LEGAL ASPECTS OF INVESTOR RELATIONS Investor Relations Workshop Karachi 17 September 2015 (Walid Iqbal)

Meaning and Scope Investor Relations is not an auxiliary function, but a key business process of acquiring capital at the lowest cost possible. Defined as a strategic management responsibility that integrates:  Finance;  Communication;  Marketing; and  Securities law compliance. Enables the most effective two-way communication possible between a company, the financial community, and other constituencies, which ultimately contributes to a company’s securities achieving fair valuation.

Origins and Evolution US Securities Act of 1933 – coming to the public for the first time. US Securities Exchange Act of 1934 – after having come to the public and beyond. The concept of “full disclosure” as the extreme opposite of the doctrine of “caveat emptor”. Insider trading – material non-public information. Sarbanes Oxley Act – enhanced disclosure, certification, executive compensation, corporate whistle blowing. Bringing a wider range of instruments into the disclosure regime.

Leading US Cases Matrixx Initiatives, Inc. v. Siracusano, 131 S. Ct (decided on March 22, 2011).  US Supreme Court unanimously held that materiality of an alleged false or misleading statement or omission, is inherently fact-specific, depending upon whether a “reasonable investor” would have viewed relevant information “as having significantly altered the total mix of information made available.”  Pharmaceutical and biotechnology companies may have an obligation to disclose adverse events to investors, even if the data is not statistically significant.  Reasonable investors may also base their decision on non- statistically significant data. So the industry (including their investor relations and public relations agencies) have to now draw a careful line on what information is “material” and needs to be disclosed.  Guidance offered by Court: “assessing the materiality of adverse event reports is a ‘fact-specific’ inquiry that requires consideration of the source, content and context of the reports.”

Leading US Cases (contd.) Basic, Inc. v. Levinson, 485 U.S. 224 (1988). US Supreme Court held that the materiality requirement is satisfied when there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Element of a material misstatement or omission also has to be accompanied by the element of “scienter” defined by the US Supreme Court to be “a mental state embracing intent to deceive, manipulate, or defraud.” Element of a material misstatement or omission also has to be accompanied by the element of “scienter” defined by the US Supreme Court to be “a mental state embracing intent to deceive, manipulate, or defraud.” No need to disclose all reports of adverse events only those for which a reasonable investor would have viewed the non-disclosed information as having significantly altered the total mix of information made available.

Challenges – Striking a Balance Disclosures and financial reporting – primary methods of keeping investors informed about corporate performance. Means of communicating a company’s financial performance to outside investors and capital markets so that informed decisions can be made about investments. The greatest challenge, therefore, is striking a balance between the need to keep sensitive information from competitors and the need of the investor for greater disclosure.

Fountainhead of the Disclosure Regime in Pakistan (The Securities Act, 2015) The preamble sets out specific purposes:  Regulation of the securities industry.  Protection of investors. Prospectus-related and follow-on provisions contained in Ss. 87–100 lie at the heart of Pakistan’s disclosure regime.  Dates, matters and reports (Ss. 87, 88 and 89).  Copies to be kept at registered office and made available to stock exchanges and bankers, published in papers, and uploaded on web-site (S. 88).  Securities not be offered to public without prospectus (S. 87).  Approval of SECP and Stock Exchange required before publication (S. 88). Civil liability (S. 93) as well as criminal sanctions (Ss. 92 and 158(4)) if prospectus contains any untrue statement.

Care to be Taken About Statements as Well as Omissions As stipulated by S. 92, you could be responsible for things you say and also responsible for things you do not say. Any statement “which is false or misleading with respect to any material fact at the time or in the light of the circumstances in which it was made” would get picked up by the disclosure regime. Any omission that is false or misleading as above would also get hit in the same way.

The Securities Act, 2015 Section 96 Disclosure Requirements A listed company must promptly disclose to the public any price sensitive information coming to its knowledge and which is material to an investor’s investment decision, bringing it to the attention of all persons who commonly invest in securities of the kind whose price and value may be affected by such information. This public disclosure may be delayed at the listed company’s own responsibility so as not to prejudice its legitimate interests, provided that:  Such delay is not likely to mislead investors;  Any person receiving the information owes the listed company a duty of confidentiality, whether statutory, contractual or pursuant to the company’s articles of association; and  The listed company is able to ensure the confidentiality of such information

The Securities Act, 2015 Section 97 Disclosure Requirements A listed company must respond promptly upon being informed by the SECP or a Stock Exchange that there are unusual movements in the price or volume of its traded securities by disclosing to the public forthwith:  Details of any matter or development of which it is aware that is or may be relevant to the unusual movements; or  A statement of the fact if it is not aware of any such matter or development. It is also the listed company’s responsibility to respond promptly, in the same manner, to any news in the print and electronic media regarding that company which may prima facie affect the opinion of investors or public at large.

The Securities Act, 2015 The SECP’s Powers Under Sections 98 and 99 The SECP can give directions to the directors, management, subsidiaries, affiliates, or controlling shareholders of a listed company to produce the records or documents specified by the SECP if it appears to the SECP that:  The company is being operated with the intent to defraud creditors, or for a fraudulent or unlawful purpose, or in a manner adversely affecting its shareholders;  There are circumstances suggesting that the company was listed for a fraudulent or unlawful purpose;  There are circumstances suggesting that the persons concerned with listing of the company, or its management, have in relation to the listing or management been guilty of fraud, misfeasance or other misconduct towards it or its shareholders; or  There are circumstances suggesting that the shareholders of the listed company have not been given all the information with respect to its affairs as they might reasonably expect. If the SECP finds any information so procured to prejudice the interests of the shareholders, it can take the matter to Court and get restraining, receivership, or other orders.

The Securities Act, 2015 The SECP’s Powers Under Section 100 The SECP can issue directives to a listed company to cease and desist from violating the Act and any associated rules and regulations, to do or not to do anything as specified thereby, and in relation to any other underlying matter if:  It is desirable for the protection of shareholders, other security holders or in the public interest;  The listed company is in breach of listing regulations;  The listed company is actually or potentially violating the Act or any associated rules or regulations, or has furnished to SECP any false, inaccurate or misleading information in connection therewith.

Also Relevant – The Companies Ordinance, 1984 Disclosure, Disclosure, Disclosure The preamble sets out specific purposes:  Healthy growth of corporate enterprises.  Protection of investors and creditors.  Promotion of investment.  Development of the economy. Dissemination of annual and quarterly results (Ss. 233, 242, and 245). Rights offer of shares must be accompanied by circular containing all material information about company’s affairs, latest accounts and reasons for issue of further capital (S. 86(3)). Notice of General Meeting taking up special business must have annexed to it a statement of all material facts relating to the special business (S. 160(1)(b)).

Case Law in Pakistan M. Shahid Saigol versus Kohinoor Mills Limited (PLD 1995 Lahore 264). Decision on whether statement annexed to notice of General Meeting genuinely contained “all material facts”. Court held that shareholders were entitled to “disclosure of all material facts and terms and conditions attached to the investment before taking a decision as regards the business in question.”

To Disclose or Not to Disclose? When faced with the dilemma of whether to disclose or not to disclose, decide in favor of disclosing. When faced with the dilemma of whether to disclose more or disclose less, decide in favor of disclosing more. For ascertainment of responsibility, keep track of individuals involved in the disclosure.