students manuals iqs law c04
TRANSCRIPT
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CHAPTER 4
LISTING AND PROSPECTUS
PROMOTING PUBLIC FUNDING
1.1 A key historical reason for the development of public companies was that public
companies provided a medium for the pooling of public funds. The public funds
collected provided companies that were involved in business that required high
Chapter objectives
After the completion of this chapter you should be able to understand amongst
other things:
How Corporate and Securities law promote public funding;
The role of the stock exchange in promoting public funding;
How disclosure of material information promotes investor protection
in regards to company securities;
The relationship between prospectuses and the disclosure of material
information;
The different kinds of prospectuses;
The Securities Commissions function in respect to prospectuses;
The regulations as to the form and contents of a prospectus;
The consequence of non-compliance as to form and contents of a
prospectus;
The common defences that can be resorted to in the event a person is
charged or sued for making or causing the prospectus to include a
misleading or fraudulent statement or information; and
Why regulations are imposed on share hawking and advertising of
company securities.
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capital investment such as infrastructure building with the necessary funding to
conduct that particular business venture.
1.2 To promote the public to invest their money in company securities, the law has
provided among other things that:
Companies are separate legal persons from its members. This allowed
the risk associated with the business venture that was to be undertaken by
that company to be allocated to the company as opposed to its members
and controllers;
Members of a company limited by shares enjoy the benefit of limited
liability. Limited liability promotes public investment because its ensures
among other things that the creditors of the company will not have access
to the personal wealth of the investor;
Public companies having complied with the necessary securities law can
offer their securities (shares and debentures) to the public for investment
purposes;
Companies must disclose material information in a written form in
regards to the company securities that has been offered to the public.
This is to enable a prospective investor to make an informed decision as to
whether to invest in that company securities or other wise. In this regard
the law requires the company that is seeking public funding to provide its
prospective investors with a prospectus. This chapter is concerned among
other things with rules that regulate the issue of a companys prospectus;
and
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Anti fraud provisions exist to ensure that all investors are treated on an
equal basis, which in turn promotes an honest market and enhances
investor confidence in the market.
ROLE OF THE STOCK EXCHANGE
2.1 Robert Baxt, Ashley Black and Pamela Hanrahan in their book titled Securities
and Financial Services Law, Sixth Edition, Butterworths, at page 268 have
submitted that:
Stock Exchanges perform an important function-they enable the transferability
of securities listed on the relevant market, which is controlled by the stock
exchange. This function is achieved by the attachment of a price to the relevant
security. The price of a security is fixed by the operation of normal market
forces-the evaluation of information concerning the company in which the
particular security is offered. The Stock exchange also offers marketability of
securities. Those listed on the stock exchange are more marketable than thosewhich are not.
2.2 Further, the authors of the book titled Commercial Applications of Company Law
in Malaysia, CCH, have also submitted at page109 that:
By arranging for its securities to be listed on the KLSE, the company creates an
organized, liquid and transparent market for those securities. Securities for
which there is a ready market are more attractive to investors than those for
which no market exists
2.3 In Malaysia the stock exchange, is regulated by the Minister of Finance and the
SC. This Is by virtue of the Securities Industry Act 1983 and the Securities
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Commission Act 1993(hereinafter referred to respectively as the SIA and the
SCA).
Listing requirements
2.4 Further, companies that wish to list their securities on the KLSE and including
companies that have already listed their securities on the KLSE have a statutory
obligation to comply with the MSEB LR: s 11 Securities Industry Act 1983.
Pre-listing requirements
2.5 Wong Yoke Eng in her book titled Securities Law for Public Listed Companies
in Malaysia, Sweet and Maxwell, have classified these pre-listing requirements
into quantitative and qualitative requirements.
2.6 Quantitative pre-listing requirements includes the public company having to
satisfy the quantitative requirements as to capital requirements-issued and paid
up capital, and historical profit track record test or market capitalization test.
2.7 The qualitative pre-listing requirements require that the public company to
comply with the requirements stated in the Policies and Guidelines on Issue/Offer
of securities. These Policies and Guidelines deals, with independence of business;
core business; prospects of the company, continuity of management; conflict of
interest and transactions with related parties.
2.8 The public company that seeks listing must make its application for listing to both
the MSEB and the SC.
