2015 BUSINESS LAW Examinable Supplement with Questions Note: “This supplement is meant to replace Chapter 22 of the existing edition 2013 of both i.e the study text and the question bank of CAF-03 Business Law With the issue of this supplement old Chapter 22 of the study pack (edition 2013 of study text and question bank) would stand completely ineffective and hence would not be examined instead this supplement would stand examinable.” CHAPTER Certificate in Accounting and Finance Business Law 22 Share Capital-Prospectus Contents Introduction to prospectus Chapter review Business Law INTRODUCTION Learning outcomes The overall objective of the syllabus is to give students an understanding of the legal system and commercial laws; and build a knowledge base of corporate laws LO4.1.1 Define a prospectus and explain its purpose LO4.1.2 Understand the requirements relating to a prospectus as laid down in Section 87(2),(4),(5),(6),(7), 88(1-8), 90, 91, 92 and 93 of the Securities Act 2015 LO4.1.3 Describe the matters that are to be specified in a prospectus as required under clause to and 17, 18 19, 24, 26 and 27 of Section of Part I of Second Schedule LO4.1.4 Describe the reports that are to be included in a prospectus as required under Section of Part I of Second Schedule LO4.1.5 Understand/explain the provisions regarding statement and consent of expert © Emile Woolf International The Institute of Chartered Accountants of Pakistan Examinable Supplement INTRODUCTION TO PROSPECTUS Section overview Basics Approval of prospectus Availability of prospectus Contents of prospectus Reports to be set out in the prospectus Timing of prospectus Expert to be independent Expert’s consent to issue of prospectus Criminal liability for defective prospectus 1.1 Basics Definition Definition: Prospectus (Section 2(41) Securities Act, 2015) “prospectus” means any document described or issued as a prospectus and includes any document, notice, circular, material, advertisement, offer for sale document, publication or other invitation offering to the public (or any section of the public) or inviting offers from the public for the subscription or purchase of any securities of a company, body corporate or entity, other than deposits invited by a bank and certificate of investments and certificate of deposits issued by non-banking finance companies; As per the above definition it can be construed that the prospectus Is a document issued for general public; It invites offers for sales of company’s securities, and Prohibits companies from inviting deposits form public other than deposit invited by a bank a bank and certificate of investment and certificate of deposits by a Non-Banking Finance Company Purpose of the Prospectus (Section (87) Securities Act, 2015) The purpose of prospectus as indicated above is to invite offers form public for the subscription or purchase of any securities of a company The term “public” is specific for prospectus because securities can be issued by the Company by private arrangement with some friends or relatives of the promotors or directors etc but if the company wants to issue securities to large number of persons it has to offer this to the general public and the requirement of the law is to issue a prospectus along with such public offer of securities © Emile Woolf International The Institute of Chartered Accountants of Pakistan Business Law The friends or relatives of the promoters and directors can get every information about the objects, prospects and operations of the company however if the general public wants to subscribe or purchase any securities in the company, it shall have no avenue available regarding the company to make investment or otherwise decision about the company Prospectus comes to play in these situations and provides the readers with all the information required by them before making any investment decision or otherwise in the company However the prospectus must be approved by the Commission prior to its issuance to the public A prospectus approved by the Commission shall be valid for a period of sixty days from the date of such approval Provided that the time period of sixty days provided for approval of prospectus may be extended by the Commission by reasons to be recorded in writing The issuer or the offeror, as the case may be, shall, not less than twenty one days before the proposed date of publication of the prospectus, submit a copy to the Commission for approval Statement in Lieu of prospectus Alternatively if a company does not want to call subscriptions from general public and wants to carry on business as a public unlisted company, it shall be required to file a statement in lieu of prospectus with the registrar at least three days before first allotment of any shares or debentures It may however be noted that the private company is not required