Meeting the Capital Requirements of Industry

Question 1

How does a PLC meet the capital requirements of industry?

Answer 1

issuance of shares
issuance of securitised debt
bank loans

Question 2

How does a private ltd, sole trader or partnership raise capital requirements

Answer 2

Ltd - private sale of shares / guarantee

Suretyships (prime credit)

Bank Loans

Question 3

What is a surety

Answer 3

A surety is a promise by one party to take responsibility for another party’s debts if the borrower defaults

Question 4

Why surety protection is there in England and Wales?

Answer 4

In England and Wales there has been a consciousness that some sureties need protection. This is particularly so in the context of non-commercial suretyship transactions which might include close proximity between the surety and the principal debtor (for example through familial relations).

Due to such relations, it is not uncommon complaint from sureties that the transaction has occurred under improper pressure, typically in the form of undue influence. Thus, the doctrine of presumed undue influence has been developed in the case of Barclays Bank v O’Brien and Royal Bank of Scotland v Etridge

Question 5

Barclays Bank v O’Brien

Answer 5

Undue influence is presumed where:

(a) there was a relationship of trust and confidence between the parties and

(b) the parties entered into a transaction which was manifestly disadvantageous to the complainant

Question 6

RBS v Etridge

Answer 6

Inference of undue influence; the complainant establishes a prima facie case of undue influence, which transfers the evidential burden on the other party to dissuade the Court from making an inference of UI.

Question 7

What happens when suretyship has been procured under undue influence of the debtor

Answer 7

Where a suretyship transaction has been procured by undue influence of the debtor, the surety would only be entitled to have that transaction set aside if the creditor had actual or constructive notice of the debtor’s misconduct

Question 8

What is constructive notice?

Answer 8

Refers to situations where a creditor is deemed to have notice of the misconduct by virtue of a failure to take certain steps, whether or not the creditor has actual knowledge of the misconduct.

The creditor will be required to take certain steps in this context of they have been ‘put on notice’

After Etridge, the creditor is always put on enquiry where the relationship between the debtor and the surety is non-commercial and this is known to the bank. They must take steps to minimise the risk of undue influence.

Creditors must ensure that independent advice is given to the surety: specific criteria, ‘core minimum requirements’, apply to creditors and their legal
advisers in all non-business third-party security cases

Question 9

Position in Scotland

Answer 9

More restrictive approach taken in Scotland - there is no doctrine of constructive notice.

Smith v Bank of Scotland where it was held that undue influence cannot be presumed in close family relations.

Meanwhile, in Forsyth it was held that banks were entitled to place a normal degree of reliance on solicitors’ due diligence

Question 10

What is the name of the process to try and establish single market in securities and shares across Europe?

Answer 10

Lamfalussy Report

Question 11

What is the Lamfalussy Report

Answer 11

Series of reports commissioned by the European Commission in the late 1990s to propose recommendations for the regulation and supervision of securities markets in the EU.

Introduced the concept of a four-level regulatory framework for securities markets which aimed at streamlining and harmonizing financial regulation across EU member states.

Question 12

What are the four levels of the Lamfalussy Project

Answer 12

1. European Parliament and Council to adopt basic laws proposed y the Commission
2. European Commission to adopt implementing measures in cooperation with experts from member states
3. Cooperation between national supervisory authorities and the European Securities and Markets Authority
4. Enforcement of regulations at the national level

Question 13

Following Lamfalussy

Answer 13

Larosière Report and Capital Markets Regulation

Question 14

Larosiere Report

Answer 14

In a response to the global financial crisis of 2008 recommended the establishment of a European System of Financial Supervision. For a European Framework for safeguarding financial stability.

Question 15

Directives to regulation

Answer 15

Prospectus Directive 2003, now Prospectus Regulation 2017

Market Abuse Directive 2003 now Market Abuse Regulation

Transparency Obligations Directive 2004 now MiFID II

This is because directives are legal acts that set out specific goals for EU member states to achieve through their own national legislations. Whereas, regulations are directly applicable across member states without the need for national implementation.

Question 16

Prospectus Directive 2003 (Now Prospectus Regulation 2017)

Answer 16

Aimed at harmonising the requirements for the disclosure of information in prospectuses issued when securities are offered to the public or admitted to trading on regular markets.

Objective was to facilitate the raising of capital by companies within the EU. Aimed at reducing barriers to cross-border capital flows, creating deep liquid pools of capital.

FCA Prospectus Rules 2005 implemented the detailed commission regulations.

Question 17

Where is the law found in the UK Framework?

Answer 17

s85(1) FSMA 2000

Question 18

What does s85(1) FSMA 200 mean

Answer 18

Offers of transferable securities require a prospectus.