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2.9 It is an offence against the SCA for anyone without the prior approval of the SC,
to:
Make available, offer for subscription or purchase, or issue an
invitation to subscribe for or purchase securities in Malaysia; or
Apply for listing of a corporation, or for quotation of securities on
the stock market of the stock exchange: ss 32 (2) and 32 (3) and
32(4) SCA.
2.10 Contravening the above provisions can result in that person having to pay a fine
not exceeding RM 1 Million or be imprisoned for a term not exceeding 10 years
or both: s 32 (13) SCA.
2.11 Further, it is also an offence against the SCA when applying for the above
approval in 2.9 to provide false or misleading information or make false or
misleading statements to the SC: s 32B SCA. Contravening this provision can
result in that person having to pay a fine not exceeding RM 3 Million or be
imprisoned for a term not exceeding 10 years or both: s 32B (4).
Company securities
2.12 The SCA defines securities to include:
Debentures, stocks or bonds issued or proposed to be issued by any
government;
Shares in or debentures of, a body corporate or an unincorporated body;
Unit trusts or prescribed investments; and
Any right, option or interest in respect thereof
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DISCLOSURE OF MATERIAL INFORMATION AND INVESTOR
PROTECTION
3.1 The law must among other things ensure that public companies that offer their
securities to the public have disclosed material information in respect of those
securities.
3.2 This is because an investor who invests in company securities is not able to
conduct a physical inspection of his or her investment as he or she can do so
before investing in land.
3.3 In lieu of physical inspection an investor in company securities relies on the
disclosure material information.
PROSPECTUSES AND DISCLOSURE OF INFORMATION
4.1 The laws relating to the registering and issuing of prospectuses to investors
among other things ensures that:
Prior to investing in company securities the prospective investor will have
written information that will facilitate his or her investment decision in
that company securities;
Information provided to the prospective investor shall be material in that
the prospectus must have sufficient information so as to enable the
prospective investor to make an informed assessment of as to his or her
investment;
Due diligence is exercised by those who prepare the prospectus; and
Those who make or give false or misleading Information to the
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prospective investor are subjected to civil and criminal liability.
4.2 A prospectus is therefore essentially a disclosure-based document. In it a
prospective investor will find key information that will enable the prospective
investor to make an informed decision as to whether to proceed with his or her
investment in that company securities.
Prospectuses as defined by the SCA
4.3 The SCA describes a prospectus to include any notice, circular, advertisement or
document inviting applications or offers to subscribe for or purchase securities.
Further, a prospectus for the purposes of the SCA also includes abridged
prospectuses for renounceable rights issues, supplementary prospectuses, shelf
prospectuses, short form prospectuses, profile statements and supplementary shelf
prospectuses: s35 SCA.
Abridged prospectus
4.4 An abridged prospectus is required when there is an issue, offer for subscription
or purchase, or an invitation to subscribe for or purchase securities by means of a
rights issue which is renounceable in favour of persons other than existing
members of that corporation and in respect of which an application has been or
will be made for permission to deal with or quote such securities on the stock
market of a stock exchange: s 46 SCA.
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prospectus is concerned with a unit trust scheme or a prescribed investment
scheme, in which case it will have to be lodged with the Securities Commission):
s 43 SCA.
THE NEED TO REGISTER A PROSPECTUS WITH THE SC
6.1 To ensure that the SC is able to carry out its function as the approving and
registering authority of prospectuses the SCA includes provisions that are
designed to require a prospectus to be registered and approved by the SC prior to
its issue to the public.
S41 SCA
7.1 This is a key provision as it provides among other things that a person shall not
issue, offer for subscription or purchase, or make an invitation to subscribe for or
purchase, any securities unless:
A prospectus that complies with the SCA in relation to the securities has
been registered by the Commission: s 41(1) SCA;
7.2 Further, it also provides that a person shall not issue, circulate or distribute any
form of application for securities unless a copy of a prospectus, which has been
registered by the Commission, accompanies that form: s 41(2) SCA.
7.3 Therefore s 41 imposes two mandatory obligations on a corporation that is
seeking public funding. They include:
That prior to that corporation seeking public funding that corporation must
first register a prospectus with the SC; and
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That the corporation must also ensure that a copy of the registered
prospectus accompanies any form of application for securities in that
corporation.