to file the statement in lieu of prospectus 1.2 Approval of prospectus (section 88(1), Securities Act, 2015) The prospectus cannot be issued, published or circulated without approval of the Commission The same condition also applies on shelf-prospectus or supplement to the prospectus Moreover, the Commission may also impose further conditions or restrictions in this regard 1.3 Availability of prospectus (Section 88, Securities Act, 2015) The prospectus in its full text or in such abridged form, shall be published at least in one Urdu and one English daily newspaper It shall not be published in the newspapers less than seven days or more than thirty days before the commencement of the public subscription A sufficient number of copies of the prospectus, as approved by the Commission, shall be made available, free of charge, from the date of its publication in the newspapers till the closing of the subscription at the registered office of the issuer, with all the securities exchanges of the country, with all the bankers to the issue, the concerned share registrar, the concerned ballotter and the concerned credit rating agency, if any The prospectus along with subscription form shall be uploaded on the website of the issuer and shall remain there from the date of its publication in the newspapers till the closing of the subscription © Emile Woolf International The Institute of Chartered Accountants of Pakistan Examinable Supplement 1.4 Contents of prospectus (Section 89, Securities Act, 2015) The Commission may approve a prospectus if it contains such information and reports as may be prescribed Primarily, the prospectus must contain sufficient material to enable any person to reach a decision on the investment in the shares or debentures of the company The prospectus is a very formal document and needs approvals from the Commission and clearance from the stock exchange as well because any security which is offered to the general public should be listed on stock exchange otherwise company is not allowed to allot that security to the applicants Hence the stock exchange in addition to the Commission is also a regulator, who regulates the listings of securities and issuance of prospectus Detailed contents of the prospectus have been stated in the second schedule to the Companies Ordinance 1984, prime of them are as follows: Prospectus shall contain the full memorandum of association of the company with complete particulars of signatories to the memorandum however if the prospectus is issued after two years of the date of commencement of business such particulars shall not be required Number and value of shares with existing members and nature of extent of interest of such shareholders in the company Description of business to be undertaken along with reasonable future prospects of the business Any provisions in articles of association regarding authority of determination of remuneration of directors Particulars of directors, proposed directors, secretary and chief executive of the company and directorships of above persons in any other company and any contract regarding appointment of the above persons or remuneration etc The amount of minimum Subscription, it includes Purchase price of property to be purchased Preliminary expenses including underwriting commissions etc Repayment of any money borrowed for above matters Working capital Any other expenditure If the company intends to meet the all or any of the above needs from any source other than the issue of shares, such source shall be disclosed Date and time of opening and closing of subscription lists It states the time and day when applicants can deposit money in bank account of company Amount payable on each share and on each application Full particulars of auditors and legal advisors of the company appointed under the Ordinance Any personal interest of any director or promoter in the promotion of the company © Emile Woolf International The Institute of Chartered Accountants of Pakistan Business Law Voting rights on the shares of the company and any restrictions on it as per articles of association of the company If the company had already commenced business then length of time from the date of commencement of business shall also be mentioned in the prospectus Purpose or the activity for which the proceeds of the issue of shares shall be used Details if the shares are to be issued for a consideration otherwise than in cash Summery in columnar form of the earnings of the company for each of the last three financial years Pending litigations of the company or its subsidiaries other than the routine litigations As we can now see that all the contents of the prospectus lead to one conclusion, whether the person reading the prospectus should decide to buy the shares or debentures of the company or he should decide otherwise The company