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Liabilities For Share Issues Notes

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Corporate Finance: SGS 4: Liabilities for Share Issues INDEX OF ABBREVIATIONS
- RIE - Recognised Investment Exchange
- IPO - Initial Public Offering
- PR - Prospectus Rules
- LR - Listing Rules
- DTR - Disclosure Guidance and Transparency Rules
- LP - Listing Principles
- PLP - Premium Listing Principles
- FSMA 2000 - Financial Services and Markets Act 2000
- RAO - Financial Services and Markets Act 2000 Regulated Activities Order 2001
- FPO - Financial Services and Markets Act 2000 Financial Promotions Order 2005
- MAR - Market Abuse Regulations
- CJA - Criminal Justice Act 2002
- FSA - Financial Services Act 2012
- UK CGC - UK Corporate Governance Code
- RCF - Revolving Credit Facility
- LSE - London Stock Exchange
- AIM - Alternative Investment Market
- FCA - Financial Conduct Authority
- MAC - Material Adverse Change
- EoD - Event of Default LIABILITY FOR THE PROSPECTUS (1) Persons Responsible for the Prospectus
- FSMA 2000 s.90: Liability - ANY PERSON RESPONSIBLE may be liable to pay compensation to investors in relation to false/misleading statements within/omissions from a prospectus.
- PR 5.5.3R(2): 'Persons Responsible' - Persons who may be responsible for a prospectus include: (a) issuer (b) all directors of issuing company at time prospectus published; (c) all future directors of issuing company to be appointed immediately/at future time who are named in prospectus; (d) offeror/directors of offeror if offeror is NOT issuer (e.g. existing shareholder selling shares by way of an offer for sale subject to exception in PR 5.5.7); (e) each person who accepts and is stated in prospectus as having accepted responsibility for the prospectus; and (f) each person not otherwise covered by (a)-(d) who has authorised contents of prospectus.
- PR App 3.1.1: Annex 1: Para 1: Responsibility Statement - Prospectus relating to listing of shares must contain declaration of responsibility by persons deemed to be responsible for the prospectus under PR 5.5.3R(2)R.
- PR 5.5.6R: Directors' Knowledge/Consent - Director will NOT be responsible for contents of a prospectus IF it was published without his knowledge/consent AND on becoming aware of its publication, director, as soon as practicable, gave reasonable public notice that it was published without his knowledge/consent.
- PR 5.5.3R(2)R(c): Other Persons Accepting Responsibility - Anyone accepting responsibility for part/whole of a prospectus will be a 'person responsible' for purposes of s.90 FSMA 2000 BUT only in respect of part of prospectus for which they have accepted responsibility (e.g. reporting accountants will only accept responsibility for pro-forma financial information building block).
- Without acceptance of responsibility a sponsor is NOT a 'person responsible' for a prospectus.
- PR 5.5.7R: Exception for Offeror - Offeror who is not the issuer/director of offeror which is a body corporate which is not the offeror will NOT be responsible for prospectus under PR 5.5.3R(2)(d) IF: (a) issuer responsible for prospectus; (b) prospectus drawn up primarily by the issuer OR by person acting on behalf of issuer; AND (c) offeror making offer in association with issuer.
- PR 5.5.8R: Limiting Responsibility - Except for issuer/directors, any person who accepts responsibility for/authorises prospectus may state that they only accept responsibility for/authorise a SPECIFIED PART of prospectus.
- Issuer/directors of issuer must take responsibility for the WHOLE of the prospectus + CANNOT limit their responsibility to parts of prospectus.
- PR 5.5.9R: Solicitors - PR's do NOT make a person responsible for a prospectus if they are simply providing advice as to contents of prospectus in their professional capacity - means that solicitor owes duty of care to issuer as their client and NOT to investors as they are not, without more, a 'person responsible' for the prospectus. (2) Criminal Liability

1 - FSMA 2000 s.21(1)-(2): Financial Promotions - Criminal offence to communicate an invitation/inducement in the course of business to engage in an investment activity if UNLESS person doing so is an authorised person OR if content of communication approved by an authorised person.
- Financial Services Act 2012 s.89(1)-(2): False/Misleading Statements - Criminal offence for a person (P) to: (a) make a statement which P knows to be false/misleading in a material respect; (b) make a statement which is false/misleading in a material respect whilst being RECKLESS as to whether it is; or (c) DISHONESTLY CONCEAL material facts if done with the INTENTION of inducing or being RECKLESS as to whether statement/concealment may induce another person to offer to enter into/enter into/refrain from entering into a relevant agreement OR exercise/refrain from exercising any rights conferred by a relevant agreement.
