1.The Joint Committee in its report (No. 23) of 18 December, 1985 on 33 Statutory Instruments dealt with the European Communities (Stock Exchange) Regulations, 1984 (S.I. No. 282 of 1984) insofar as the manner, in which relevant Council Directives had been implemented by the Regulations, seemed to the Committee to be open to certain objections. In that report the Committee indicated that it proposed to examine other aspects of the Regulations. That examination has now been completed and this report deals with the results.
2.The further examination of the Regulations was carried out for the Joint Committee by a Sub-Committee under the Chairmanship of Senator Mary Robinson. The Committee wishes to record its appreciation of and to express its thanks for the work of Senator Robinson and her colleagues.
3.The Joint Committee wishes also to thank the Stock Exchange-Irish Unit and the Department of Industry, Trade, Commerce and Tourism whose representatives gave Senator Robinson’s Sub-Committee unstinted assistance in its examination of the Regulations.
Contents of Regulations
4.The Regulations give effect to EEC Directives concerning (a) the conditions for the admission of securities to official listing on the Stock Exchange, (b) the obligation imposed on the issuers of securities admitted to official listing, and (c) the information required to be published regularly by companies whose shares are listed. The Directives implemented are Council Directives 72/729/EEC of 5th March, 1979 (Admissions Directive), 80/390/EEC of 17th March, 1980 (Listing Particulars Directive) and 82/121/EEC of 15th February, 1982 (Interim Reports Directive). In this Report the Joint Committee is concerned with the implementation of the Listing Particulars Directive insofar as it seeks to protect the investing public.
Effect on Irish Law
5.Prior to the making of the 1984 Regulations the flotation of a company (i.e. the offer for sale of a company’s shares to the public at large or to clients of an issuing house) was governed exclusively by the Companies Act, 1963 and the rules of the Stock Exchange. The relevant requirements of the Companies Act, 1963 continue to apply to unlisted securities which must also comply with relevant stock exchange rules. The Regulations modify the provisions of the 1963 Act and give statutory force to Stock Exchange requirements relating to listed securities.
6.Sections 44 to 52 inclusive of of the 1963 Act and the Third Schedule thereto contain detailed provisions designed to ensure that prospectuses of companies contain adequate information and are not misleading. Section 45 requires a prospectus to contain matters such as financial commitments, material contracts and auditors reports. A director or other person responsible for a prospectus will not incur liability arising from the non-compliance or contravention of section 44 if “(a) as regards any matter not disclosed, he proves that he did not know it; or (b) he proves that non-compliance or contravention arose from an honest mistake of fact on his part; or (c) the non-compliance or contravention was in respect of matters which in the opinion of the court dealing with the case were immaterial or was otherwise such as ought, in the opinion of the court, having regard to all the circumstances of the case, reasonably to be excused”. Subsection (6) of section 44 provides that “in the event of failure to include in a prospectus a statement relating to the matters specified in paragraph 16 of the Third Schedule (relating to directors’ interests), no director or other person shall incur any liability in respect of the failure, unless it is proved that he had knowledge of the matters not disclosed”. Contravention of subsection (1) (requirements of Third Schedule) and subsection (3) (application form) incurs liability of a fine not exceeding £100 under subsection (8). It would also seem that such contravention may attract civil liability for breach of statutory duty to investors demnified.
7.Section 49 of the 1963 Act provides that a director, a prospective director, promoter or person authorising the issue of the prospectus shall be liable to pay compensation to those who subscribe on the faith of the prospectus for loss or damage sustained by means of an untrue statement in the prospectus. A statement is “deemed to be untrue if it is misleading in the form and context in which it is included” [Section 52(a)]. A person may be relieved of the liability under this section if he proves that he
(i)withdrew consent to becoming director before the prospectus issued and did not authorise issue;
(ii)gave reasonable public notice that the prospectus was issued without his knowledge or consent;
(iii)withdrew consent after issue of its prospectus and gave reasonable public notice of the fact; or
(iv)had reasonable ground to believe and did believe up to the time of allotment that the statement was true [Section 49(3)].
There are also particular defences where the untrue statement purports to be a statement by an expert or official person.
8.There is also criminal liability for an untrue statement unless the person who authorised the issue of the prospectus can prove that the statement was immaterial or that he had reasonable grounds for believing the statement to be true and did not believe, up to the time of the issue of the prospectus, that it was true (Section 50).
9.Regulation 3(1) of the Regulations provides that the requirements of the EEC Directive should have effect and be applied accordingly. Regulation 4(1) imposes the obligation, referred to in Article 4.1 of the Listing Directive on the persons referred to in Article 4.2 thereof. Article 4.1 of that Directive reads:-
“The Listing particulars shall contain the information which, according to the particular nature of the issuer and of the securities for the admission of which application is being made, is necessary to enable investors and their investment advisers to make an informed assessment of the assets and liabilities, financial position, profits or losses, and prospects of the issuer and of rights attaching to such securities”.
Member States are obliged by Article 4.2 to impose the foregoing obligations on natural and legal persons “responsible for the listing particulars”.
10.Article 5 of the Directive requires that, subject to certain exemptions, the listing particulars should at least contain the information provided for in Schedules A, B and C depending on whether shares, debt issue or certificates representing shares are involved.
Regulation 4(1) is the only provision of the Regulations, the non-compliance with or contravention of, may attract civil liability, and a breach of any of the other provisions of the Regulations will involve the offender in civil liability, only if such liability arises under a provision of the Companies Act, 1963. In the case of civil liability arising under Regulation 4(1), Regulation 4(2) provides for defences in identical terms to those allowed by Section 44 of the 1963 Act which are quoted in paragraph 4 above.