THE CONSEQUENCES OF CONTRAVENING S 41 SCA
8.1 Contravening ss 41(1) and 41(2) SCA is punishable with a fine not exceeding
RM10 Million or imprisonment for a term not exceeding ten years or both: s 41(4)
SCA.
8.2 Further a person who suffers loss or damage by reason of or by relying on the
conduct of that person who has contravened s 41 SCA can institute civil
proceedings against that other person to recover for loss or damage suffered. Civil
proceeding can be instituted against that other person although that other person
has not been charged with an offence: s 153 SCA.
THE COMPANY AS THE CONVICTED PERSON
9.1 The SCA provides that in the event the convicted person is a body corporate, that
body corporate will be punished with a fine only: s 138(1) SCA.
9.2 The SCA also provides that in the event an offence is committed by a body
corporate against the SCA, any person who at the time of the commission of the
offence was a director, a chief executive officer, an officer, an employee or the
secretary of that body corporate or was purporting to act in that authority shall be
deemed to have committed that offence unless he or she proves that the offence
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was committed without his or her consent and that he or she exercised all due
diligence to prevent the commission of the offence: s 138(2) SCA.
NON-APPLICATION OF THE SCA PROVISIONS IN REGARDS TO
PROSPECTUS
10.1 A private company that makes an offer for subscription or purchase of or an
invitation to subscribe for or purchase its securities need not comply with the
SCA provisions in regards prospectus.
10.2 This is because the SCA regards the offer, invitation or issue securities made by a
private company to be an excluded offer, invitation or issue: ss 35,38,39 and 40
SCA together with the accompanying schedule 2 and 3 of the SCA.
REGISTERING A PROSPECTUS WITH THE SC
Formalities to be complied with: s42 (2) SCA
11.1 The applicant must comply with the formalities that are set out in SCA,
specifically those formalities that are set out in s 42(2). Further, the applicant
must also comply with any relevant guidelines that have been issued by the SC in
regards to prospectuses.
The SC can refuse to register a prospectus: s 42 (1) SCA
11.2 The SCA also sets out instances when the SC can refuse to register a prospectus: s
42(1) SCA.
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11.3 The SCA empowers the SC to refuse to register a prospectus when that prospectus
among other things:
Does not comply with any requirement or provision of SCA: s 42(1) (a);
Contains a statement of information that is misleading or false: s 42 (1)(c);
11.4 Further, the SC can also refuse to register a prospectus when the issuer has
contravened any provisions of securities law or the CA that can cast doubt on the
fitness of the issuer to have access to public funding: s 42 (1)(f).
Consequence of the SC registering a prospectus
11.5 The fact that the SC has in fact registered a prospectus does not indicate that the
SC has in fact recommended that securities for which a prospectus has been
registered with the SC or that the SC has assumed responsibility for the
correctness of any statements, opinions or reports expressed in that prospectus: s
44(1) (b) (iii) SCA.
REGULATING THE CONTENTS OFA PROSPECTUS
12.1 As we have discussed above in 4.2 a prospectus is a disclosure based document.
In it the prospective investor will find information that will enable him or her to
make an informed assessment as to his or her investment in the company
securities.
12.2 To enable the prospectus to fulfil this function it is therefore crucial that the SCA
empowers the SC to control the contents of a prospectus.
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12.3 Controls are be imposed to ensure among other things that:
Information provided for in the prospectus is material to the investor, in
that the information provided for in the prospectus must actually assist the
investor in facilitating an informed assessment as his or her investment in
the company securities;
Inclusion of false or misleading information or omission of material
information in the prospectus shall be punishedand not be tolerated by
the authority; and
Due diligence is exercised by those who prepare the contents of the
prospectus.
ENSURING THAT PROSPECTUS INCLUDES MATERIAL INFORMATION
13.1 The prospectus must include information that will facilitate the investor in making
an informed decision as to whether he or she should proceed in investing in the
company securities. It is in this respect the term material information is used.
13.2 To ensure that the prospectus includes only material information the SCA has
adopted an approach that requires the prospectus to include two classes of
information.
13.3 Class one information, refers to that information that must be included in the
prospectus. This is set out in s44 of the SCA and for purposes of convenience we
shall refer to this information as specific content information.
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13.4 Class two information, refers to that information which a reasonable investor
would expect to find in the prospectus. This is provided for by s 45 of the SCA
and for purposes of convenience we shall refer to this information as the
reasonable investor information.