Question 19

EU Roots

Answer 19

UK securities regulation is based on EU directives that set out the principles on which securities regulation across EU is based. These directives permit member states to gold plate their own regulations.

UK have elected for more stringent regulations. This means issuers will be attracted to issue securities in the UK.

Question 20

What is at the heart of securities regulation

Answer 20

The requirement that any company seeking to offer securities to the public or wishing to have securities admitted to trading on a regulated market must have a prospectus relating to those securities, authorised by the FCA.

Question 21

What are transferable securities?

Answer 21

Prospectus Directive 2003 defined these as:

1. Shares in companies and other securities equivalent to shares
2. bonds and other forms of securitised debt negotiable on the capital market
3. any other securities

Question 22

Effects of breaching FSMA 2000 s85

Answer 22

Failure to comply with either requirement constitutes a criminal offence 85(3).

In private law, failure to comply is actionable on behalf of anyone who suffers a loss. 85(4) of the FSMA 2000 provides that a claimant is entitled to the remedies applying to actions of breach of a statutory duty in tort.

Question 23

What is a prospectus

Answer 23

A document that makes prescribed forms of information about securities and their issuers that is available to the investing public

Question 24

Exemptions to prospectus regulations

Answer 24

Schedule 11a FSMA 2000 provides three categories of securities are excluded from the offence of 85(1):

1. Govt
2. Securities issued by not-for-profit organisations

s86. offers made to or directed at qualified investors; fewer than 150 of such investors. Subject to minimum investment of 100,000 EUR

Where FCA has exempt an issue

Question 25

Where to find Necessary information

Answer 25

s87A(2) FSMA

Question 26

Where to find requirement for supplementary prospectus

Answer 26

s87G FSMA 2000 (As amended by FSMA regulations 2019)

Any person [who is responsibility for a prospectus approved by the FCA] who is aware of any new factor, [material mistake or material inaccuracy] which may require the submission of a supplementary prospectus in accordance with Article 23 must give notice of it to -

(a) the issuer of the transferable securities to which the prospectus relates and

(b) the person on whose application the prospectus was approved

Question 27

What is s90

Answer 27

Compensation for statements in listing particulars or prospectus. This means anyone responsible for prospectus is liable to pay compensation to someone who has acquired a securities to which the prospectus applies and suffered a loss as a result of any untrue or misleading statement, or omission of any matter required by section 80 or 81

Question 28

Where are penalties found

Answer 28

s91

Question 29

Where are defences to liability found

Answer 29

Schedule 10 FSMA 2000:

1. Where D believed the truth of the statements made in prospectus
2. When statement was made by an expert with experts consent
3. There has been publication or taking reasonable steps to secure publication of a correction
4. Reasonable steps have been taken to secure the publication of a correction made by an expert
5. when statement was made by an official person or contained in a public or official document, provided that the statement was accurately and fairly reproduced
6. if the court is satisfied that the investor acquired the securities with knowledge that the statement was incorrect, there was not misled by it

Question 30

Civil liability for prospectus issuance, preparation and negligent misstatements

Answer 30

Golden legacy case-law on prospectuses, tort of negligent misstatement and misrepresentation

Question 31

What are the cases involved in the Golden Legacy case law

Answer 31

New Brunswick
Central Railway of Venezuela
Henderson v Lacon

Question 32

What is the golden case law

Answer 32

Long before the introduction of any kind of formal securities regulation in the late twentieth century, the case law had always taken the approach those preparing a prospectus relating to the issue of securities must do so with complete honesty.

Question 33

New Brunswick

Answer 33

In this case, it was set out that:

• those who issue a prospectus are bound to state everything with strict and scrupulous accuracy
• not only to abstain from stating a fact which is not so, but to omit no facts might affect the nature, quality or extent of the privileges and advantages which the prospectus holds out as inducement to take shares

Question 34

Where was strict and scrupulous accuracy approved

Answer 34

Central Railway of Venezuela
Henderson v Lacon

Question 35

Central Railway

Answer 35

• no misstatement or concealment of any material facts or circumstances ought to be permitted.
• The public should be given the opportunity to judge everything that had a material bearing on the true character of the company’s proposed undertakings.
• Thus it was proposed that the utmost candour ought to characterise the promoters’ public statements.

Question 36

Henderson v Lacon

Answer 36

Page-Wood: “the result of all the cases which have occurred shows the great value of that golden legacy which has been left to us by Sir Richard Kindersley who has condensed in a few words the whole doctrine as to the rule of conduct between shareholders and their directors”

Question 37

FCA Prospectus Rules vs Golden Legacy case law

Answer 37

FCA rules take a broadly similar approach to the obligations of those preparing a prospectus to include all of the necessary information.

