10.2. The Scope of this Section and the Need to Regulate Issuers

This section is mainly concerned with the public offering and trading of securities. It therefore concerns the content of advertising, and information about issuers, offerings, listing, periodic reports and reports of material events, takeovers or the change in control or change of interest associated with the holding of a publicly traded security. ²⁸

The term issuer should be understood broadly. It includes all those who raise funds on the market. However, those who offer interests in collective investment schemes are dealt with in the subsequent section. ²⁹ Disclosure requirements of the type described in section 10.4 may extend beyond the issuer to include others, such as directors and senior officers of the company, participating underwriters, and material shareholders.

Regulation of issuers should ensure both investor protection and a fair, orderly and efficient market. Annexure 3 describes some of the other laws necessary to complement securities regulation. Of particular importance in this context are:

• company formation;
• duties of directors and officers;
• regulation of takeover bids and other transactions intended to effect a change in control;
• laws governing the issuance of securities;
• disclosure of information to security holders to enable informed voting decisions;
• disclosure of material shareholdings;
• insolvency law.

10.3 Timely Disclosure of Information

Investors should be provided with the information necessary to make informed investment decisions on an ongoing basis. The principle of full, timely and accurate disclosure of current and reliable information material to investment decisions is directly related to the objectives of investor protection and fair, efficient and transparent markets.

10.4 When Disclosure is Required

Disclosure rules should extend to, at least: ³⁰

• the conditions applicable to an offering of securities for public sale;
• the content and distribution of prospectuses or other offering documents (and, where relevant, short form profile or introductory documents);
• supplementary documents prepared in the offering;
• advertising in connection with the offering of securities;
• information about those who have a significant interest in a listed company;
• information about those who seek control of a company (discussed in greater detail below);
• information material to the price or value of a listed security;
• periodic reports;
• shareholder voting decisions

Disclosure should be clear, reasonably specific and timely. Specific disclosure requirements should be augmented by a general disclosure requirement. Such a general disclosure requirement can provide that disclosure is required of all material information that is relevant to a particular investment decision. Another approach for such a general disclosure requirement provides that disclosure is required of all material information that is necessary to keep disclosures made from being misleading. ³¹

Regulation should ensure the sufficiency and accuracy of information. Generally this will involve sanctions or liability on the issuer company and those responsible persons who fail to exercise due diligence in the gathering and provision of information. Regulation should ensure that proper responsibility is taken for the content of information and, depending upon the circumstances, those liable to take responsibility may include the issuing company, underwriters, promoters, directors, authorizing officers of the company, and those experts and advisers who consent to be named in the documentation or provide advice.

Regulators also need to give careful consideration to the circumstances in which it may be necessary to the proper functioning of the market to allow something less than full disclosure: for example, of trade secrets or incomplete negotiations. In the limited circumstances where the market requires some derogation from the objective of full and timely disclosure, there may need to be temporary suspensions from trading or restrictions on the trading activities of those who possess more complete information. In such circumstances, trading should be prohibited in the absence of full disclosure.

10.5 Information About Corporate Control

To safeguard the fair and equitable treatment of shareholders, regulation should require disclosure of the security holdings of management and of those persons who hold a substantial beneficial ownership interest in a company. This is generally regarded as information necessary to informed investment decisions in the secondary market.

The level at which disclosure is required varies from jurisdiction to jurisdiction, but is generally set at a level well below that which would be characterized as a controlling interest. More stringent disclosure requirements may be appropriate for persons contemplating exercise of control.

The nature of the disclosure required also varies but full public disclosure is generally thought to best meet the underlying policy rational of disclosure where a change in control of a company has occurred or is contemplated. Regulation should have regard to the information needs of the shareholders of the subject company.

The information necessary to enable informed decision making will vary with the nature of the transaction but the general objective remains true for cash offers, offers by way of tender and exchange, business combinations and privatizations. Generally, in the circumstances described in the preceding sentence, this will require that shareholders of a company:

• have a reasonable time in which to consider any offer under which a person would acquire a substantial interest in the company;
• are supplied with adequate information to enable them to assess the merits of any proposal under which a person would acquire a substantial interest in the company;
• as far as practicable, have reasonable and equal opportunities to participate in any benefits accruing to the shareholders under any proposal under which a person would acquire a substantial interest in the company;
• receive fair and equal treatment (in particular, minority shareholders) in relation to the proposal;
• are not unfairly disadvantaged by the treatment and conduct of the directors of any party to the transaction or by the failure of the directors to act in good faith in responding to or making recommendations with respect to the proposal.

10.6 Accounting and Auditing Standards

Comparability and reliability of financial information are critical to informed decision making. The objective of general purpose financial statements is to provide information about the financial position, results of operations, cash flow and changes in the ownership equity of an enterprise that is useful to a wide range of users for decision making purposes. The statements should be characterized by comprehensibility, consistency, relevance, reliability and comparability. Financial statements should also show the results of the stewardship of management or the accountability of management for the resources entrusted to it. High quality accounting and auditing standards provide a framework for other disclosure obligations. Accounting and auditing standards are necessary safeguards of the reliability of financial information. Accounting standards should ensure that fundamental information is available. There should be comprehensive and well-defined accounting principles that are of a high and internationally acceptable quality, and provide accurate and relevant information on financial performance.

Regulation should be intended to ensure:

• The timeliness and relevance of the information provided to investors and potential investors.
• An appropriate mechanism for the setting of quality standards and to ensure that where there is some dispute or uncertainty, standards can be the subject of authoritative and timely interpretation that is consistently applied.
• An independent verification of financial statements and compliance with accounting principles through professional external auditing.
• Any audit is conducted pursuant to well defined and internationally acceptable standards.
• Rules designed to ensure the independence of the auditor.
• That where a set of international standards acceptable to the regulator is available, their use should be permitted to facilitate efficient cross-border capital raising as an aid to the provision of internationally comparable information and to assist in the more efficient raising of capital. ³²
• A mechanism for enforcing compliance with accounting and auditing standards.