REASONABLE INVESTOR INFORMATION: s 45 SCA
Change in approach
14.1 It is in respect of class two information that the regulators have adopted a change
in approach.
14.2 Previously when the Registrar (now known as CCM) was the registering authority
for prospectuses the approach adopted by Registrar in registering a prospectus
was the merit-based approach. Under the merit-based approach the law
specified in detail the type of information that had to be included in the
prospectus.
Disclosure based approach the new approach
14.3 The merit based approach has been discarded and replaced with a disclosure-
based approach. Under the disclosure based approach the registering authority
no longer specifies the information that must be found in the prospectus.
14.4 Instead the issuer of the prospectus is given the freedom to determine what
information is relevant to the prospective investor subject to the qualification that
the information included in the prospectus by the issuer must be that which the
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reasonable investor would reasonably require and reasonably expect to find the
prospectus.
Implementing the disclosure based approach
14.5 Thus, the SCA among other things states that the prospectus must include that
information which prospective investors and their professional advisers would
reasonably require and reasonably expect to find in the prospectus so as to enable
them to make an informed assessment as to:
The assets and liabilities, financial position, profits and losses and prospectsof the issuer;
The rights attaching to the securities; and
The merits of investing in the securities and the extent of the risk involved
in doing so: s 45(1) SCA.
14.6 The SCA also states that this category of information includes information that is
actually known or would have been known by making reasonable enquiries by all
or any of the following persons:
A person who was a director of the issuer at the time of the issue of the
prospectus;
A person who has consented or caused him or herself to be named and is
named in the prospectus as a director or having agreed to become a director,
either immediately or after an interval of time;
A promoter;
The principal adviser in relation to an issue of, offer for subscription or
purchase of, invitation to subscribe for or purchase, securities;
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A person named in the prospectus, with his or her consent, as having made a
statement that is included in the prospectus or on which a statement made in
the prospectus is based;
A person named in the prospectus, with his or her consent as a stock broker,
shareholder or underwriter;
A person named in the prospectus, with his or her consent as auditor, banker
and advocate; and
A person named in the prospectus, with his or her consent, as having
preformed or performing any function in a professional, advisory or other
capacity other than listed above: s 45(2) SCA.
14.7 Further, to assist the issuer in determining what information an investor or his or
her professional adviser would reasonably require and reasonably expect to find
in the prospectus the SCA provides that regard must be given to:
The nature of the securities;
The business of the issuer;
The person likely to consider acquiring such securities;
The fact that certain matters may reasonably be expected to be known toany professional adviser; and
Whether previously information if any had been given by the issuer to the
prospective investor under any law, any requirement of the rules or listing
requirements or otherwise: s 45(3) SCA.
14.8 The above provisions are designed to ensure among other things that:
Those who are involved in the preparation of a prospectus will exercise
due diligence in that they will first check and test the information before
including that information in the prospectus. As we shall discuss later, an
investor has no cause of action against those who have exercised due
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diligence in the preparation of information that was supplied to the
investor;
The issuer of the prospectus enjoys a certain degree of freedom in regards
to determining what information shall be material to the prospective
investor and their professional adviser. Clearly a prospectus for an initial
public offer shall include more information than that included in a
prospectus for a rights issue for as we have discussed above in 14.7 in
determining the level of information that must be included in the
prospectus regard is to be given to among other things to the persons
likely to acquire that security.
14.9 In the Australian case of Exeter Group Ltd v ASC the court held that a
prospectus which merely stated that the companys strategy was to negotiate an
investment with an appropriate target, containing nothing more than a profile of
the directors who were given extensive authority to make investment decisions,
did not comply with the standard set out in the Australian equivalent of s 45 SCA.
Forecast of future profit
14.10 As we have discussed above in 14.5 the SCA requires among other things that the
prospectus shall include information that will enable the prospective investor or
his or her professional adviser to make an informed assessment as to the
prospects of the issuer.
14.11 This information is usually provided for in the prospectus by including into the
prospectus a forecast of future profits.