11.Regulation 12(3) provides that when an offer for subscription or purchase of listed securities is made in the approved manner the listing particulars shall be deemed to be a prospectus within the meaning of the Companies Act, 1963 but that most of the provisions of that Act relating to the contents of prospectuses shall not apply. Apart from a modification of subsection (3) thereof (issue of prospectus with an application form for shares) section 44 of the 1963 Act is retained with the exception of subsection (1) thereof which requires prospectuses to comply with the Third Schedule to the Act. Article 49 of the 1963 Act is not affected by the Regulations.
12.In contrast to section 44(1) of the 1963 Act, which required a prospectus to state specified matters and set out specified reports, Article 4(1) of the Listing Particulars Directive, which is incorporated into Irish law by Regulation 4(1) of the Regulations, imposed an obligation to provide whatever information may be necessary “to enable investors and their investment advisers to make an informed assessment of the assets and liabilities, financial position, profits and losses, and prospects of the issuer and of the rights attached to such securities”. The effect of imposing a positive duty on those responsible to give all the information necessary for making an informed assessment would appear to amount to imposing liability for material omission and material mistatements including misleading opinions. If this is correct, it imposes a heavier obligation on an issuer than that imposed by section 49 of the 1963 Act which renders him liable only for an untrue statement being one “misleading in the form and context in which it is included”. Yet ignorance or an honest mistake, no matter what the circumstances, will, by virtue of Regulation 4(2) excuse an issuer in the former case. While in the latter case an issuer can escape liability only if he proves that he had reasonable grounds for believing that the statement was true, and did in fact believe it to be true up to the time of allotment or if one of the defences referred in paragraph 7 above is available to him.
13.While it would appear that an untrue statement in the listing particulars might contravene both Regulation 4(1) of the Regulations and Section 49 of the Companies Act, 1963, it does not necessarily follow that an alternative remedy under these provisions would always be available to an investor. Under Section 49 only persons “who subscribe for any shares or debentures on the faith of the prospectus” are given a right of action. Reliance on the prospectus as well as the materiality of the statement under Article 4.1 of the Listing Particulars Directive would seem to depend only on an objective test of whether a statement was such as affected the making of an informed assessment. Moreover, the duty of disclosure under the Directive is owed not only to investors, but also to their investment advisers. The foregoing suggests that there is no need for an investor in listed securities to prove that he relied upon or even saw the listing particulars. This raises some doubt as to whether the Regulations are intended to give a cause of action based on the listing particulars to a subsequent purchaser. Such would scarcely be reasonable when a market in the securities has been established, but might not be unreasonable where an issue is oversubscribed and an unsuccessful applicant is forced to buy shares at a premium when dealing commences.
14.Under Section 49 the following persons are liable:-
(b)a person named in the prospectus with his authority as director or future director,
(c)a promoter, and
(d)a person who has authorised the issue of the prospectus.
Under the Directive the persons liable are identified as the natural or legal persons “responsible for the listing particulars or, as the case may be, for certain parts of them, with, in the latter case, an indication of those parts”. It is understood from the Stock Exchange that all the directors are required to accept responsibility for the listing particulars. Nevertheless it would seem that a wider range of persons is liable under Section 49 than under Regulation 4(1).
15.Failure to state in a prospectus the particulars required by Section 44(1) or to issue an application form for shares or debentures unless accompanied by such a prospectus is punishable under Section 44(8) by a fine not exceeding £100. Under Regulation 12(3) of the Regulations, listing particulars are deemed to be a prospectus when issued with an application form for securities. Accordingly, if the listing particulars when so issued, do not comply with the provisions of Articles 4 and 5 of the Listing Particulars Directive, it would seem that the issuer is liable to the penalty provided for in Section 44(8) of the 1963 Act. When this non-compliance takes the form of a material omission or misrepresentation comparable to a contravention of Section 49 of the 1949 Act, the Joint Committee doubts if the penalty is adequate. Breach of Section 49 is punishable following conviction on indictment, by imprisonment for a term not exceeding 2 years or a fine not exceeding £500 ,or both, or on summary conviction by imprisonment for a term not exceeding 6 months, or to a fine not exceeding £100 or both, unless the person who authorised the issue of the prospectus proves either that the statement was immaterial or that he had reasonable ground to believe and did believe up to the time of the issue of the prospectus that the statement was true.
Conclusions of Joint Committee
16.The Joint Committee considers that it is unsatisfactory that amendments to legislation dealing with such an important subject as company law should be effected by regulations made under the European Communities Act, 1972. In the Committee’s view such amendments should be made only by amending statute enacted after full parliamentary discussion. The amendments made to the Companies Act, 1963 by the Regulations now under consideration, seem to the Committee to raise doubts and to create confusion about the civil liability of those responsible for issuing listing particulars. The Committee recommends that amending legislation be introduced to replace the provision of the Regulations and to amend and modify Sections 43 to 52 inclusive of the Companies Act, 1963 so as to comply with the requirements of the Listing Particulars Directive. The amending legislation should not merely clarify the civil liability of those responsible for listing particulars and equate it with that of issuers of other prospectuses, but also provide for realistic penalties for non-compliance with the statutory requirements.
Mr. Gerard Collins T.D.
Chairman of the Joint Committee
(4th June, 1986.)