Disclosure, financial misconduct and listed companies: a critical analysis of the UKLA’s continuing obligations regime
| Pages | 310-326 |
| Published date | 01 October 2005 |
| Date | 01 October 2005 |
| DOI | https://doi.org/10.1108/13590790510624800 |
| Author | Olu Omoyele |
| Subject Matter | Accounting & finance |
Journal of Financial Crime Ð Vol. 12 No. 4
Disclosure, Financial Misconduct and Listed
Companies: A Critical Analysis of the UKLA's
Continuing Obligations Regime
Olu Omoyele
INTRODUCTION
This paper is aimed predominantly at the critical
examination of the continuing obligations regime
imposed on listed public companies via the United
Kingdom Listing Authority's (UKLA) Listing Rules.
It will examine to what extent the continuing obliga-
tions provide adequate protection for a company's
shareholders (as well as potential investors, ie the
general public) against, inter alia, ®nancial misconduct
by the directors of their companies. The importance
of shielding shareholders, and others, from such mis-
conduct, has been exacerbated by recent corporate
scandals in the USA that have had far-reaching
eects on their heavily dispersed membership base.
A steady stream of ®nancial scandals has rocked the
world of business in recent times. As a result, the reg-
ulation of ®nancial information Ð and, more impor-
tantly, the detection and prosecution of gross
misconduct and fraud on the part of directors of
large corporations Ð has become the focus of consid-
erable discourse, both in the news media and in the
legal academic world. The issue of prosecution (by
both the mass media and the courts) has more recently
been concentrated in the USA; however, the sheer size
and global nature of the corporations involved mean
that the issues are nevertheless of international signi®-
cance. In any event, the United Kingdom is not
exactly impervious to such scandals; the names
Maxwell and Hollinger spring to mind. Disclosure
of information to the shareholders and to the public
has therefore become an unavoidable requirement.
Because of those various ®nancial scandals that have
rocked the corporate world in recent years,
1
aided by
the increasingly proliferated news media, numerous
proposals have been put forward to counter what is
essentially accounting fraud.
2
The condition, some-
what cheekily dubbed `Enronitis' by one commenta-
tor,
3
involves `rapidly advanced and ill-thought-out
courses of action which shift the responsibility for
doing anything onto someone else'.
4
Apart from
these scandals, the importance of reliable (and accu-
rate) accounting information is self-evident. This is
so, as `accounting information has economic conse-
quences, since such information in¯uences decisions
concerning the allocation of scarce economic re-
sources'.
5
As a result, the UK Accounting Standards
Board decided to review the UK Accounting Stan-
dards to counter the possibility of an Enron-type
scandal occurring in the UK.
The need for continuing obligations arises almost
innately out of the need for the law to protect
modern shareholders against possible malpractice by
their company's directors. This is important because
of the increasing tendency toward shareholding in
large corporations as a short-term investment mech-
anism. Such short-termism means that shareholders
are detached from the day-to-day running of their
company and so have little control over the move-
ment of the business or of the manner in which their
investment is being utilised. The fact that such
interim investments are in vogue necessitates that
such vulnerable members of a listed public company
are adequately insulated.
The Continuing Obligations Guide,
6
produced by
the Financial Services Authority (FSA) in its capacity
as the UKLA and designed to serve as a synopsis of
the continuing obligation regime, outlines in para-
graph 1.4 two underlying principles behind all conti-
nuing obligations promulgated in the listing rules:
timely disclosure of all relevant information; and
equal treatment of all shareholders.
The aim of the former is to eect mandatory disclo-
sure of all relevant information about a listed compa-
ny's business on a continuing basis, to ensure that the
market and the general public are not kept in the
dark as to information which may impact on their
various decision-making thought processes. The
latter principle is self-explanatory, as it mainly serves
to ensure that all the members of a company are
treated in an identical manner: that is, requirements
such as the timely disclosure of information must be
ful®lled in respect of all the shareholders of the
Page 310
Journalof Financial Crime
Vol.12,No. 4, 2005,pp.310±326
#HenryStewart Publications
ISSN1359-0790
company. The increasing proliferation and diversity
of shareholders in contemporary companies means
that shareholders have little or no control, or even
input, in the day-to-day running of their company's
aairs. This fact makes the need for equality in the
treatment of such a diverse range of shareholders of
paramount importance under the continuing obliga-
tions regime.
