LAW

LAW

Law is a system of rules and guidelines which are enforced through social institutions to govern behavior, wherever possible. It shapes politics, economics and society in numerous ways and serves as a social mediator of relations between people. Contract law regulates everything from buying a bus ticket to trading on derivatives markets. Property law defines rights and obligations related to the transfer and title of personal and real property. Trust law applies to assets held for investment and financial security, while tort law allows claims for compensation if a person's rights or property are harmed. If the harm is criminalized in legislation, criminal law offers means by which the state can prosecute the perpetrator. Constitutional law provides a framework for the creation of law, the protection of human rights and the election of political representatives. Administrative law is used to review the decisions of government agencies, while international law governs affairs between sovereign states in activities ranging from trade to environmental regulation or military action. Writing in 350 BC, the Greek philosopher Aristotle declared, "The rule of law is better than the rule of any individual."

Legal systems elaborate rights and responsibilities in a variety of ways. A general distinction can be made between civil law jurisdictions, which codify their laws, and common law systems, where judge made law is not consolidated. In some countries, religion informs the law. Law provides a rich source of scholarly inquiry, into legal history, philosophy, economic analysis or sociology. Law also raises important and complex issues concerning equality, fairness and justice. "In its majestic equality", said the author Anatole France in 1894, "the law forbids rich and poor alike to sleep under bridges, beg in the streets and steal loaves of bread." In a typical democracy, the central institutions for interpreting and creating law are the three main branches of government, namely an impartial judiciary, a democratic legislature, and an accountable executive. To implement and enforce the law and provide services to the public, a government's bureaucracy, the military and police are vital. While all these organs of the state are creatures created and bound by law, an independent legal profession and a vibrant civil society inform and support their progress.

PROSPECTUS

PROSPECTUS

 TOPIC:

“How does the law protect an investor who has acquired shares in a company based on inaccuracies in its prospectus? Do you consider such protection adequate?”

By

Mohd. Zamre Bin Mohd. Zahir

Master in Laws (LL.M), UiTM

2012

PROSPECTUS

A prospectus frequently provides investors by means of material information about mutual funds, bonds, stocks and other investment. For example, a description of the company's business, financial statements, biographies of officers and directors, detailed information about their compensation, any litigation that is taking place, a list of material properties and any other material information. A prospectus is distributed by underwriters or brokerages to potential investors.

If we look to the history, until the year 2000, the regulatory framework for fund raising in Malaysia was to some extent quite different with some aspects of fund raising exercise requiring Securities Commission of Malaysia (hereinafter called as SC) approval such as for the issuance of securities while approvals for prospectuses resided with the Registrar of Companies.[1] In 2000, based on Section 231 (2) of the Capital Markets and Services Act 2007 (hereinafter called as CMSA), the SC began registering prospectuses for all issuance of securities unless for prospectuses issued by unregistered recreational clubs.[2] Shanti Geoffrey in her book contends that the changes were significant as gradually shifted from a system based on merit regulation to the introduction of a disclosure based regulatory framework governing securities offering.[3]

However, this is not to indicate that the existing framework of regulation is fully disclosure based. What currently in place is a hybrid system of regulation that to follow Section 212 of the CMSA 2007 as to submit information to the regulators for purposes of corporate proposals and a disclosure based system of the regulation pursuant to Division 3 of Part VI.[4]

If we look to other states, for example in United Sates of America, in a securities offering in the United States, a prospectus is required to be filed with the Securities and Exchange Commission (SEC) as part of a registration statement.[5]  The issuer may not use the prospectus to finalize sales until the registration statement has been declared effective by the SEC, meaning it appears to comply on its face with the various rules governing disclosure.[6]

In United Kingdom, publication of information in relation to the issue of securities in the United Kingdom is governed by the Prospectus Rules, which implement the European Law Prospectus Directive.[7]  A prospectus must be published where certain types of securities either are offered to the public or are requested for admission on a regulated market. In the United Kingdom, the only regulated market is London Stock Exchange full list.[8]

In Malaysia like other states, the investors who involve in selling or purchasing shares of the corporation always rely on the prospectus. In the event the prospectus is inaccurate, there are several actions can be taken in protecting the investors based on Common Law, Malaysian statutes such as Companies Act 1965 (hereinafter called as CA), CMSA and Securities Commission Act 1993 (hereinafter called as SCA) and by the regulators such as our Malaysian Securities Commission (SC).

