3) Regulatory Framework Flashcards
What are the underlying principles of the Companies Act?
Incorporation as right not privilege:
- The formation of a company is the exercise by a person of a constitutional right to freedom of association and freedom of contract.
Simplicity:
- A single-member/ one person can incorporate (private/ public)
- A non-profit company requires a minimum of three persons
- Only requirement for formation is to file a ‘Notice of Incorporation’ plus MOI and payment of the prescribed fee
Flexibility:
- The Companies Act provides for flexibility in the regulation of the internal affairs of a company through MOI and company rules.
- Governing principle: MOI must be consistent with the Act and is void to the extent that it contravenes the Act - e.g. s 15(2)(b): MOI may contain any special conditions specific to the company.
Efficiency:
- Shift from capital maintenance rule to solvency and liquidity
- No par value shares
- Introduction of business rescue
Transparency
- Recognition of director accountability, and appropriate participation of other stakeholders.
- Public announcements, information and prospectuses should be subject to similar standards for truth and accuracy.
- Protection of shareholder rights, shareholder activism, and enhanced protections for minority shareholders. - Minimum accounting standards required for annual reports.
Predictable Regulation:
- Sanctions should be de-criminalised where possible.
- Enforcement through appropriate bodies and mechanisms, either existing or newly introduced.
- Strike a careful balance between adequate disclosure, in the interests of transparency, and over-regulation
Differences between King III and King VI?
King III was a code of (75) best practices
- Approach to compliance: ‘apply or explain’
- Rules-based approach
- Technical, sometimes difficult to apply, particularly to SMEs
King IV is a code of (16+1) principles
- Approach to compliance: ‘apply and explain’
- Outcomes-based approach
- Principles framed as aspirational outcomes
- Aimed at ‘holistic and integrated set of arrangements’
- Simpler, more flexible, applicable to SMEs
What is insider trading?
The sale and purchase of a company’s securities by persons associated with the company, known as insiders, who are in possession of ‘price-sensitive’ information not generally available and gained as a result of that association.
Why is insider trading outlawed?
Insiders are in a position of trust
- Harmful to the company
- Insider should not be in a position of ascendancy over outsider
- Trading on inside information deters investors
The FMA governs trading on the strength of inside information; the approach thus to regulate ‘secondary insiders’.
The Act considerably broadens scope of offences related to insider trading, and prohibits three kinds of conduct:
- Dealing:
o Buying and selling yourself
o Or through a broker - Encouraging or discouraging dealing
- Improper disclosure
The Act extends liability so as to also apply to juristic persons, partnerships and trusts.
What is an ‘insider’?
An insider is a person who has inside information:
(a) through -
(i) being a director, employee or shareholder of an issuer of securities to which the inside information relates
(ii) having access to such information by virtue of employment, office or profession
(b) where such person knows that the direct or indirect source of the information was a person contemplated in paragraph (a)
What is ‘Inside Information’?
1) Must be specific and precise.
2) Must not have been made public.
3) Must be obtained or learned as an insider.
a. If you know that it comes from an insider, then you are a secondary insider.
4) If it were made public, it would be likely to have a material effect on the price or value of any security listed on a regulated market.
What are the liabilities for insider trading?
Offences:
Dealing Offence:
- Deal yourself
Dealing on behalf of someone else, either:
- Being an insider, or
- Knowing that the other person is an insider
Disclosure Offence:
- When you disclose price sensitive information.
Encouraging or Discouraging Offence
Penalties:
- Maximum ± R50 mill fine/prison: 10 years/both
- Civil liability
o For losses caused
(When there is ‘discouraging’ that does not give rise to civil liability)
- Same acts that give rise to criminal liability can give rise to civil liability (except for ‘discouraging’)
What is the rationale behind regulating market manipulation?
To maintain an open and free market where natural forces of supply and demand determine a securities price.
To achieve investor confidence in the integrity of the financial markets and to protect investors from market manipulation.
What are the deemed prohibited practices under the FMA?
Wash sales:
- No change in the beneficial ownership of that security, with the intention of creating a false or deceptive appearance of the trading activity.
- Same person is benefitting in the background but is just being held in various hands.
- Trades are occurring but they are still benefitting the same person in the end
Matching orders:
- Order to buy or sell a security with knowledge that an opposite order or orders at substantially the same price, have been or will be entered by or for the same or different persons with the intention of creating a false or deceptive appearance of trading activity.
- Makes an impression that there is trading but really you are manipulating the market.
Buy orders at successively higher prices and sell at successively lower prices:
- Buy at excessively higher prices so that the price goes up and then you sell at low prices.
Marking the close:
- Approving or entering, on a regulated market, an order at or near the close of the market, the primary purpose of which is to change or maintain the closing price of a security listed on that market
- Inflate the closing value of a particular security.
Auctioning processes or pre-opening session:
- Private auction but you have no intention to buy so you just drive the price up.
Market corner
Maintaining an artificial price
Manipulating devices, schemes or artifices
What are the defences against market manipulation?
Price stabilization
- If you are engaging in this activity to maintain the correct/accurate price of the security on the market then that is not artificially inflating it.
Definitional defences
Additional defences in other jurisdictions
- Chinese Wall (doesn’t apply in South Africa)
(Literally putting up some kind of wall in the workplace so that other departments cannot view the information or computers with restricted access etc)
What are the incidences of liability for auditors?
Client damages
Third parties damages
Disciplinary sanctions
Criminal charges
What is the Audit Profession Act?
Establishes Independent Regulatory Board for auditors established to, amongst other things:
- Promote integrity of auditing profession
- Prescribe standards of professional qualifications, ethics etc
- Protect public in their dealings with auditors
- Final authority on education, training and professional development
Imposes:
- Criminal liability in respect of reportable irregularities as well of failure to discharge duties set out in section 44 (and others)
- Disciplinary liability
What is auditor liability in relation to negligence?
Liability may be to:
- A client in terms of:
o A contract
o Delict
- A third party in terms of
o Delict
- Contributory negligence and the Apportionment of Damages Act
- Wrongfulness in cases of pure economic loss
What is the ‘Shareholder Debate’?
Pluralist Approach
- Companies should be controlled for the benefit of all stakeholders
Enlightened Shareholder Value Approach
- Companies are entitled to consider the interests of other stakeholders only to the extent that it would be in the interest of shareholders to do so.
- Theory that is applied by the Companies Act and within the Common Law.