Whilst corporate governance per se is not the precise
subject matter of this research, it should be borne in
mind that it is, nevertheless, the fundamental basis
for continuing obligations; as such, it is expected to
be a recurring concept in this paper. In essence, conti-
nuing obligations may be best viewed as representing a
small aspect of the much wider scope of corporate
governance.
Continuing obligations are `continuing' by their
very nature: they continue to apply to public compa-
nies even after the initial set of requirements have been
complied with in the process of listing or quotation,
and in any case, a listed plc must continually have
regard to them. These continuing obligations are a
combination of the requirements of the single ®nancial
regulator, the FSA; UK legislation; and European
Union Directives.
7
The obligations to be considered are:
Disclosure of information (Listing Rules (LR),
chapter 9)
Transactions, including related-party transactions
(LR chs 10, 11)
Financial information (LR ch 12; Companies Act
(CA) 1985, Part VII and schedules 4± 11)
Communications with shareholders (LR ch 14;
LR 9.24)
Directors (LR ch 16 and the Model Code)
Buy-back of shares (LR 14.16 and ch 15; CA
1985, ss 143± 170 and 277).
These obligations are, presumably, not exhaustive;
additional obligations, perhaps in response to the per-
petually changing markets, will be added as deemed ®t
by the UKLA. The eectiveness of these obligations
in ful®lling their purpose of investor/public protec-
tion is the essence of this research. Whilst they are
not purported to be the only mechanisms conferring
continuing obligations on listed public companies, it
is proposed that they are the most signi®cant ones in
eecting a practical approach to investor/public pro-
tection.
8
In the following sections each of the obliga-
tions will be examined critically.
DISCLOSURE OF INFORMATION
Introduction
The ¯ow of information from a listed public company
to the general public via the market is a major aspect of
its continuing obligations. It is aimed at the distribu-
tion of information that might be expected to aect
the company's share price. Any incident which, if
made public, may in¯uence the share price of a
company inevitably leads to trading in the company's
listed securities. For example, news of a proposed take-
over bid is certain to aect almost instantaneously the
price and value of listed shares. The obligation to
disclose such information can, broadly speaking, be
categorised into general and speci®c disclosure
requirements.
The general obligation
Such information is disseminated via any one of the
®ve Primary Information Providers. LR paragraph
9.1(a) provides that a company must notify a regula-
tory information service (RIS) without delay of any
major new developments in its `sphere of activity'.
This refers to developments which are not yet in the
public domain and which may lead to substantial
movement in the price of its listed securities. `Sphere
of activity' denotes a wide duty of disclosure, since it
seems to catch even information that does not directly
relate to the company. The idea is that the general
public is given access to information that is unique to
the ®eld or sector in question. In essence, information
which may otherwise be considered as inside or specia-
list information but which may aect share price must
be revealed. David Keeling
9
believes that, as a result, a
company would have to disclose information regard-
ing, say, a technological breakthrough made by a
competitor that would result in the company's
major product becoming outmoded.
10
Arguably,
this appears a rather extreme requirement, as a
company would be forced to assess the likelihood of
a competitor's product superseding its own. On the
other hand, where a company's wealth, and perhaps
market dominance, is dependent on a single product,
the introduction of a superior product by a competitor
is bound to reduce the company's ability to compete in
that marketplace and thus diminish its viability as a
good investment apparatus.
Paragraph 9.2 of LR goes further, to require the dis-
closure of information concerning a change in the
company's ®nancial position, the performance of its
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The UKLA's Continuing Obligations Regime
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