- Financial Services Act 2012 s.90(1)-(3): False/Misleading Impression by Conduct - Criminal offence to engage in a course of conduct which creates false/misleading impression as to the market in/price of relevant where that act is done either: (a) with the intention of inducing another to engage in investment activity; or (b) with knowledge that the is false/misleading or being reckless as to whether it is false/misleading AND with intention to make a gain/cause a loss or risk of loss to another OR being aware that gain/loss/risk of loss to another is likely to result from the creation of that impression.
- Financial Services Act 2012 s.91: Specified Benchmark Offences - Criminal offence to engage in conduct which involves making/creating false/misleading statements in relation to specified benchmarks (e.g. LIBOR).
- FSMA 2000 s.400(1): Directors Involved in False/Misleading Statements - Criminal offence for a director/other controlling individual to consent to/connive in/cause through their neglect a s.89 FSA 2012 offence (false/misleading statement inducing relevant agreement).
- Fraud Act 2006 s.2: Fraud by False Representation - Criminal offence for a person to DISHONESTLY make a false representation with the INTENTION of making a GAIN or causing a LOSS/RISK OF LOSS to another (although gain/loss need not actually occur).
- R v Ghosh (1982): Dishonesty - D's behaviour must be such that it would be regarded as dishonest by reference to the standards of the reasonable/honest person AND D must have realised that his conduct would be considered dishonest by the such reasonable/honest people even if D did not consider his own conduct to be dishonest by reference to his own standards.
- Fraud Act 2006 s.3: Fraud by Failure to Disclose Information - Criminal offence to fail to disclose information where there is a legal obligation to disclose that information where omission made with INTENTION to make GAIN or cause a LOSS/RISK OF LOSS.
- Covers dishonest breach of general disclosure obligations in s.87A(2) FSMA 2000 + specific disclosure obligations under PR 2.3.1/PD Regulation Arts 3-23/PD Regulation Annexes. (3) Civil Liability for Issuer and Directors
- FSMA 2000 s.90(1): Compensation for Statements in Prospectus - Any person responsible for a prospectus may be liable to pay compensation to any person who has: (a) acquired securities to which the prospectus applies; and (b) suffered loss in respect of those securities as a result of any untrue/misleading statement in the prospect OR omission from prospectus of any matter required to be included by s.87A (general disclosure obligations for prospectus) or s.87G FSMA 2000 (general disclosure obligations for supplementary prospectus.
- s.90(2): Exceptions - Liability under s.90(1) subject to exceptions set out in FSMA 2000 Schedule 10.
- FSMA 2000 s.90(4): Breach of s.87G - Any person who fails to comply with requirements of s.87G (supplementary prospectus) is liable to pay compensation to any person who has acquired securities of the kind in question and has suffered loss as a result of the breach of s.87G.
- s.90(5): Exceptions - Liability under s.90(4) subject to exceptions set out in FSMA 2000 Schedule 10.
- Advantages of FSMA 2000 s.90 - Advantages to investor of making civil claim for compensation under s.90 FSMA 2000 include: (a) no need to prove reliance on misstatement/omission (unlike negligent misstatement) as investor need only establish causal link between misstatement/omission and loss suffered; (b) no need for investor to show that the misrepresentation/omission induced them to invest (unlike s.2 Misrepresentation Act 1967 claim); (c) available to subsequent purchasers of shares BUT remedies less likely to be available the longer the period of time between the breach of s.87A/s.87G and date of claim; and (d) no need to prove that misrepresentation/omission made dishonestly/fraudulently.
- FSMA 2000 s.90A: Liability of Issuers for Published Information - Company may be liable to pay compensation to person who suffers loss as a result of false/misleading statement/dishonest omission OR dishonest delay in publishing information in relation to its securities.
- FSMA 2000 Schedule 10A Para 4 - Issuing company will NOT be liable to pay compensation under s.90A if company already liable in respect of prospectus under s.90(1).
- FSMA 2000 s.91: Liability for Breach of LPDT Rules - FCA has statutory power to impose penalties for breach of LPDT Rules - allows FCA to impose penalties against company + directors + relevant officers in breach within 3 years of FCA first acquiring knowledge of the breach. 2

- Market Abuse - False/misleading statements within or omissions from prospectus can amount to breach of Market Abuse Regulation - can lead to range of civil penalties.
