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
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
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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.
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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
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Shares Debentures - Protecting Investors When Raising Capital by Securities
The following are a number of regulations intended to protect investors
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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.
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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
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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.
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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
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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.
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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)
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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.
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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.
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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
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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.
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Remedies for non-disclosure and misrepresentation in Listing Particulars and Prospectuses
Civil Liability
Misrepresentation
Voidable
Repudiate and Rescind /or damages
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The listing particulars or prospectus must contain a false statement of fact which induced him or her to subscribe for share in the company.
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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)
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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)
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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.
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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.
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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.
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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.
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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
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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.
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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
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Shares Debentures - Protecting Investors in Subsequent Dealings in Securities
Insider dealing
Take-overs
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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
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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
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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)
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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.
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Definitions
Securities
Dealing
Insider
Inside Information
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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
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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.
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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
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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.
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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.
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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
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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.
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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
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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.
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Post-acquisition - Minority forcing purchase of shares by offeror
S 430 Minority may require the offeror to purchase their shares
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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.
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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.
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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
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General Principles
There are 10 general principles
Rules
There are 38 rules.
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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.
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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.
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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).
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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.
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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