14.12 It should be noted that the inclusion of a forecast of future profit in the prospectus
is only required by the law provided it is a piece of information that the
prospective investor or his or her professional adviser would reasonably require
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and reasonably expect to find in the prospectus to make an informed assessment
as to the prospects of the issuer except in the case of a prospectus issued for an
initial public offering. In the case of a prospectus issued for an initial public
offering the inclusion of a forecast of future profit is made by of the Prospectus
Guidelines On Public Offering.
14.13 To determine whether a forecast of future profit should be included in
prospectuses other than that which is issued for an initial public offering the court
may give regard to the practises adopted in prospectuses of similar nature.
14.14 In the Australian case of Pan-continental Mining Ltd v Goldfields Ltd, the
court applied this approached and held that:
The inclusion in each of these prospectuses of earnings forecasts affords
clear and substantial support for the view that earnings and dividend
forecasts provide material information, which investors and their advisers
would reasonably require and reasonably expect to find in such documents
for the making of an informed assessment of the prospects of the
corporations.
14.15 It will also serve the interest of the issuer to take note of Emmet Js, advice as
set out below should the issuer include a forecast of future profit in its
prospectus.
14.16 In the Australian case of GIO Australia Holdings Ltd v AMP Insurance
Investment Holdings Pty Ltd, Emmet J said that:
So long as a forecast is accompanied by appropriate caveats and underlying
assumptions, a forecast will be of greater assistance than no forecast at all.
14.17 This is because where a forecast of future profits is not accompanied by the
appropriate caveats and underlying assumptions the inclusion a forecast of
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future profit may give rise to the fact that the prospectus includes false or
misleading information that are actionable under the SCA.
SPECIFIC CONTENT INFORMATION: s 44 SCA
15.1 In addition to the reasonable investor information the SCA also requires that the
prospectus must include specific information as set out in s44. Further, the SCA
also prohibits the inclusion of certain information as part of the prospectus.
Information that must be included as part of the prospectus
15.2 The SCA specifically requires that the prospectus must:
Be dated, (unless proven otherwise, the date mentioned shall be treated as
the date of the issue of the prospectus): s 44(1) SCA;
Include a statement to the effect that the prospectus has been registeredwith the Commission and a disclaimer to the effect that registration does
not imply that the Commission has recommended the securities nor that
the Commission assumes responsibility for the correctness of any
statement made or opinion or reports expressed in the prospectus: s 44 (1)
(b) (iii) SCA;
Include a statement to the effect that no securities will be allotted or issued
on the basis of the prospectus later than such period that the Commission
may specify s 44 (1) (c) SCA.
15.3 The SCA also provides that where the prospectus contains a copy of or an extract
from a report, memorandum or valuation of an expert the prospectus must state
the date as to when that report, memorandum or valuation was made and a
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statement to the effect stating whether that that report, memorandum or valuation
was made for the purposes of incorporation in the prospectus: s 44(1) (d) SCA.
15.4 In addition to the matters discussed above, the contents of the prospectus must
also include information, matters or reports that have been specified by the
Commission: s 44(1)(f) of the SCA. This provision therefore requires the issuer to
have knowledge of those matters that have been specified by the Commission in
its Guidelines.
Information that must be excluded from the prospectus
15.5 The SCA has specifically provided that the prospectus cannot name a person as
having made a statement that is included in the prospectus, unless that person has
in fact consented to its inclusion as part of the contents of the prospectus and has
not withdrawn his or her consent: ss 44(1)(e) and 53 SCA.
15.6 Contravention of this requirement can result in every person who is knowingly a
party to the issue of the prospectus being guilty of an offence against the SCA: s
53(2) of the SCA.
15.7 Further, the SCA also provides that where consent has not been given or has been
withdrawn, the maker of that purported statement will not be subjected to any
criminal or civil liability for the fact that the prospectus Includes false or
misleading statements: s 63(1)(bb).
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CONSEQUENCES FOR CONTRAVENING SS 44 AND 45 SCA
16.1 Where the contents of the prospectus has contravened ss 44 and 45, the following
consequences may apply:
That the SC can refuse to register the prospectus: s 42(1) SCA.
That the SC can also issue a stop order: s 54(1) SCA. The SCA empowers
the SC to issue a stop order to direct the issuer or such other person not to
allot, issue, offer, make an invitation to subscribe for or purchase or sell,
further securities where:
The prospectus does not comply with or is not prepared in
accordance with any requirements or provision of the SCA: s 54(1)
(a) SCA;
The prospectus contains a statement or information that is false or
misleading: s 54(1) (b) SCA;
The prospectus contains a statement or information from which
there is a material omission: s 54(1) (c) SCA; or
The issuer has contravened any provision of the securities law or the
Companies Act 1965: s 54(1) (c) SCA.
