Berkeley Legal | The Role of Solicitors in Capital Market Transactions
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27 Jul The Role of Solicitors in Capital Market Transactions

The Capital Market is a market where financial instruments known as securities (i.e. shares and bonds) are issued to raise medium to long-term financing, and where such securities are traded.

The capital market comprises of two segments which are;

  1. The primary market – The market for new issues or Initial Public Offerings; and
  2. The secondary market – The market for trading in already issued securities of Public Companies.

Investments in capital market can be done via the following:

  1. Initial Public Offer of a company’s shares, conducting a Rights’ offer, private placement;
  2. Issuing debt instruments such as bonds, bank notes;
  3. Derivatives i:e futures, options;
  4. Collective Investment Schemes – this may take the form of a private equity fund, a unit trust, a mutual fund, Real Estate investment schemes etc.

For effective regulation of the market, the Securities & Exchange Commission (SEC)applies various regulatory/supervisory tools such as registration of market operators, registration of facilities and securities to be traded in the market, monitoring, enforcement and rulemaking.

CAPITAL MARKET OPERATORS

Capital market operators are the intermediaries duly registered by SEC to perform designated functions in the capital market. They facilitate the transaction of various businesses in the market.

Some of the Capital Market Operators include:

  1. Issuing houses
  2. Underwriters
  3. Brokers
  4. Investment Advisers
  5. Rating Agents
  6. Registrars – Maintain registers of company shareholders
  7. Trustees – Maintain assets on behalf of investors
  8. Funds/portfolio managers
  9. Capital Market Experts or Professionals i.e. Legal Practitioners (Solicitors)

       Rule 178 of the SEC Consolidated Rules and Regulations 2017 (As Amended) provides a list of professionals that the law recognizes as capital market experts. The rule further refers to Legal Practitioners as one of the professionals whose opinion will impact directly on capital market transactions.

THE SOLICITOR AS AN OPERATOR IN CAPITAL MARKET TRANSACTIONS

A solicitor advises a client in a public offer either as a solicitor to the company or solicitor to the offer respectively. This is because the capital market is very sophisticated and complex. It is a market open to all. The instruments traded in the capital market do not lend themselves to physical examination because they are intangible. As such, the public relies on representations contained in the offer documents in making investment decisions. It is therefore the duty of the solicitor to ensure that there is no deliberate concealment of material facts or misstatement contained in the offer documents.

Below are some of the salient roles the Solicitor plays in capital markets transactions:

SOLICITOR TO THE ISSUER:

This is the solicitor in an equity offering who advises the company making the equity offering to the public.

  1. Ensuring that the issuer is legally capable of making the offer to the public. This role will require confirming the status of the company as a Public Company, review of the memorandum and articles of association of the Company to confirm there are no restrictions, making any necessary legal amendments that may be required to the Company’s corporate documents.
  2. Reviewing all contractual documents of the Company and also the officers of the Company. This includes disclosure of Director’s interest in any contracts of the Company.
  3. Ensuring that all corporate and regulatory approvals are obtained at the prescribed time.
  4. Verification of all historical documentations of the Company.
  5. Preparation of all corporate documents and agreements required for the transaction.
  6. Review and confirmation of compliance of the contents of the offering documents.
  7. Negotiation of all transaction documents on behalf of the Issuer.
  8. Disclosure of any ongoing or threatened litigation or claim, the outcome of which could adversely affect the transaction.
  9. Preparation of comfort letter to the Issuing house and also confirmation that the Issuer has been properly advised and that the directors have collectively and individually accepted full responsibility for the accuracy of the information given in the offering documents.

 

SOLICITOR TO THE OFFER

The solicitor to the Offer is an independent professional observer acting on behalf of the general investing public and the issuing house.

  • Advising the Issuing House in relation to the offer process.
  • Verifying the accuracy and authenticity of the Issuer and Offer documentation and ensuring all condition precedents are satisfied.
  • Verification of the legal status of the company whose securities are about to be offered to the public.
  • Examining all documents, contracts and correspondences and advising the Issuing House accordingly on same.
  • Ensuring due compliance with all legal and regulatory requirements and relevant corporate approvals.
  • Review of the offering documents and relevant agreements.

 

SOLICITOR TO THE TRUSTEE

  1. Prepares the Trust Deed and ensures that the bondholders are adequately protected.
  2. Advises the Trustees on all aspects of the Trust Deed and transaction.
  3. Ensures that the Trustees comply with the laws, regulations and guidelines of the Trustee Investments Act.
  4. Advise the Trustees to ensure proper care and caution is taking in selecting corporations to invest in.

 

OTHER ROLES OF THE SOLICITOR AS PROVIDED BY SEC CONSOLIDATED RULES 2017 (As Amended)

Rule 180 of the SEC Consolidated Rules 2017 provides, “The legal practitioner shall have the following functions, amongst others”:

  1. Carry out due diligence to ensure that all information material to a transaction are disclosed in the transaction documents;
  2. Advise on the legal structure of the transaction and on legal risks associated with it;
  3. Negotiate, draft and review all legal documentations required for a transaction including but not limited to the prospectus, offer/scheme documents, trust deeds, vending agreements, powers of attorney/consents and underwriting agreements;
  4. Advise parties on disclosure obligations and general observance of and compliance with sound corporate governance principles, rules and regulations as they relate to a transaction;
  5. Advise on compliance with the requirements of the Corporate Affairs Commission, the Securities and Exchange Commission, the listing requirements of the Nigerian Stock Exchange and other relevant industry specific regulatory requirements;
  6. Certify or obtain certification of compliance with all statutory requirements by the issuer and other parties to a transaction;
  7. Make all statutory filings and provide confirmations (legal opinion) as to the enforceability and effectiveness of transaction documents;
  8. File necessary applications in Court in support of transactions and any other roles ancillary to any of the above.

 

CONCLUSION

The solicitor plays a vital role as a capital market operator to any party in a capital market transaction from start to finish.

There are enormous challenges facing the capital market particularly in terms of prevention of fraud and market abuses. On occasions, the solicitor is under-utilized in the transaction process and only called in when issues have been encountered in the transaction or to fulfill a statutory requirement in the transaction.

Engaging a solicitor timeously in any capital market transaction is therefore recommended to parties either investing or being invested in, this is to ensure that the entire transaction is valid and that there is adequate disclosure of materials in the transaction documents in order to mitigate incidents of fraud.