Investor Protection

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					     Topic 6
Investor Protection
          Investor Protection
Companies may raise capital by:
• Loans
• Shares
          Investor Protection
• Unsecured Bank Loans
• Secured Loans
  – Mortgages
  – Debentures
           Investor Protection
• Protecting Investors When Raising Capital
  by Securities
• Protecting Investors in Subsequent Dealings
  in Securities
           Investor Protection
• A Registered Company Limited by Shares
  is financed by shares and debentures which
  are known collectively as securities
             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
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
            Investor Protection
    Shares & Debentures - Protecting
    Investors When Raising Capital by
•   Public & Private Companies
•   Requirements for Listed and Unlisted
•   Exceptions to the use of Listing
    Requirements or Prospectus
•   Remedies for non-disclosure under the
    Listing Requirements or Prospectus
           Investor Protection
  Shares & Debentures - Protecting
  Investors When Raising Capital by
• The following are a number of regulations
  intended to protect investors
           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.
              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
            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.
          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:
            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.
           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)
           Investor Protection
Requirements Relating to Listed Securities
  The Stock Exchange may exempt
  information from disclosure if that
a) would be contrary to the public interest;
b) seriously detrimental to the issuer of the
c) unnecessary for the specialised market in
  which the securities are to be issued.
          Investor Protection
Requirements Relating to Unlisted
 For unlisted securities to be offered to the
 public they must comply with the Public
 Offer of Securities Regulations 1995.
          Investor Protection
Requirements Relating to Unlisted
 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
              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
• by charities and non-profit making bodies.
           Investor Protection
Remedies for non-disclosure and
 misrepresentation in Listing Particulars
 and Prospectuses
Civil Liability
• Voidable
• Repudiate and Rescind &/or damages
           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.
               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
               Investor Protection
• The statement must have influenced the
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)
                Investor Protection
• Types of Misrepresentation
Statement is known to be false Derry v Peek (1889); Akerheim v De
   Mare (1959); Peek v Gurney (1873); Andrews v Mockford
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.
              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
             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.
           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.
            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
                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
f) where the change was such that supplementary listing
   particulars or prospectus were not required.
               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
          Investor Protection
  Shares & Debentures - Protecting
  Investors in Subsequent Dealings in
• Insider dealing
• Take-overs
           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
           Investor Protection
• Insider Dealing is dealing which gives an
  unfair advantage
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
                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)
             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.
          Investor Protection
• Securities
• Dealing
• Insider
• Inside Information
           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
            Investor Protection
• Inside Information:
a) it must relate to particular securities or
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.
           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
           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
             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.
           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
           Investor Protection
The interests of shareholders are protected In
  the face of a Take over by:
• Ss 428 - 430 of the Companies Act 1985
• The City Code on Take Overs and Mergers.
           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
            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.
           Investor Protection
Post-acquisition - Minority forcing
  purchase of shares by offeror
• S 430 Minority may require the offeror to
  purchase their shares
             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.
           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.
           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
           Investor Protection
General Principles
• There are 10 general principles
• There are 38 rules.
            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.
            Investor Protection
• When offer received a press notice should be
  issued and the shareholders should be
  informed immediately.
• Dealings on the Stock Exchange usually
• Offer must state the consideration and the
           Investor Protection
• 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).
           Investor Protection
Mandatory Offer
• Must make an offer if significant holding
• 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.
             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

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