In Malaysia we can see some changing happened and we can find the development of law concerning to prospectus. Earlier, the Companies Act 1965 provided specific regulations and play roles relating to prospectus. One issue may arise which is does Companies Act 1965 have role to play? The answer is no. However, Companies Act 1965 still applies to Unlisted Recreational Clubs. However, our Malaysian law relating to prospectus keeps on developed. On 1^st July 2000, Securities Commission Act 1993 regulates and has role to play on a matter relating to prospectus. But, previously some sections relating to prospectus in SCA 1993 already deleted and amended. Now, it is under Capital Markets and Services Act 2007 (CMSA) that provides specific regulations and play big roles to the matter relating to prospectus.

The regulations have done several aspects. Firstly, a prospectus is required to be registered in the Securities Commission (SC). Secondly, the disclosure based approach as replaced as merit based approach. Thirdly, introduced a due diligence requirement by those who prepared the prospectus filing which they risk both civil and criminal liability. Fourthly is an introduced prohibition on share banking and advertisement. The disclosed based approach and merit based approach is for making assessment of public issue and to ensure that they provide sufficient information The share banking prohibition is unsolicited invitation such as credit card and cannot simply issue share without asking and the public must ask for it.

Besides that, one question may arise in a context of prospectus as why must be regulation in public issuance prospectus. Actually, prospectus is for investor protection in the context of public issue of shares. It is because the purpose of regulation of public of shares is to ensure that potential investors are provided in sufficient and accurate into so as to ensure that there are able to make a sound investment decision. It is also because to ensure that new diligent is exercised by those who prepare the disclosure documentation. For example, he must have enough information either to invest or not in the company. And the information is found in the prospectus.

 DEFINITION

First and foremost, an ordinary meaning of prospectus is a document containing information of corporation. Oxford Dictionaries defines prospectus as a printed document that advertises or describes a school, commercial enterprise, forthcoming book and others to attract or inform clients, members, buyers, or investors.[9] Bursa Malaysia also defines prospectus as a document to be issued by a company intending to make an issue of shares to the public.[10]

A legal meaning of prospectus can be seen as a legal document that potential shareholders of an initial public offering of a stock must be provided before they can invest.[11] It lists complete financial details of the company as well as the associated risks of the investment.[12] A prospectus is also required for mutual funds and any regulated security.[13]

Furthermore, a prospectus is a document or a publication by, or on behalf of, a corporation containing information on the character, nature, and purpose of an issue of shares, debentures, or other corporate. Actually, securities extend an invitation to the public to purchase the securities.[14] The content of a prospectus is regulated by federal law. It must contain all material facts relating to the company and its operations so that a prospective investor can make an informed decision as to the merit of the investment.[15] A prospectus must be furnished to an investor before any purchase is made.[16]

Prospectus is a legal document which offering securities like shares or mutual fund shares for sale required by Securities Act of 1933. It must explain the offer, including the terms, issuer and objectives if it is mutual fund or planned use of the money if it is securities, historical financial statements and other information that could help an individual decide whether the investment is appropriate or not for him.[17]

The Malaysian statutory in Section 4 CA defines prospectus as may be summarised to its essentials as a document inviting applications or offers from the public to subscribe or purchase shares or debentures of any corporation.[18]

However based on Part VI CMSA 2007, prospectus means a notice, circular, advertisement or document inviting applications or offers to subscribe for or purchase securities or offering any securities for subscription or purchase and  unless expressly specified, includes a supplementary prospectus, replacement prospectus, shelf prospectus, short form prospectus, profile statement, supplementary shelf prospectus and abridged prospectus.[19] Section 226 CMSA explains the invitation or offer to suscribe or purchase share or securities is prospectus. Based on the case of Edgington v Fitzmaurice (1885), a company issued a ‘prospectus’ which means a document inviting subscriptions for debentures.

