
    been obtained form an inside source - inc sub
    tippees

37
Investor Protection
  • Inside Information
  • a) it must relate to particular securities or
    company
  • b) it must be specific or precise
  • c) it must not have been made public
  • d) it must be information that would be likely to
    significantly affect the price or value of any
    securities ("price affected securities") if it
    were made public.

38
Investor Protection
  • Sanctions
  • Seven years imprisonment and/or a fine
  • No civil remedies - no contract is void or
    unenforceable by reason of an offence having been
    committed s63 compare USA

39
Investor Protection
  • Defences
  • Under s 53 of the CJA 1993 there are the
    following defences which the defendant must prove
    on the balance of probabilities
  • 1. the defendant did not at the time expect the
    dealing to result in a profit or the avoidance of
    a loss
  • 2. the defendant at the time reasonably believed
    that the information was widely enough known
    (although not public) so as not to prejudice the
    other parties to the dealing, (this covers
    underwriters)
  • 3. the defendant would have dealt or encouraged
    another to deal in the securities even if he had
    not had the inside information, (this covers take
    over bids)
  • 4. the defendant did not expect that any person
    would deal as a result of any disclosure of the
    information
  • 5 the defendant did expect another to deal as a
    result of the disclosure of information but did
    not expect a profit or avoidance or a loss to
    arise from such dealing.

40
Investor Protection
  • Take-over occurs when the take over company
  • 1. Purchases the shares of the target company
    from the individual members of the target company
  • 2. Purchases the shares of the target company on
    the Stock Exchange
  • 3. Makes an offer to all or a significant number
    of the shareholders of the target company to buy
    their shares at a specified price the offer to
    remain open for a specified time and conditional
    upon a specified percentage of the shareholders
    accepting the offer.

41
Investor Protection
  • Reasons for Take-over
  • 1. A particular asset e.g. a product, a trademark
    or a factory
  • 2. To reduce or eliminate competition (Note
    Monopolies and Mergers Commission)
  • 3. The market price of the shares low (Note
    asset stripping)
  • 4. The target company run inefficiently

42
Investor Protection
  • The interests of shareholders are protected In
    the face of a Take over by
  • Ss 428 - 430 of the Companies Act 1985 and
  • The City Code on Take Overs and Mergers.

43
Investor Protection
  • Pre-acquisition - Preventing the Minority
    blocking a Take-over
  • S 428 if offeror has obtained at least 90
    within 4 months then may serve within 2 months a
    notice to compulsory acquire remainder

44
Investor Protection
  • Pre-acquisition - Preventing the Minority
    blocking a Take-over
  • S 428 Provisos
  • Certain shares not included in 90
  • If choice of shares or cash, dissenting
    shareholders must be given 6 weeks to elect.
  • Any dissenting shareholder has 6 six weeks to
    apply to the court
  • a) to prevent the compulsory purchase or
  • b) specify different terms of acquisition.

45
Investor Protection
  • Post-acquisition - Minority forcing purchase of
    shares by offeror
  • S 430 Minority may require the offeror to
    purchase their shares

46
Investor Protection
  • Post-acquisition - Minority forcing purchase of
    shares by offeror
  • s 430 Provisos
  • All shares held by the offeror may be included in
    the calculation.
  • The offeror must within one month of acquiring
    90 inform the minority of their right to be
    bought out.
  • Notice may specify a period of not less than
    three months from the end of the offer period.

47
Investor Protection
  • The City Code
  • City Panel - own secretariat.
  • Companies in breach may be
  • reprimanded,
  • censured or
  • withdrawn from the Stock Exchange.
  • Appeal Committee
  • Judicial review
  • Reference to DTI, Stock Exchange or Monopolies
    and Mergers Commission.

48
Investor Protection
  • The Code is a means of self regulation by the
    companies of the Stock Exchange.
  • The Code not law
  • The spirit as well as the precise wording of the
    Code must be observed
  • The provisions of the code are made up of
  • a) Standards of good commercial behaviour
  • b) Best practice

49
Investor Protection
  • General Principles
  • There are 10 general principles
  • Rules
  • There are 38 rules.

50
Investor Protection
  • The Approach and Independent Advice
  • Offers to the board of the target company.
  • The identity of the offeror revealed
  • independent advice circulated to shareholders.
  • Offers to control - must acquire 50 of the
    voting shares.

51
Investor Protection
  • Announcements
  • When offer received a press notice should be
    issued and the shareholders should be informed
    immediately.
  • Dealings on the Stock Exchange usually halted
  • Offer must state the consideration and the
    conditions.

52
Investor Protection
  • Dealings
  • No person other than the offeror may deal in the
    target company's shares if he or she is privy to
    confidential information relating to the offer
    between the time when an offer is anticipated and
    the public announcement (see Insider Dealing).

53
Investor Protection
  • Mandatory Offer
  • Must make an offer if significant holding
    obtained
  • Significant holding 30 of the voting rights or
  • 30 - 50 of the voting rights acquires a further
    1 or more of the voting rights within a year.

54
Investor Protection
  • But 2 problems
  • 1. Identity of the acquirer hidden by associates
  • Those with 3 or more must disclose when
    purchasing further shares.
  • 2. Shareholders did not benefit - dawn raid
    market price did not take-over bid price
  • Where a person acquires if acquire 10 or more
    within 7 days taking holding to 15 or more but
    less than 30 (mandatory take over rule) then it
    will be treated as a partial bid must make a bid.
    Rules Governing the Substantial Acquisition of
    Shares December 1980
Write a Comment
User Comments (0)