would surely want that all the good aspects are shown and people are allured to invest in the company but this is the time when regulators like, Commission, Stock exchange and Registrar come to the rescue and ask the company about every fact written in or omitted from the prospectus, before approving the prospectus for issue to the general public It is customary for the authorities to require the company to arrange and write the risk factors separately All the factors that could be risky for investment in the company are written in a single paragraph and readers of the prospectus are specifically advised to read at least that paragraph before making any investment decision It does not however mean that the authorities act just to discourage the company and its promoter but it is the duty of authorities to make sure the provision of accurate information to the prospective shareholders or members 1.5 Reports to be set out in the prospectus In addition to the above contents, following reports, by the auditors of the company shall also be set out in the prospectus; namely A report on assets and liabilities at the last date when accounts were prepared and Profit and loss account of the company along with any unusual or extraordinary or non-recurring item Dividends paid by the company during last five financial years for all classes of shares including when dividend was not paid and also on the matter when accounts of the company were not prepared for any year during last five years If the company has got subsidiaries the auditor’s report shall deal with the profit and loss accounts and statements of assets and liabilities of the subsidiaries as well along with the same financial statements of the company itself If the proceeds of the issue shall be used for the acquisition of any business or any interest therein then the auditors (of that company whose shares or interest is proposed to be purchased) shall report separately on last five year’s profits and losses of that business or company and assets and liabilities of that business or company at a date not earlier than 120 days of the prospectus © Emile Woolf International The Institute of Chartered Accountants of Pakistan Examinable Supplement Further If the proceeds of the issue shall be used for the acquisition of any business or any interest therein, which shall make the other company as subsidiary of the company, then the auditors (of that company whose shares or interest is proposed to be purchased) shall report separately on last five year’s profits and losses of that business or company and assets and liabilities of that business The report shall also explain that what difference would it have been on the profit and loss of the company (issuing a prospectus) had the company always held those shares in that company which are proposed to be purchased now Further if that other business or company has subsidiaries, the report shall include the performance and assets and liabilities of that business as well 1.6 Timing of prospectus The company may issue a prospectus at any point in time of its life If the company wants to issue shares to the public before commencement of business it may opt to issue a prospectus at the very moment Or otherwise the company may opt to not to issue shares to the general public initially and start the business without involving the general public in the company, in such a case however company would be required to file a statement in lieu of the prospectus with the registrar before obtaining a certificate to commence the business In future whenever the company decides to issue shares or debentures to the general public, it shall be required to issue a prospectus and get the shares or debenture, as the case may be, listed on stock exchange Once issued and securities allotted under a prospectus, its existence ends and it is not like something the memorandum or articles of association It is intact for a certain period of time for which company is in a process to issue shares or debentures etc 1.7 Expert to be independent (Section 90, Securities Act, 2015) A prospectus shall not contain a statement purporting to be made by an expert unless the expert is a person who is not, and has not been, engaged or interested in the formation or promotion or in the management of the company Definition: Expert “Expert” includes banker, securities advisor, engineer, valuer, accountant, lawyer and any other person whose profession gives authority to a statement made by him Illustration: Approval from the Commission ABC Limited, a listed company, has decided to issue shares to the general public The company has submitted a copy of prospectus to the Commission for its approval: a) At the same time it is planning to publish and circulate the prospectus to inform the general public, or b) Due to some unavoidable reasons the company