Mohsen Shamsollahi
Abstract
Extended Abstract Introduction Non-compliance with the disclosure requirements in the securities market incurs losses to investors such as the denial of informed decision making and stock trading at artificial (inflationary) prices. Causation between the harmful act and the loss is one of ...
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Extended Abstract Introduction Non-compliance with the disclosure requirements in the securities market incurs losses to investors such as the denial of informed decision making and stock trading at artificial (inflationary) prices. Causation between the harmful act and the loss is one of the main elements of civil liability, and compensation of investors’ losses is subject to causal relationship between the breach of the securities disclosure requirements and the loss suffered. However, there are numerous factors affecting investor decision making and the price of securities and it is not possible to determine what part of the price change is due to the violation of these requirements. This is the main reason that in Iranian Law Article 43 of the Securities Market Act (in relation to the primary market) has not been enforced until now, and in practice, despite widespread violations of disclosure requirements in recent years, the losses derived from violating of these requirements has not been compensated. Therefore, this article will examine the comparative approach to the question of what strategies are available to facilitate establishment of causation in civil liability cases for violation of the legal requirements regarding information disclosure. In summary, it seems likely to be helpful in these lawsuits providing a judicial or legal presumption about the causation between securities price differences over a specific period of time and violation of the disclosure requirements. Theoretical framework given the specific characteristics of the securities markets (where there is a risk and probability with a significant role, and always a degree of uncertainty), and the particular conditions for Civil liability (such as the need for a certain loss and the need to establish a certain causal link between the harmful act and the harm), the possibility of applying civil liability rules for compensating the damages caused by the violation of disclosure requirements is Doubtful. In this article we want to examine the legal ways for establishing a causal connection between violation of the disclosure requirements and the loss of investors. Methodology The research methodology of this paper is an analytical method and the subject will be studied comparatively (both in French and US law) in order to discover the legal ways for establishing a causal connection between violation of the disclosure requirements and the loss of investors. Results & Discussion The application of civil liability rules in these cases is faced with legal barriers, mainly due to the difficulty of proving the causation between violation of the disclosure requirements and the loss of investors. In fact, what is related to civil liability is that failure to comply with information disclosure requirements has led to a loss to the investor, and in cases where the investor has suffered losses from adverse market conditions, this loss will not be recoverable. So, the main problem with civil liability is that it can’t be determined how much the damage inflicted on the investor results from a breach of the disclosure requirements and how much of this loss derives from the venture risk. This will be a serious obstacle to obtaining a causal relationship in these cases. Conclusions & Suggestions For resolving legal problems against civil liability derived from violation of legal disclosure requirements in the securities market, it is necessary to anticipate certain mechanisms such as establishing the presumption of a causal relationship. So, concerning the establishment of a causal relationship and a certain loss I will propose a presumption upon which in the event of a breach of the legal requirements of the disclosure of information, all price changes that occur on the date of disclosure of incorrect information are caused by false information. In contrast, in Iranian law despite French law, it does not seem possible to apply the theory of loss of opportunity in these cases. This is because the theory of loss of opportunity in Iranian law is a nascent theory and has not yet been accepted by the legislature or the judiciary. So the acceptance of a particular interpretation of this theory in civil liability claims for breaches of information disclosure requirements based on the loss of an abstract opportunity seems far-fetched in Iranian law. In particular, the application of this theory to the disputed claims in French law itself has been severely criticized in various respects, such as its inconsistency with the principle of full compensation.
Mohsen Shamsollahi
Abstract
Introduction
Non-compliance with the disclosure requirements in the securities market incurs losses to investors such as the denial of informed decision making and stock trading at artificial (inflationary) prices. In different legal systems, for compensating these losses civil liability is anticipated ...
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Introduction
Non-compliance with the disclosure requirements in the securities market incurs losses to investors such as the denial of informed decision making and stock trading at artificial (inflationary) prices. In different legal systems, for compensating these losses civil liability is anticipated for issuers and their directors. Legally, it is questionable that with regard to the specific features of securities markets, basically, how can civil liability rules be applied for compensating the losses derived from non-compliance with these requirements? Economically, considering that for economic justifying civil liability there must be a specific function for civil liability, it is questionable that what is the main function of civil liability? In short, it seems that the application of civil liability rules in these cases is faced with serious legal barriers, which requires a special mechanism (such as causation presumption) for compensating these losses. Also the main purpose of civil liability in these cases is compensating the damages that have been reached to investors unduly.
Theoretical framework
the specific characteristics of the securities markets given (where there is a risk and probability with a significant role, and always a degree of uncertainty), and the particular conditions for realization Civil liability (such as the need for a certain loss and the need to establish a certain causal link between the harmful act and the harm), the possibility of applying civil liability rules for compensating the damages caused by the violation of disclosure requirements is Doubtful. In this article we want to examine the legal possibility and economic efficiency of civil liability in these actions.
Methodology
The research methodology of this paper is an analytical method and the subject will be studied comparatively (both in French and US law) in order to discover a logical relationship between securities law and tort law and how we can recover investors’ losses derived from non-compliance with these requirements. We will use simultaneously economic and legal analysis in order to investigate this matter.