Question 38

Tort of negligent misstatement

Answer 38

Set out in Hedley Byrne v Heller

Question 39

Hedley Byrne v Heller

Answer 39

• Hedley Byrne were an advertising firm who sought a credit reference from Heller and Partners, a bank, regarding the creditworthiness of a potential client.
• Heller and Partners provided a favourable credit reference, but the client subsequently defaulted on payments, leading to financial losses for Hedley Byrne.
• Hedley Byrne sued Heller, alleging they had suffered financial loss due to the negligent misstatement made by the bank in the credit reference

Question 40

Principles from Hedley Byrne v Heller

Answer 40

Damage for pure economic loss could arise in situations whereby:

1. a fiduciary relationship of trust and confidence exists between the parties
2. the party preparing the advice/information has voluntarily assumed the risk
3. there has been reliance on the advice
4. the reliance was reasonable

Question 41

Banca Nazionale del Lavoro SpA v Playboy Club

Answer 41

• Banca Nazionale issued a reference letter to Playboy Club London, stating one of its customers had a good credit standing
• Relying on the reference, Playboy Club extended credit facilities to the customer
• Transpired the customer has been conducting fraudulent activities and had no funds
• Playboy Club suffered financial losses and sued BNL for negligent misstatement

Court applied the principles established in Hedley Byrne, recognizing that a duty of care could arise in situations where one party voluntarily assumes responsibility to provide information or advice to another party, and it is reasonable for the recipient to rely on that information or advice.

Question 42

Caparo Industries plc v Dickman

Answer 42

The effect is that you are not liable for negligent misrepresentation if your statement was intended for a narrow group of people that do not include the claimant. There must be sufficient proximity.

• Claimant relied upon accounts prepared for the defendants that had misstated the financial position of Fidelity
• The claimant contended this had caused a loss as it was seen as encouraging the take over
• Held the claimant was not in the class of people who were intended to see the accounts, therefore the loss was not foreseeable.

Hudson therefore questions whether this is applicable to securities law. This is because an issuer is required to make that prospectus available to the public at large.

Question 43

What is the certain criteria for approval of the prospectus by FCA

Answer 43

Informed assessment of

1. Assets and liabilities, profits and losses, financial position and prospects of the issuer and guarantor
2. rights attaching to the securities
3. reasons for the issuance and its impact on the issuer

Question 44

Where are defences to liability

Answer 44

Schedule 10 FSMA

Question 45

From directive to regulation

Answer 45

Move in the EU from directives to regulation as part of the Capital Markets Plan

The 2017? regulation imposed new rules as to when a prospectus is required, what information is to be included and how it must be approved.

Furthermore, included was to be a summary which is drawn up as a short document written in a concise manner. Maximum length of seven sices of A4 paper when printed. The summary should be presented in a way that is easy to read and in a language and style facilitated for understanding information in clear non-technical language

Question 46

Role of Brexit

Answer 46

There were questions surrounding the EU prospectus regulation and Brexit, the status of the 2017 regulation seemed to be retained by UK law through the EU (withdrawal) Act 2018. However, this led to the position of London and Edinburgh in their offering of securities to be at risk and disabling the UK investors’ access to EU offerings.

Question 47

New regulation

Answer 47

There has however, been a recent introduction in the UK including prospectus regulations of 2024. This might perhaps be seen as a way of challenging New York and Singapore through a shift to de-regulation

Question 48

What are objectives of the new implementations

Answer 48

The regulations implemented recommendations from the Hill Listing review to increase the attractiveness of London and Edinburgh as a desirable destination. The new prospectus regime aims to improve the quality of information investors receive and make prospectus regulation more agile, dynamic and capable of being adapted more fluidly.

The prospectus will remain a key feature of offerings made on the UK public markets, but the changes seek to facilitate access to the public markets in the UK which should benefit capital-hungry high-growth companies and their investors by making the process to tap back into the public markets less administratively burdensome, time-consuming and costly

A further significant change is the transfer of responsibility for the regime to the FCA; critically the power to decide whether or not a prospectus is required will reside exclusively with the FCA. The move away from legislation make amending the regime much less burdensome allowing it to adapt efficiently around evolving markets conditions, allowing London and Edinburgh to maintain their competitiveness as a listing venue.

Question 49

Key takeaways from new regulation

Answer 49

• New exemptions were added to include offers to existing shareholders, offers made via a regulated platform including crowd-funding

The exemption relating to regulated platforms strives in particular to maximise participation of investors, such as retail investors in equity offerings, because offers made via platforms such as crowdfunding are likely to be largely directed to this sector

• moves aware from a legislation based regime and shifts power to the FCA. FCA now has power to authorise omissions from the prospectus and mandate inclusion of additional information when it deems necessary for investor protection
• FCA now possess flexibility to stipulate the circumstances in which a prospectus will be required

Question 50

Prominence of the FCA

Answer 50

Consistent with the governments’ desire to delegate responsibility to the FCA and overarching objectives of maximising participation in capital markets.

