The Foundations of Dutyto Disclose theInformation on Securities Transactions

دانشنامه حقوق اقتصادی

Article 6, Volume 24, Issue 12, May 2017, Pages 139-174   

Document Type: Scientific research

DOI: 10.22067/le.v24i12.65221

Authors

Hassan Rahpeik; Mohsen Shamsollahi^*

University of Judicial Sciences

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 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.

Keywords

Securities Law; Duty to Disclose the Information; Securities Disclosure; Contractual Disclosure

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