Results & Discussion
The application of civil liability rules in these cases is faced with legal barriers, mainly due to the difficulty of proving certainty of losses, the collectivity of the securities market and privac of contract in secondary market transactions. In fact, what is related to civil liability is that failure to comply with information disclosure requirements has led to a loss to the investor, and in cases where the investor has suffered losses from adverse market conditions, this loss will not be recoverable. So, the main problem with civil liability is that it can’t be determined how much the damage inflicted on the investor results from a breach of the disclosure requirements and how much of this loss derives from the venture risk. This will be a serious obstacle to obtaining a causal relationship as well as the certainty of a compensable loss in these cases. The other problem is primary market, the issuer himself is a contract party, in the secondary market he is not a party of the contract. Being issuer a third party in the secondary market transactions may effect on civil liability arising from Non-compliance with the disclosure requirements.
Also, from economic perspective the efficiency of compensatory and dissuasive function of civil liability in these cases is frequently questioned. It is said that issuer’s liability in these cases will result in circularity, because of the relative overlap between the wrongdoer and the victim. But the circularity is partial and relative, and regarding the independence of the legal personality of the company from shareholders, there is no logical objection to this case. Another objection raised in order to undermine the compensatory and dissuasive function in function of civil liability in these cases is that the imposition of a final liability on a shareholder who has committed no breach of the disclosure requirements is not fair. While there is no reason to impose liability on investors that are as innocent as plaintiff. However Shareholders who have the power of electing and changing managers should not considered as innocent.
Conclusions & Suggestions
For resolving legal problems against civil liability derived from violation of legal disclosure requirements in the securities market, it is necessary to anticipate certain mechanisms such as establishing the presumption of a causal relationship, to facilitate compensation of these losses. So, concerning the establishment of a causal relationship and a certain loss I will propose a presumption upon which in the event of a breach of the legal requirements of the disclosure of information, all price changes that occur on the date of disclosure of incorrect information are caused by false information.
The objections raised by the advocates of economic analysis of law about the compensatory function of civil liability in the cases are not admissible, and the main purpose of civil liability in these cases can be to compensate the investors.
Hassan Rahpeik; Mohsen Shamsollahi
Abstract
Introduction
The share represents the right of its holder on a part of the company, but it is distinct from the Joint ownership of a property. Although the nature of the right of the owner of securities is closer to the objective rather than subjective right, intangibility of the securities make it ...
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Introduction
The share represents the right of its holder on a part of the company, but it is distinct from the Joint ownership of a property. Although the nature of the right of the owner of securities is closer to the objective rather than subjective right, intangibility of the securities make it difficult to identify featuresand assess the quality of the securities for potential investors.This aspect of securities has resulted in imposing the duty to disclose the information on securities transactions on the primary and secondary market in some legal systems. In Iranian law, Securities Act of 2004 created the mandated disclosure system for securities transactions in the primary and secondary market. In this article, it is intended to examine if this duty is justifiable according to the special foundations of the Iranian legal system; and if yes, based on what foundations. In short, it can be stated that, given the special features and specific rules governing securities transactions, it is a significant imbalance between investors and powerful market participants in accessing to the information there, and it seems to be necessaryto impose the duty to the disclosure of material facts on the stronger party.
Theoretical Framework
Traditionally, according to the principle of contractual freedom, the parties are free to maintain their own interests in the contractual relationship, because they are free to enter into legally binding agreements. Thus in the contract law, when one of the parties hasthe information that is necessary for the other party to decide about entering into the contract, he is not obliged to inform the opposite party. In this article we have examined, contrary to the general rules of contracts and the general rule of freedom, why the issuer is obliged to disclose all of the material information to the public in securities law. We think that since the material information about the issuer is necessary for the investors to decide about buying or selling the issuer’s securities and only the issuer’s duty to disclose the information allows the investors to make informed decisions, imposing this duty on issuers is necessary.
Methodology
In this study, apart from using descriptive and analytical methods, we have done a comparative study, in order to discover a logical relationship between securities law and contract law and why in securities contracts the issuer must inform the other party and in other words the public.
Results and Discussion
In the first place, we examined if the establishment of an information disclosure system in the securities market is theoretically necessary .In this regard, some commentators believe that in order to protect investors and enable them to make informed decisions, the duty to disclose information is necessary in the primary and secondary markets, and can eliminate the imbalance existing in the market, enabling the investors to make the right investment decision. In contrast, some believe in the inadequacy of disclosure requirements to protect investors. Unsophisticated investors, even if they have all of the important information about the issuer, will not properly comprehend this information due to lack of expertise. Therefore, they suggest that prior to the issuance of the securities, the securities market regulator should not allow issuers, whose securities are undesirable, to issue securities.
Secondly, we have examined the factors justifying the imposition of the duty to disclose information in the securities market on the issuers. In this regard, this issue has been investigated in terms of economic and contract law. In terms of contract law, we have discussed that this duty is not only intended to protect the weaker contract party, but also to eliminate informationalinequalities and to create informational balance between different market activists. Economically, we have examined this duty from the perspectives of institutional, operational, and allocational efficiency, and we have also studied the impact of information on securities price.
Conclusions and Suggestions
Firstly, we think that a disclosure-based system can better protect the investors unlike merit-based systems owing to their various problems, such as high costs associated with their implementation.
Secondly, the main basis of the establishment of a mandatory disclosure system is to protect the investors and make it possible for them to make informed decisions. the intangibility of the securities has eliminated the possibility of objective examination of the securities; while in accordance with Article 216 of the Civil Code, detailed knowledge is a necessary element for concluding the securities transactions. On the other hand, these securities represent the right of the holder to the company, and the main determining factor of their value is the current status of the company and its future financial situation, while it is difficult for non-shareholders and even shareholders to obtain this information. Therefore, to inform the investors and enable them to make informed decisions, it is necessary to oblige the issuers to disclose all material information which may have an impact on investor decisions and securities price.