Question 51

Civil Liability

Answer 51

Golden legacy case law

New Brunswick with Kindersley. Set the gold standard in that those who issue a prospectus are bound to state everything with strit and scrupulous accuracy

Followed y Central Railway of Venezuela

Question 52

Central Railway

Answer 52

“…once it is established that there has been any fraudulent misrepresentation or wilful concealment by which a person has been induced to enter into a contract, it is no answer to his claim… to tell him that he might have known the truth by proper inquiry. He has a right to retort… “You at least, who have stated what is untrue, or have concealed the truth… cannot accuse me of want of caution because I relied implicitly upon your fairness and honesty.”

Question 53

Possfund

Answer 53

• the court had to consider whether company directors owed a duty of care in relation to negligent misrepresentations made to secondary market purchasers of shares.
• The plaintiffs purchased shares in reliance on a prospectus that had materially misrepresented the company’s financial position.
• The main issue Lightman J had to determine was whether the claims had necessary proximity between the directors and the secondary market purchasers.
• He found that the courts have, since 1873, recognised a duty of care in case of prospectuses when there is sufficient direct connection between those responsible for the prospectuses and the party acting in reliance, P’s claim may be recognised merely as an application of this established principle. It is highly questionable whether recognition of such a duty involves recognition of a novel category of negligence or is a massive extension of duty of care. I can find nothing which precludes the finding of such a duty.
• In view of changes market practice, the purpose of the prospectus was not just to invite the initial subscribers to take up the share but also for use by secondary market purchasers.

Found a duty of care could exist between duty of care to subscribers in the initial public offering

Question 54

Negligent misstatements in relation to shares

Answer 54

Al-Nakib v Longcroft
Possfund

Question 55

Al-Nakib v Longcroft

Answer 55

• A prospectus was issued inviting shareholders to subscribe for shares
• Plaintiff sued alleging the prospectus contained misrepresentations as to the identity of the person who would be manufacturing the company’s products
• It was held by Mervyn Davies J that the prospectus had been issued for a particular purpose, namely to encourage subscription for shares by a limited class of subscribers and any duty of care in relation to its issue was directed at that purpose only
• it had not been directed at purchases in the after-market and therefore any misrepresentation therein could not found a claim based in the tort of negligence
• in this regard, the dicta in Caparo was followed in that reliance might not be placed on accounts by a claimant if they had been prepared for a limited certain purpose
• Mervyn Davies sought to rely on this to the effect that a prospectus prepared for limited purposes ought to be incapable of founding a general liability in tort
• Crucially, his lordship found that the fact the shares were subsequently made available for sale to the public, did not itself create a duty of care in favour of those who bought them subsequently in the after-market

Question 56

Possfund

Answer 56

The question before the court was whether changed market conditions (where it was alleged that prospectuses were now commonly relied upon by the investor public in the after market could justify change in common law
- issue was one of proximity
- where the maker of the statement intends that the prospectus will be relied upon by the public in making investment decisions, it is reasonable to assume there is sufficient proximity
- Lightman J was prepared to find where a prospectus is prepared with the intention of inducing the investor public to acquire securities then a duty of care can arise between those responsible for the contents and the investing public

Question 57

FSA Prospectus rules and Golden Legacy

Answer 57

Take a broadly similar approach to the obligations of those preparing the prospectus to include all necessary information. Mandatory to produce one and provide for positive, continuing obligations on companies as to the full disclosure of relevant information.

Question 58

Takeovers

Answer 58

Caparo v Dickman

Claim brought here asserted a very wide duty of care in relation to contemplating takeover of companies. An assertion considered by the House of Lords as too far.

Question 59

Reliance

Answer 59

It must be shown that the people making the misrepresentation intended that the claimant relied on the representation (Possfund)

Question 60

Case for misrepresentation

Answer 60

Kyslant

Question 61

Kyslant

Answer 61

• the statements in the prospectus were true however the document as a whole as false because of what is concealed, omitted or implied
• this had influence on the law of fraudulent misrepresentation
• investors could sue if the 3 past test in derry and peel were satisfied

Question 62

The Royal Mail case

Answer 62

• Lord Kyslant falsified a trading prospectus with the aid of the company accountant to make it seem as though the company was profitable and entice potential investors
• Kyslant was found guilty of falsifying the trading prospectus and sentenced to 12 months in prison
• Case affected misrepresentation in contract law
• misrepresentation is an untrue statement of fact that induces a contract
• Court held that although prospectus was strictly true it was intended to give a misleading impression