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[1] Section 37 of the Companies Act 1965.

[2] Section 231 (2) of the Capital Markets and Services Act 2007.

[3] Shanti Geoffrey, Capital Market Laws of Malaysia, (Lexis Nexis 2010), p. 319.

[4] Ibid.

[5] U.S. Global Investors, “Prospectus”, online, available at http://www.usfunds.com/investing-with-us/prospectus/ accessed on 14 November 2011.

[6] Ibid.

[7] Ibid.

[8] Ibid.

[9] Oxford Dictionaries, “Prospectus”, online, available at http://oxforddictionaries.com/definition/prospectus?region=us accessed on 10 November 2011.

[10] Bursa Malaysia, “Glossary of Stock Market Terminology”, online, available at http://www.bursamalaysia.com/website/bm/bursa_basics/market_terminology/glossary_resources/terminology-P.html accessed on 14 November 2011.

[11] US Legal, “Prospectus Law & Legal Definition”, online, available at http://definitions.uslegal.com/p/prospectus/ accessed on 10 November 2011.

[12] Ibid.

[13] Ibid.

[14] Farlex, “Prospectus” (2011) The Free Dictionary, online, available at http://legal-dictionary.thefreedictionary.com/prospectus accessed on 14 November 2011.

[15] Ibid.

[16] Ibid.

[17] InvestorWords, “Prospectus”, online, available at http://www.investorwords.com/3911/prospectus.html accessed on 14 November 2011.

[18] Section 4 of the Companies Act 1965.

[19] Part VI CMSA, Section 226 of the Capital Markets and Services Act 2007.

STOCK EXCHANGE AS DEMUTUALISATION MARKET

STOCK EXCHANGE AS DEMUTUALISATION MARKET

By:

Mohd. Zamre Bin Mohd. Zahir

Master in Laws (LL.M), UiTM

2012

The author confirms that the works submitted is his own and that appropriate credit has been given where reference has been made to the work of others.

Demutualisation is the process by which a customer-ownedmutual organization (mutual) or co-operative changes legal form to a joint stock company.[1] It is sometimes called stocking or privatization.  As part of the demutualization process, members of a mutual usually receive a ‘windfall’ payout, in the form of shares in the successor company, a cash payment, or a mixture of both. Mutualisation is the opposite process, wherein a shareholder-owned company is converted into a mutual organization, typically through takeover by an existing mutual organization. Furthermore, re-mutualization depicts the process of aligning or refreshing the interest and objectives of the members of the mutual society.

The mutual traditionally raises capital from its customer members in order to provide services to them (for example building societies, where members' savings enable the provision of mortgages to members). It redistributes some profits to its members. By contrast a joint stock company raises capital from its shareholders and other financial sources in order to provide services to its customers, with profits or assets distributed to equity or debt investors. In a mutual organization, therefore, the legal roles of customer and owner are united in one form ("members"), whereas in the joint stock company the roles are distinct. This allows a broader capital base if the customers cannot or will not provide sufficient financing to the organization. However, a joint stock company must also try to maximize the return for its owners instead of only maximizing the return and customer services to its customers. Shelagh Heffernan (2003) contends that this can lead to a decline in customer service to the extent that customers', management's and shareholders' interests diverge.[2]

In general, the demutualization of the exchanges has been observed to offer a wide range of advantages.[3] It allows exchanges to abolish the members or traders’ monopoly over intermediation and be responsive to the needs of its issuers and investors by allowing them direct and cost effective access to exchange.[4] For-profit motive of exchanges allows it to generate the desired levels of investments, while offering appropriate returns to owners. Provided the incentive structure of demutualized exchange is developed effectively, demutualization lends itself to improved governance.[5] This can be achieved through a shift in the ownership of the exchange from member brokers and dealers to a wider group of investors with adequate safeguards to prevent excessive concentration of ownership and power, appointment of a professional board and management and appropriate investments in automated trading to offer competitive services.[6]

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[1]Oxford, “Demutualisation”, (Oxford English Dictionary 2004), online, available at http://dictionary.oed.com/cgi/entry/00328152?query_type=word&queryword=demutualize&first=1&max_to_show=10&single=1&sort_type=alpha accessed on 10^th December 2011.