couldn’t circulate the prospectus, approved by the commission, and issue new shares After three months the company decides to issue those shares based on the prospectus approved by the Commission three months back © Emile Woolf International The Institute of Chartered Accountants of Pakistan Business Law The Securities Act, 2015 does not allow a company to issue shares unless the Commission approves the prospectus A prospectus approved by the Commission is valid for sixty days from the date of approval or such longer period as approved by the Commission Consequently, a) ABC limited shall have to wait for the approval from the Commission or b) apply for grant of extension for the validity of the Prospectus beyond sixty days 1.8 Expert’s consent to issue of prospectus containing statement made by him (Section (90) Securities Act, 2015) A prospectus that contains a statement purporting to be made by an expert or to be based on a statement made by an expert shall not be issued, circulated or published unless: i The expert has given, his written consent to the issue of the prospectus with the statement in the form and context in which it is included; and ii There appears in the prospectus a statement that the expert has given and has not withdrawn his consent 1.9 Criminal liability for defective prospectus (Section 92, Securities Act, 2015) A person commits an offence, who: i Makes a misleading, incorrect, untrue or deceptive statement in a prospectus; or ii Omits information or a statement from a prospectus that Securities Act, 2015 or any rule or regulation made under Securities Act, 2015, requires to be included in the prospectus 1.10 Compensation for false or misleading prospectus (Section 93, Securities Act, 2015) Every offeror, issuer, director of an offeror or issuer or any person who has signed the prospectus shall be liable to pay compensation to any person who acquires any of the securities, in reliance upon the prospectus, to which the prospectus relates and suffers loss in respect of them as a result of any incorrect, untrue or misleading statement in the prospectus or the omission from it of any matter required to be included under Securities Act, 2015 © Emile Woolf International The Institute of Chartered Accountants of Pakistan Examinable Supplement CHAPTER REVIEW Chapter review Before moving on to the next chapter check that you now know about: the concept, need and contents of a prospectus the reports to be set out in a prospectus the concept of experts in context of a prospectus and provisions regarding their statements © Emile Woolf International The Institute of Chartered Accountants of Pakistan Business Law Questions & Answers © Emile Woolf International 10 The Institute of Chartered Accountants of Pakistan Examinable Supplement QUESTIONS 93 Prospectus – consent of expert Quite often, a prospectus inviting persons to subscribe for shares in a company contains a statement from person(s) who are experts in their respective fields 94 95 (a) Describe the term “Expert” as explained in Securities Act, 2015 in the above context (02) (b) Narrate the conditions that a company should comply with if its prospectus contains a statement by an expert (03) Prospectus – publication and availability (a) Deo Limited (DL) has published a prospectus on March 1, 20X4 The subscription list is due to open on April 5, 20X4 Explain whether the company is in compliance with the provisions of the Securities Act, 2015 regarding the publication of its prospectus What relaxation can DL avail, in this regard? (03) (b) Identify the places where DL is required to make available the copies of its prospectus (02) Prospectus - registration The Securities and Exchange Commission of Pakistan shall not approve a prospectus unless certain requirements of the Securities Act, 2015 are complied with You are required to list such requirements (06) 96 Prospectus – relief from liability Mr Zafar a director of Hilltop Limited, a listed company, has asked you to explain the provisions of Securities Act, 2015 regarding: Criminal liability for defective prospectus Compensation for false or misleading prospectus Being a consultant you are required to explain the relevant provisions of the Securities Act, 2015 to Mr Zafar (04) 97 Minimum subscription Under the applicable legal framework, what are the contents of the prospectus as regards minimum subscription? (05) © Emile Woolf International 11 The Institute of Chartered Accountants of Pakistan Business Law ANSWERS 93 94 Prospectus – consent of expert [Section 91, Securities Act, 2015] (a) “expert” includes banker, securities advisor, engineer, valuer, accountant, lawyer and any other person whose profession gives authority to a statement made by him (b) A prospectus that contains a statement purporting to be made by an expert or to be based on a statement made by