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. 1309
(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 nonstatistically 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.”
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.