Civil Liability for Defective Disclosures in Prospectuses - Research Paper Example

Download file to see previous pages The current risks are not only occasioned by the hugeness of the business or organizational entities at play, the enormity of finances that are involved, and the complexity of the transactions that are concerned – among others. They are also arising from issues and practices of information disclosure and transparency. False disclosures in the financial statements of Enron and WorldCom, for instance, had caused catastrophic financial failures in the US.

Understandably, thus, the effectiveness of a nation’s legal system of liability is very closely watched particularly by foreign and local investors. And, when any state can avert malfeasance by economic players and/or protect the “innocent” general investors, it is going to reap and enjoy the benefits of investor confidence. In the concrete, it would expectedly boast the market performance and firm up its stability. As in the issue of capital market and its relevant subjects, the significant positive correlation between law and finance serves its purpose

The elements of the liability system of the Kingdom of Saudi Arabia particularly in pertinence to defective prospectuses are fundamentally found in the Article 55 of the Capital Market Law of Saudi Arabia, Articles 75 to 78 of the Company Regulations, and Articles 16 to 18 of the Listing Rules by the Capital Market Authority. It is deemed significant, too, to point out at the outset of this paper that these laws have as their backdrop the Islamic system of liability that is found to be applied and observed in the countries of Iran, Jordan, and Sudan. Too, through this, the affinity or proximity of the Saudi laws to their counterparts in other countries could be ascertained. This is especially important as foreign investors would always prefer familiar rules to work with.

Liability – which consists of the elements of deceit and negligence – is the responsibility to pay financial compensation as a result of an injury inflicted on others. Without specifically dealing with civil liberties arising from defective prospectuses, Article 75 of the Company Regulations paints in broad stroke the essence of civil liabilities by business organizations: “The company shall be bound by all the acts performed by the board of directors within the limits of its competence, and shall also be responsible for damages arising from unlawful acts committed by directors in this administration of the company.”

In broad terms, civil liabilities are civil remedies to any person who suffers loss because of malfeasance or fraud by others. These are considered gauges of every government’s effort to promote particularly an enticing investment climate for investors. Called “good legal rules,” they are indicators of a developed securities market as they form part of the government’s effort to protect the investors. Those who are actually and significantly damaged can lean on these legal measures for compensation – a concrete instance of investor protection (Glaeser, Johnson & Shleifer, 2001).

Similarly, the main objective of civil liabilities occasioned by defective prospectus is deterrence for the potential violators of the disclosure requirements. Deterrence means the avoidance of a particular action or omission through fear of the perceived subsequence. In the concrete, it comes in the form of imposition of some sanctions that include imprisonment, fines, or penalties – together with the stigma of criminality such as what the tenth and the final chapter of the CML contains. Conventionally, it has been determined that suitably revolting punishments are very likely to inhibit individuals from committing crimes

For a Muslim country that is Saudi Arabia, civil liabilities may have their religious function. They are perceived as resultants of the general principles of Islamic law, which prohibits any action that causes damage to others. ...Download file to see next pages Read More