an expert shall not be issued, circulated or published unless: (i) the expert has given, his written consent to the issue of the prospectus with the statement in the form and context in which it is included; and (ii) there appears in the prospectus a statement that the expert has given and has not withdrawn his consent Prospectus – publication and availability [Section 88(4) (5)(6) & (7), Securities Act, 2105 (a) The prospectus shall not be published in the newspapers less than seven (7) days or more than thirty (30) days before the commencement of the public subscription Since, Deo Limited published the prospectus on March 1, 20X4, which is more than 30 days before the subscription list was due to open i.e April 5, 20X4 The Company is in violation of the requirements of above provision of Law (b) Deo Limited is required to make available sufficient number of copies of its prospectus at the following places: (i) Free of charge, from the date of its publication in the newspapers till the closing of the subscription at the registered office of the Company, with all the securities exchanges of the country, with all the bankers to the issue, the concerned share registrar, the concerned ballotter and the concerned credit rating agency, if any (ii) The prospectus in full text and the shares subscription form shall be uploaded on the website of the Company and shall remain there from the date of its publication in the newspapers till the closing of the subscription (iii) The Company shall not issue, circulate, publish, telecast or broadcast without the prior written approval of the Commission, an advertisement, other than a prospectus, announcing a public offer of securities for which a prospectus is required unless a prospectus has been published and the advertisement gives an address in Pakistan from which it can be obtained (iv) The Company shall not issue, circulate, publish, telecast or broadcast without which it can be obtained © Emile Woolf International 12 The Institute of Chartered Accountants of Pakistan Examinable Supplement 95 Prospectus - registration The registrar shall not register a prospectus unless the following requirements have been complied with: 96 i) Prospectus is dated ii) It shall state the matters and reports specified in the Second Schedule iii) Experts whose statements are included have not been connected with the formation, promotion or management of the company iv) Experts whose statements are included in the prospectus have given written consent for issue of such statements v) All requirements regarding approval, issue and registration have been complied with vi) The prospectus is accompanied by the written consent of the auditor, legal adviser, attorney, solicitor, banker and the broker who have agreed to act in that capacity Prospectus – relief from liability Section 92 and 93 of the Securities Act, 2015 deal with the required explanation i.e Criminal liability for defective prospectus and Compensation for false or misleading prospectus (1) Criminal liability for defective prospectus: A person commits an offence, who:- (2) (a) makes a misleading, incorrect, untrue or deceptive statement in a prospectus; or (b) omits information or a statement from a prospectus that Securities Act, 2015 or any rule or regulation made under Securities Act, 2015, requires to be included in the prospectus Compensation for false or misleading prospectus: Every offeror, issuer, director of an offeror or issuer or any person who has signed the prospectus shall be liable to pay compensation to any person who acquires any of the securities, in reliance upon the prospectus, to which the prospectus relates and suffers loss in respect of them as a result of any incorrect, untrue or misleading statement in the prospectus or the omission from it of any matter required to be included by or under the requirement of Securities Act, 2015 97 Minimum subscription The amount of minimum subscription must be stated in the prospectus This includes: Purchase price of property to be purchased Preliminary expenses including underwriting commissions etc Repayment of any money borrowed for above matters Working capital Any other expenditure If the company intends to meet all or any of the above needs from any source other than the issue of shares, such source shall be disclosed © Emile Woolf International 13 The Institute of Chartered Accountants of Pakistan ,ĞĂĚ KĸĐĞͲĂŚŽƌĞ WŚŽŶĞ͗ ;ϵϮͲϰϮͿ ϯϳϱϭϱϵϭϬͲϭϮ͕ h E͗ ϭϭϭͲϬϬϬͲϰϮϮ͕ ĞͲŵĂŝů͗ lahore@icap.org.pk /ƐůĂŵĂďĂĚ KĸĐĞ͗ ^ĞĐƚŽƌ 'ͲϭϬͬϰ͕ DĂƵǀĞ ƌĞĂ͕ /ƐůĂŵĂďĂĚ h E͗ ϭϭϭͲϬϬϬͲϰϮϮ͕ &Ădž͗ ;ϵϮͲϱϭͿ ϵϭϬϲϬϵϱ͕ ĞͲŵĂŝů͗ ŝƐůĂŵĂďĂĚΛŝĐĂƉ͘ŽƌŐ͘ƉŬ &ĂŝƐĂůĂďĂĚ KĸĐĞ͗ ϯϲͲ͕ ŽŵŵĞƌŝĐĂů ĞŶƚĞƌ͕ EĞĂƌ DƵũĂŚŝĚ͕ ,ŽƐƉŝƚĂů DĂĚŝŶĂ dŽǁŶ͕ &ĂŝƐĂůĂďĂĚ WŚŽŶĞ͗ ;ϵϮͲϰϭͿ ϴϱϯϭϬϮϴ͕ &Ădž͗ ;ϵϮͲϰϭͿ ϴϱϬϯϮϮϳ͕ ĞͲŵĂŝů͗ ĨĂŝƐĂůĂďĂĚΛŝĐĂƉ͘ŽƌŐ͘ƉŬ DƵůƚĂŶ KĸĐĞ͗ ϯƌĚ &ůŽŽƌ͕ WĂƌŬůĂŶĞ dŽǁĞƌ͕ KĸĐĞƌƐ͛ ŽůŽŶLJ͕ EĞĂƌ ŝĚ 'ĂĂŚ ŚŽǁŬ͕