students manuals iqs law c04

7/27/2019 Students Manuals Iqs Law c04

1/31

Listing and Prospectus

ICSA IQS Corporate Law 84

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.


2/31



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


3/31



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


4/31



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.


5/31



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


6/31



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


7/31



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.


8/31


9/31



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


10/31



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


11/31



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.


12/31



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.


13/31



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.


14/31



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


15/31



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;


16/31



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


17/31



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


18/31



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


19/31



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


20/31



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).


21/31



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


22/31



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.


23/31



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.


24/31



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


25/31



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.


26/31



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.


27/31



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).


28/31



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.


29/31



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)


30/31



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.


31/31


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.

students manuals iqs law c04

Documents