This order can however only be issued provided the SC has given a
reasonable opportunity to the affected person to state why the order should
not be made: s 54(3) SCA. The SC can however issue an interim order
against the issuer without giving the issuer an opportunity to be heard if it
serves public interest: s 54(4) SCA. Where an order (final or interim )is made
against the issuer and it is contravened the issuer shall be guilty of an offence
against the SCA: s 54(8) SCA.
That the issuer and other persons responsible can be subjected to criminal
and civil liability: ss 55 and 57 SCA. This is because the fact that the
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prospectus has contravened ss 44 and 45 may result in that prospectus to
include a statement or information that is false or misleading.
STRICT COMPLIANCE WITH THE FORM AND CONTENTS CAN BE
WAIVED
17.1 As we have discuss above the SCA among other things prescribes the form and
the contents of the prospectus that is to be issued by the issuer.
17.2 The SCA also recognizes that in some situations strict compliance with the
prescribed form and contents may be too onerous or inappropriate to the issuer.
17.3 Therefore, the SCA empowers the SC on its own accord, or by written application
by the issuer to:
Exempt/relive the issuer from having to comply with the prescribed form
and contents of the prospectus; or
Vary the issuers duty of compliance in regards to the prescribed form and
contents: 44(3) SCA.
17.4 The SC may make the above orders subject to such terms and conditions that it
deems fit: s 44(4) SCA.
17.5 Further, the SC can only make the above orders provided it is satisfied that strict
compliance with prescribed form and contents of the prospectus:
Is unnecessary for the protection of persons who may normally be
expected to deal in those securities, being persons who would reasonably
be expected to understand the risks involved: s 45 (5) (a) SCA; or
Will impose an unreasonable burden on the issuer: s 45 (5)(b) SCA.
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WAIVER OF SS 44 and 45
18.1 Any conditions in the prospectus that have the effect of waiving the requirements
of ss 44 and 45 of the SCA between the issuer and the applicant are prohibited
and void: s 44 (2) of the SCA.
LIABILITY FOR INCORRECT STATEMENTS IN THE PROSPECTUS
19.1 The prospectus is a disclosure-based document. The prospectus should include
material information that will assist the prospective investor in making an
informed assessment as to their prospective investment in that companys
securities.
19.2 As we have discussed above in 4.1, investor protection is dependent not only on
the disclosure of material information but also that the law must impose legal
sanctions on those who provide incorrect information in the prospectus.
19.3 Incorrect information in the prospectus refers to a statement or information
included in the prospectus, which is false or misleading. Further, incorrect
information in the prospectus also extends to cover material omission of fact or
information from the prospectus.
CRIMINAL LIABILITY: S 55 SCA
20.1 The SCA provides that it is an offence for a person to authorize or cause a
prospectus to be issued that contains any statement or information that is false or
misleading or to omit material information from the prospectus: s 55(1) SCA.
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20.2 Contravention of this provision is punishable with a fine not exceeding RM 3
million or imprisonment for a term not exceeding ten years or both: s 55(3) SCA.
20.2 In the event a person is charged with this offence that person may rely on the
common defences provided for by the SCA. These defences are outlined below in
23.1 onwards.
CIVIL LIABILITY:S 57 SCA
21.1 That the person who causes or authorises the issue of a prospectus that includes
false and or misleading statement or information or who has omitted from the
prospectus a material statement or information can also be required to pay
damages to the investor who has suffered loss as result of having relied on that
incorrect statement or information: s 57(1) SCA.
2.1 2 To claim compensation under this civil liability provision the investor must
establish a causative link between his or her loss and that false or misleading
statement or information or material omission.
21.3 Section 57 appears to impose strict civil liability on all those who are involved
directly or indirectly with the preparation of the prospectus, although the extent of
liability may vary from one person to another.
21.4 For example, where the wrongdoer is the issuer or a director or a person who has
consented to be a director of the issuer at the time of the issue of the prospectus
there is no limit as to their liability: ss 57(1)(a) and s 57(1) (b) SCA.