- Negligent Misstatement - Where prospectus containing misstatement has reasonably been relied upon by an investor in circumstances where it was reasonable for them to do so and where it was reasonable to have expected person responsible for prospectus to have foreseen such reliance AND the investor has suffered reasonably foreseeable loss as a result of that reliance, person responsible for the prospectus may be held to have owed a duty of care to the investor and be liable to compensate that investor.
- Hedley-Byrne & Co v Heller (1964) - Even where there is no contractual relationship between the parties, a duty of care may arise where there is a 'special relationship' based on: (a) sufficient degree of PROXIMITY between the parties due to an ASSUMPTION OF RESPONSIBILITY by D towards C or a class of persons including C; (b) D KNEW/it was REASONABLE in the circumstances to have expected D to have KNOWN that C would rely upon information provided by D when entering into a particular contract with a 3rd party; and (c) it was REASONABLE in the circumstances for C to rely on the information provided by D when entering the contract with the 3rd party.
- Caparo Industries v Dickman (1990) - In order for a duty of care in tort of negligent misstatement to be imposed three tests must be satisfied: (a) it must have been REASONABLY FORESEEABLE that C would suffer harm as a result of D's conduct; (b) there must have been a sufficient degree of PROXIMITY between the parties; and (c) in all the circumstances of the case it must be FAIR + JUST + REASONABLE to impose a duty of care on D.
- Misrepresentation - Any untrue statement of fact, including any such statement within a prospectus which induces another person to contract with the statement maker may give rise to claim of misrepresentation under s.2 Misrepresentation Act 1967 where that other person suffers loss as a result of entering into the contract.
- Claim can be for rescission OR damages for all loss directly resulting from fraudulent/negligent misrepresentation under s.2(1) Misrepresentation Act 1967 OR damages for all reasonably foreseeable loss flowing from the innocent misrepresentation under s.2(2) Misrepresentation Act 1967.
- Breach of Contract - Investor may have contractual claim against issuer for difference between inflated price paid for securities as a result of a misrepresentation within/omission from the prospectus and the actual value of the securities. (4) FSMA 2000 Schedule 10: Exemptions from Civil Liability
- FSMA 2000 Schedule 10: Para 1(2): Statements Believed to be True - Responsible person may be EXEMPT from liability under s.90(1) FSMA 2000 if he/she held a REASONABLE BELIEF based on REASONABLE ENQUIRIES that: (a) omission/incorrect or misleading statement was true + not misleading; or (b) matter whose omission caused loss to investor was properly omitted from prospectus; AND (c) one of the conditions in Para 1(3) satisfied.
- Schedule 10: Para 1(3): Conditions - Conditions which must be satisfied for exemption to apply are: (a) person continued to hold reasonable belief until time securities acquired by person who suffered the loss; (b) person suffering loss acquired shares before it was reasonable practicable to bring correction of omission or misleading/false statement to their attention; (c) person responsible took all reasonable steps to ensure that correction of incorrect/misleading statement or omission was brought to investor's attention before they acquired the securities; or (d) person responsible continued to hold reasonable belief until after commencement of dealings in securities after their admission to Official List + complainant investor acquired shares after such a lapse of time that person responsible ought reasonably to be excused.
- FSMA 2000 Schedule 10: Para 3: Corrected Statement - Person responsible for prospectus does NOT incur liability under s.90(1) FSMA 2000 if he satisfies court that: (a) before securities acquired, correction had been published in a manner calculated to bring it to attention of people likely to acquire the shares; or (b) he took all reasonable steps to secure publication of correction and reasonably believed that correction had been published before complainant investor acquired the securities.
- FSMA 2000 Schedule 10: Para 6: Investor Knowledge - Even where person responsible for prospectus knew of omission or false/misleading statement in prospectus they will NOT be liable under s.90(1) or s.90(4) FSMA 2000 if they are able to satisfy court that complainant investor acquired shares + suffered loss WITH KNOWLEDGE that statement was false/misleading OR of omitted matter OR of change/new matter not disclosed. (5) Liability of the Sponsor
- Listing Rule 8: Role/Duties of Sponsor - Sponsor intended to ensure that applicant company has complied with its duties/obligations/responsibilities under Listing Rules + Market Abuse Regulation + Disclosure and Transparency Rules prior to applying for admission to trading (LR 8.3.1R).
- LR 8.3.1R(1A): FCA Request for Explanation - Sponsor must provide FCA with any explanation/confirmation it reasonably requires for purpose of ensuring that LR's complied with by listed company. 3

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