[2]Shelagh Heffernan, "The Effect of UK Building Society Conversion on Pricing Behaviour (March 2003)" (PDF). (Faculty of Finance, CASS Business School, City of London 2003) http://www.cass.city.ac.uk/facfin/papers/WP2003/Mutuals-WP.pdf accessed on 10^th December 2011. 

[3]Shamshad Akhtar, “Demutualisation of Asian Stock Exchanges-Critical Issues and Challenges” (2002), p. 29.

[4]Ibid.

[5]Ibid.

[6]Ibid. 

VARIOUS THEORETICAL FRAMEWORKS UNDERLYING THE DISCOURSE ON CORPORATE GOVERNANCE.

VARIOUS THEORETICAL FRAMEWORKS UNDERLYING THE DISCOURSE ON CORPORATE GOVERNANCE.

By: Mohd Zamre Bin Mohd Zahir 

"Corporate governance promotes effective performance. Effective performance concerns all stakeholders with an interest in the corporation, whether direct or indirect, directors, management and other employees, shareholders, customers and suppliers."[1]

Corporations have become a powerful and dominant institution. They have reached to every corner of the globe in various sizes, capabilities and influences. Their governance has influenced economies and various aspects of social landscape. Shareholders are seen to be losing trust and market value has been tremendously affected. Moreover with the emergence of globalization, there is greater deterritorialization and less of governmental control, which results is a greater need for accountability (Crane and Matten, 2007). Hence, corporate governance has become an important factor in managing organizations in the current global and complex environment. In order to understand corporate governance, it is important to highlight its definition. Even though, there is no single accepted definition of corporate governance but it can be defined as a set of processes and structures for controlling and directing an organization. It constitutes a set of rules, which governs the relationships between management, shareholders and stakeholders (Ching et al, 2006).

In fact, the term “corporate governance” has a clear origin from a Greek word, “kyberman” meaning to steer, guide or govern. From a Greek word, it moved over to Latin, where it was known as “gubernare” and the French version of “governer”. It could also mean the process of decision-making and the process by which decisions may be implemented. Henceforth, corporate governance has much a different meaning to different organizations (Abu-Tapanjeh, 2008). In recent years, with much corporate failures, the countenance of corporate has been scared.

Corporate governance includes all types of firms and its definitions could extend to cover all of the economic and non-economic activities. Literatures in corporate governance provide some form of meaning on governance, but fall short in its precise meaning of governance. Such ambiguity emerges in words like control, regulate, manage, govern and governance. Owing to such ambiguity, there are many interpretations. It may be important to consider the influences a firm has or affected by in order to grasp a better understanding of governance. Owing to vast influential factors, proposed models of corporate governance can be flawed as each social scientist is forming their own scope and concerns. Hence, this article reviews various fundamental theories underlining corporate governance. These theories range from the agency theory and expanded into stewardship theory, stakeholder theory, resource dependency theory, transaction cost theory, political theory and ethics related theories such as business ethics theory, virtue ethics theory, feminists ethics theory, discourse theory and postmodernism ethics theory.

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[1] Rashidah Abdul Rahman, “Corporate Governance in Malaysia” (Sweet & Maxwell Asia 2009) online, available at http://www.sweetandmaxwellasia.com.my/products/prod_spec.asp?ProdId=2085&cvalue=a25a54a117a48 accessed on 14^th December 2011.