21.5 Whereas in the case of those persons who have consented to a statement being
included in a prospectus in accordance to s53 SCA that person will only be liable
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for that loss or damage caused by the inclusion of the statement in the prospectus:
s 57(1)(e).
21.6 In the event a person is sued for compensation under this civil liability provision
that person may rely on the common defences provided for by the SCA. These
defences are outlined below in 23.1 onwards.
Avoiding the contract to acquire company securities
21.7 It is submitted that where the prospectus includes a false statement or information
which has induced the investor to enter into a contract to acquire shares from the
issuer that contract may be rescinded by the investor on the basis that there has
been a misrepresentation or fraud: ss 17, 18 and 19 Contracts Act1950.
CONTRACTING OUT OF THE CONSEQUENCES OF SS 55 AND 57
22.1 The SCA provides among other things that any agreement that purports to exclude
or restrict the liability of a person having contravened of ss 55 and 57 SCA is
void: s65 SCA.
22.2 This provision can therefore have the effect of invalidating any exemption clauses
that may be relied upon by the issuer when the issuer is subjected to civil or
criminal liability as discussed above.
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COMMON DEFENCES
23.1 The SCA among other things provides common defences to a person who is
charged or sued under ss 55 and 57 SCA.
Due diligence defence
23.2 Section 59 SCA furnishes a due diligence defence in relation to prospectuses
which is applicable to actions brought under ss 55 and 57. Under s 59, it is a
defence for the person charged or sued to show that he or she has made all
reasonable inquires and believed on reasonable grounds that the statement or
information included in the prospectus was not misleading or deceptive or that the
prospectus did not include any omission.
Reliance defence
23.3 The SCA also provides a general reliance defence, applicable to both ss 55 and 57
SCA, under which there is no liability if the person charged or sued proves that he
or she had reasonably relied on information given by an another.
23.4 For the reliance defence to succeed, the person must have relied upon:
A person referred to in s 53(1) SCA. S 53 deals with statements made by
experts that are included in the prospectus: s 60 SCA;
A statement made by a public officer in the course of his or her duties or
is contained in a copy of or what purports to be a copy of, or an extract
from, a public official document: s 62 SCA.
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Withdrawal of consent defence
23.5 Under s 63 it is a defence to an action based on ss 55 and 57 SCA where the
person charged or sued can show that he or she had withdrawn his or her consent
to be associated with the preparation of the prospectus.
REGULATING THE PRACTISE OF SHAREHAWKING
24.1 To ensure that the prospective insurer is able to make an informed assessment
prior to investing in company securities the SCA also restricts the practise of
share hawking.
24.2 Robert Baxt, Ashley Black and Pamela Hanrahan in their book titled Securities
and Financial Services Law, Sixth Edition, has submitted that the need for this
kind of regulation arose out of the activity of canvassers, many paid by
commission, personally hawking securities from house to house and offering
them to persons who in many instances lacked business experience. In many cases
where the securities proved to be of little value, fraud was often suspected but,
although the law provided a remedy for fraudulent misrepresentation, it was
usually impracticable to seek this remedy because the victim had to prove fraud or
recklessness and lacked the financial means to sue.
24.3 The SCA thus among other things provides that except as provided for by the
SCA no person shall not make an unsolicited:
Offer of any securities for subscription or purchase; or
Recommendation of any securities: s64 (1).
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24.4 The above restriction does not among other things extend to:
To a licensed person or a person who has been allowed in writing by the
SC in making invitations or offers or recommendations in relation to any
securities listed on the stock exchange;
To a management company providing further information or
recommendations to existing unit holders, or
To an invitation, offer or recommendation that is made in, or accompanied
by a prospectus that complies with the SCA: s 64(2) SCA
24.5 Further, the SCA provides that any person who contravenes s 64(1) can be
punished with a fine not exceeding RM 3 million or imprisonment for a term not
exceeding ten years or both: s 64(7) SCA.
24.6 It must be noted where ss 64(1) and (2) of the SCA applies, s 363 of the
Companies Actdoes not apply: s 64 (6) SCA.
