Citation(2014) 26 SAcLJ 137
Published date01 December 2014
Date01 December 2014
AuthorWai Yee WAN LLB (National University of Singapore), BCL (Oxford); Associate Professor of Law, Singapore Management University.

This article examines the extent to which lawyers advising on the disclosure documents of their clients issued to the securities markets should be responsible for their clients' disclosure failures. It identifies the following problems with the current framework. First, there is a lack of objective due diligence standards which lawyers are expected to meet when they are advising on public disclosure documents. Second, except for takeovers, public enforcement actions against lawyers are inadequate even if they have not acted with due care and diligence in ensuring that their clients comply with their disclosure obligations. Third, private enforcement actions against lawyers are weak or non-existent. Fourth, the lack of clarity on the reporting obligation of lawyers, who suspect securities fraud committed by, or on behalf of, their corporate clients, to report up the ladder and the lack of obligation to report externally to a regulator, do not encourage lawyers to make the relevant inquiries. This article argues that the solution has to lie in imposing public oversight over the lawyers advising their clients on public disclosure documents. This is already the position taken for takeovers and there is no reason why such oversight should not be extended to all disclosure documents.

I. Introduction

1 Lawyers, together with issue managers or financial advisers, underwriters and accountants, are retained by companies entering into significant business transactions, including securities offerings or significant mergers and acquisitions. Listed companies entering into such transactions or offerors making takeover offers for listed

companies are required to issue the relevant disclosure documents to the securities market pursuant to the applicable legislative or regulatory requirements. Lawyers are engaged by these companies not only to structure, negotiate and execute the transaction but also to prepare or review the non-expert sections of the disclosure documents, which are based on information compiled and obtained from their corporate clients.

2 In theory, lawyers not only provide independent advice to, but are also in the position to monitor and control the disclosure decisions of, their clients, thereby deterring their clients from making false or misleading statements or withholding material disclosures. In some ways, they can be regarded as carrying out the function of gatekeepers to the securities market.1 In the US, § 307 of the Sarbanes-Oxley Act of 20022 and the regulations promulgated thereunder3 impose certain statutory gatekeeping responsibilities on securities attorneys.

3 In Singapore, the focus has been on increasing the regulation of the issue manager or the financial adviser, particularly in light of the recent scandals involving S-chips, which are companies listed on Singapore Exchange (“SGX”) but whose operations are predominantly in China.4 Until recently, the responsibilities of the lawyers for their clients' misstatements and omissions have not been the subject of

intense public debate or scrutiny.5 However, the decision of the Singapore Securities Industry Council (“Council”) in Re Jade Technologies Holdings Ltd (“Re Jade Technologies”)6 has put the role of lawyers advising on disclosure documents in the spotlight; in that case, it was held that solicitors acting for the offeror could be publicly censured for its false statements in public takeover documents if they (the solicitors) have fallen short of their duty of care.

4 Part II examines the role of lawyers in relation to the disclosure documents issued by their corporate clients to the securities market in Singapore and the problems in holding the lawyers to account. The focus is on the following obligations of the lawyers: (a) the obligation to conduct due diligence and verification on disclosure documents; (b) the duty to advise the client on disclosure issues; and (c) the duty to report, up the organisational ladder, should there be any suspicion or knowledge of securities fraud by the company or its management or employees. Whether the lawyer should report externally to a regulator in the absence of the client's consent is beyond the scope of this article. Part II argues that while lawyers owe duties and are theoretically liable to their corporate clients for failing to conduct due diligence in the preparation of the disclosure document, the lack of common standards of due diligence will make it difficult for a claim based on negligence to succeed (whether by the board of the corporate client or by the shareholders pursuant to a derivative action). Contributory negligence also exists to reduce the damages payable. The lack of clarity on the reporting obligation of a lawyer who suspects securities fraud committed by, or on behalf of, his corporate client, to report up the ladder does not encourage the lawyer to make the relevant inquiries lest he is tainted with knowledge. Actions premised on dishonest assistance by the lawyers are also fraught with difficulties.

5 Part III argues that, except for takeovers, lawyers advising their clients on public disclosure documents are subject to very low risks of public enforcement action or disciplinary proceedings if they are found to be wanting in care and diligence. Part IV argues that private enforcement actions by shareholders and other investors of a listed company who have suffered losses arising from the misstatements or

omissions against its lawyer are unlikely to be successful even if the lawyer has failed to act with due care and diligence.

6 Part V discusses the proposed modest solution. This article argues that reputational concerns will not be sufficient to ensure that lawyers carry out their disclosure duties properly and that public oversight over lawyers, which already exists for disclosure documents issued in public takeovers, should be extended to all disclosure documents issued to the securities market. There should also be clear prescriptive reporting obligations on the lawyers when they know or suspect securities fraud being conducted which are similar, but not identical, to those imposed pursuant to the regulations promulgated under § 307 of the Sarbanes-Oxley Act of 2002. This article also argues that the arguments against imposing such gatekeeping responsibilities are not persuasive. Part VI concludes.

7 For the purpose of this article, it focuses only on lawyers who are practising in law firms who are retained as external lawyers, and not in-house lawyers.7 This article does not address the individual lawyer's liability if he is also a director of the company. This article also does not address situations where the lawyers have deliberately colluded with the management or third parties to actively facilitate securities fraud. Instead this article concentrates on the lawyer's responsibility for failing to identify problems and for reporting when securities fraud is suspected.8 Disclosure documents refer to any document required to be disclosed to the stock exchange and/or the shareholders in connection with the business transaction either under the applicable legislation or regulation (including the Securities and Futures Act9 (“SFA”), Companies Act10 and the SGX listing rules).

II. Roles and responsibilities of lawyers to clients and civil liability controls

A. Background and disclosure documents

8 When a company makes an initial offering of securities in Singapore in conjunction with its listing, it needs to issue a prospectus.11 Once the company is listed on SGX, it is subject to continuous disclosure obligations, including the obligation to make periodic disclosures such as quarterly and annual financial reports12 and, subject to narrow exceptions, it must announce immediately information which would likely to have a significant effect on the price of securities.13 If the listed company issues further securities or enters into a significant business transaction (such as a merger or acquisition) pursuant to the listing rules, it may be required to make announce the transaction and/or despatch the circular to the shareholders to obtain their approval.14

9 In these business transactions, the boards of the companies will engage independent professional advisers such as lawyers, issue managers or financial advisers,15 underwriters (for fund-raising activities), accountants and valuers. Accountants and valuers will prepare their respective expert reports to be included in the expert sections of the disclosure documents. The remaining information, which forms the majority of the disclosure document, will be found in the non-expert sections and are normally drafted by the lawyers. In the case of a prospectus, non-expert sections include an industry overview, a business description, a management discussion and analysis of financial information, a description of the use of proceeds, risk factors and a description on interested person transactions and conflicts of interests. In the case of a shareholders' circular relating to the approval of a merger or acquisition, non-expert sections include the rationale for the transaction and the implication of the transaction on the operations of the acquirer or target.

B. Duties owed by corporate lawyer to his corporate client

(1) Background

10 The primary responsibility for the disclosure document falls on the listed company (or “issuer”) and its directors.16 In the case of a prospectus, under ss 253 and 254 of the SFA, among others, the issuer, its directors, issue manager and underwriter may be criminally and civilly liable respectively for false or misleading statements or omissions in the prospectus. It is also clear that the issuer's lawyers are not among the defendants who are liable under s 253 or s 254 of the SFA for false or misleading statements or material omission unless they elect to make statements in the prospectuses.17 Criminal liability under s 253 is strict for the issuer and its...

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