Malaysian Code on Corporate Governance (Code)

Malaysian Code on Corporate Governance (Code)

By: Mohd Zamre Bin Mohd Zahir

The Malaysian Code on Corporate Governance (Code), first issued in March 2000, marked a significant milestone in corporate governance reform in Malaysia. It codified the principles and best practices of good governance and described optimal corporate governance structures and internal processes.[1]

Since the release of the Code, the Malaysian corporate scene has made significant strides in corporate governance standards.[2] The mandatory reporting of compliance with the Code has enabled shareholders and the public to assess and determine the standards of corporate governance by listed companies.[3] The Malaysian Securities Commission (SC) has released a new Code on Corporate Governance which takes effect from 1st October 2007, following an announcement in the 2008 Malaysian Budget Statement by Dato’ Seri Abdullah Badawi.[4]

The Malaysian Code on Corporate Governance (Revised 2007) supersedes the existing regulations issued in March 2000.[5] The Code aims to strengthen Malaysia's corporate governance framework and bring it in line with current global best practice. Its main revisions strengthen the roles and responsibilities of Boards of Directors and Audit Committees and aim to ensure the effective discharge of their duties.[6] The revisions also codify the eligibility criteria for the appointment of Directors, the composition of the Boards and the role of the Nomination Committee.[7]

The new regulations state that Independent non-Executive Directors should continue to make up at least one-third of the members of the Board and that there should be a more meaningful and independent oversight function. Appointments and reappointments to the Board must be made by a separate Nomination Committee which is expected to evaluate the professionalism and integrity of each Director.[8] The Committee should also make sure that Board members possess basic skills, knowledge, expertise and experience to discharge their duties and responsibilities.

The revised Code strengthens the regulations on the role of Audit Committees to ensure that they provide an effective check on company mangers.[9] The new rules cover the composition of Audit Committees, the frequency of meetings and the need for audit committee members to attend continuous training to keep abreast with developments in relevant financial and other related developments. In order to ensure the independence of the Audit Committee, Executive Directors are excluded from membership.[10]

Recent corporate accounting irregularities have highlighted the importance of an effective and independent internal audit function. The revised Code emphasizes this by requiring all public-listed companies to carry out their own internal audit functions.[11] The reporting line has also been clarified so that the Board of Directors will now be held accountable for ensuring adherence to best practice standards for internal audit functions.[12]

The revised Code has received support from leading stakeholder groups including the Malaysian Institute of Corporate Governance and the Minority Shareholder Watchdog Group (MSWG).[13] The CEO of the MSWG, Abdul Wahab Jaafar Sidek said, “I laud the initiative to revise the Code and set new rules to deal with improper activities of certain directors.”[14] The revised Code has been achieved through ongoing collaboration between the SC, other government agencies and industry leaders and is widely regarded as being a significant advance which will strengthen Malaysia's corporate governance framework.

The Malaysian Code on Corporate Governance as revised in 2007 represents the continued collaborative efforts between Government and the industry. The Securities Commission (SC) would like to thank the Companies Commission of Malaysia, Bursa Malaysia Berhad, Bank Negara Malaysia, the Bar Council, the Federation of Public Listed Companies, the Malaysian Institute of Corporate Governance, the Minority Shareholders Watchdog Group, the Malaysian Accounting Standards Board, the Malaysian Institute of Accountants, the Malaysian Institute of Certified Public Accountants, The Institute of Internal Auditors Malaysia, the Malaysian Institute of Chartered Secretaries and Accountants and the Malaysian Investment Banking Association for their invaluable feedback and comments.[15]

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[1] Malaysian Code on Corporate Governance (Revised 2007).

[2] Ibid.

[3] Ibid.

[4]CSR Malaysia, “Revised Code on Corporate Governance Introduced in Malaysia” online available at http://www.csr-malaysia.org/news/malaysia/revised-corporate-governance-code-2007101324/ accessed on 20^th December 2011.

[5] Ibid.

[6] Ibid.

[7] Ibid.

[8]  Ibid.

[9]  Ibid.

[10] Ibid.

[11] Ibid.

[12] Ibid.

[13] Ibid.

[14] Ibid.

[15] Note 1.