24.7 Section 363 of the Companies Actpreviously prohibited share hawking.
ADVERTISTING RESTRICTIONS
25.1 Investor protection is at the heart of all the rules discussed above. While the law
cannot impose a duty on an investor to read the necessary information, it can and
does impose a duty on the issuer of the securities to provide the prospective
investor with all the necessary information prior to the investor applying for the
companys securities. Investor protection, however, could be easily thwarted if a
company could freely advertise or publicize its intention to issue securities
without the necessary safeguards as we have discussed above.
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25.2 Advertising restrictions are therefore justified on the basis that where there are no
such restrictions, advertising campaigns could cause investment decisions to be
made before a prospectus is made available to the prospective investor. Once an
investment decision is made, the influence of a subsequent prospectus is
diminished.
25.3 Section 50 of the SCA is the key provision concerning advertising restrictions.
Section 50(1) imposes a general prohibition against advertising unless exempted
by any of the following ss 50(2), 50(3), 50(4), 50(5), 50(6) and 50(7) SCA.
25.4 The trust of legislative controls on advertisements is to require them to direct the
attention of the readers, listeners and viewers to the disclosure document that has
been lodged with the SC.
RESTRICTION ON THE ALLOTEMENT OF SECURITIES BY COMPANIES
THAT HAVE ISSUED A PROSPECTUS
Restriction imposed by the CA
26.1 The CA prohibits the allotment of shares offered to the public by a company made
pursuant to a prospectus that is registered with the SCA unless the minimum
subscription is obtained and the sum payable on application for the shares is
received by the company: s 48 CA.
26.2 If the minimum subscription has not been attained within four months after issue
of the prospectus, the amounts received must be returned to the applicants: s 48(4)
CA. Provision is also made for payment of interest of ten per cent per annum if
application money is not returned at the expiration of five months after the issue
of the prospectus. In addition, if the money is not repaid within this period, the
directors shall become personally liable to the applicant for the amount: s 48(4)
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CA. They are also guilty of an offence, punishable with imprisonment for three
years or RM1m or both: s 48(6) CA. It is a defence for a director if absence of
misconduct or negligence on her or his part can be proved. If shares are allotted in
contravention of s 48, the allotment is voidable at the applicants option: s 48(5)
CA.
26.3 Section 49 CA reinforces s 48 CA by requiring the company to hold application
money in trust for applicants until allotment. This means that the company cannot
treat this money as its own and ensures that applicants get their money back if the
minimum subscription is not reached.
Restriction Imposed by the SCA
26.4 It is often of great importance to prospective shareholders that their shares will be
listed on a stock exchange. This gives the shares a much greater degree of
marketability.
26.5 The SCA provides that where a prospectus states or implies that an application
has been made or will be made for permission for the securities offered to be
listed for quotation on the official list of a stock exchange or other similar
exchange outside Malaysia, any allotment made will be void if the permission is
not applied for or where permission is not granted within the specified time
frame: s 52(1) SCA.
26.6 Further, where permission is not applied for or where permission is not granted
the issuer will repay without interest all monies received from applicants in
pursuance of the prospectus within 14 days after the issuer becomes liable to pay
it. Where payment is still outstanding after 14 days the issuer would have to pay
interest of ten per cent per annum or such other rate as prescribed by the SC: s
52(2) SCA.
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26.7 A person shall not issue a prospectus if among other things the prospectus
includes any false or misleading statement that permission has been granted for
those securities to be dealt in or listed on an exchange: s 52(9) SCA.
26.8 A person who contravenes this provision shall be guilty of an offence against the
SCA which is punishable with a fine not exceeding RM 3 million or
imprisonment not exceeding 10 years or both: s52 (12) SCA.
RESTRICTIONS ON A PUBLIC COMPANY TO COMMENCE BUSINESS
27.1 The CA provides, amongst other things, that where a company having a share
capital has issued a prospectus pursuant to the SCA in relation to its shares, the
company shall not commence any business or exercise any of its borrowing
powers if any money is or may become liable to be repaid to applicants for any
shares or debentures offered for public subscription by reason of any failure to
apply for or to obtain permission for listing for quotation on any Stock Exchange:
s 52(1)(a) unless CCM has issued that company with a certificate to commence
business in accordance to s 52(3) CA. To receive this certificate that public
company must satisfy the conditions set out in s 52(1)(b) CA.
27.2 Contravention of the above restriction imposed by the CA can result in every
person who is responsible for the contravention in having to pay an RM 10,000
penalty and a default penalty of RM 250.