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Lusaka Stock Exchange Listing Rules of 2003 – Powers to ensure orderly and fair trading on the Stock Exchange – Whether Lusaka Stock Exchange has power to suspend trades in shares after sale has taken place but before trade is settled. Extent of Lusaka Stock Exchange discretion to suspend trades and regulate the market Securities (Conduct of Business) Rules – Instructions of Licencee’s client to sell shares conflicting with directive of Licencee’s regulator to suspend trading in subject shares – Licensee’s duty to observe high standards of integrity and fair dealing
Civil procedure – Costs awarded at the discretion of the court – Costs to follow the event
The Appellant was a shareholder in the Third Party of 3 000 000 shares. Following a directive from the Bank of Zambia that banks should increase their capital reserves to US$100 million, the Third Party's shareholders, at an annual general meeting (AGM) held on 28 March 2012, resolved that the Third Party was to retain all profits earned in the year so that its capital reserves would increase in accordance with the directive by Bank of Zambia. It was also resolved that the Third Party would issue bonus shares to all its shareholders appearing in the register of members, as at the record date of 18 April 2012, at the ratio of 26 to 1, that is, 26 additional shares would be issued to each shareholder for every share owned by the record date. The effect of the bonus shares issue was that it devalued the Third Party's shares from K80 to K2.96. There was, however, a delay in the issuance of the bonus shares by the Third Party and a delay in publication of the bonus issue. The publication in two daily newspapers happened on 27 April 2012. Meanwhile, the Appellant as property owner of shares in the Third Party, between 18 and 20 April 2012, engaged the 2nd Respondent to trade his shares on the 1st Respondent stock exchange without taking into account the dilutive effect of the then pending bonus issue. However, before the settlement date and prompted by the Third Party's failure to issue the bonus shares by the record date as aforesaid, the 1st Respondent on 25 April 2012 issued a notice suspending trading in the Third Party's shares on the stock exchange with effect from 24 April 2012. This included the trade in the Appellant's shares. The suspension of trade was also at the instigation of the Third Party after its shareholders, who included the Appellant, refused to change the record date to another date to accommodate the delay in the issue of the bonus shares. The 1st Respondent’s intervention was partly because the Third Party's shares were being traded at an artificial price which did not take into consideration the dilution of their value as a consequence of the bonus issue. It was therefore sought to protect members of the public who bought or were in the process of buying the Third Party's shares at the artificial price of K80.00 per share instead of K2.96 per share. The 2nd Respondent contended that it could not conclude the trade in the Appellant's shares because of the suspension. As a consequence of this, all its efforts to have the trade settled were frustrated by the suspension.
The Appellant being aggrieved by the suspension prevailed upon the 1st Respondent to settle the trade but the latter refused to do so. This prompted him to seek intervention by the Securities and Exchange Commission as regulator of the 1st Respondent but his efforts were fruitless. The Appellant was undeterred so he sought redress through the High Court by commencing an action against the Respondents claiming amongst other things that his sale of shares on the stock exchange was valid and that the Respondents breached the rules by preventing the trades from settling; and for an order for the payment of K174 605 885. 41 being the net value of the trade in question.
The High Court held that the 1st Respondent's decision to cancel the trade appeared to be logical and justified. The Learned High Court Judge justified his findings by referring to the Securities (Conduct of Business) Rules which he held places an obligation upon the 1st Respondent to ensure that high standards of integrity and fair dealing are maintained on the stock exchange and provides discretion to cancel a trade which contravenes these principles, in accordance with rule 4.27 of the Listing Rules of 2003ª. He found further that the power under rule 4.27 is reinforced by rule 2.03(10)ᵇ, which he held empowers the 1st Respondent to suspend all or part of trading activities on the stock exchange in the event of an emergency. The Appellant appealed.
1. The 1st Respondent has power to ensure orderly and efficient trading on the stock exchange and to suspend trading in any issue of securities, pursuant to rule 2.24(1) of the Listing Rules ͨ . The 1st Respondent acted within its mandate when it suspended the trade in the Third Party's shares and consequently, annulled trade in the Appellant's shares. The rule is couched in such a manner that it does not restrict the powers to suspend to a certain period of a trade. The power to suspend trading in shares can be invoked at any stage of a trade. By maintaining the record date at 18 April 2012, the Third Party's shares diluted in value from K80 per share to K2.96 per share on that date. The Appellant nonetheless went ahead to trade them at K78 per share on a subsequent date prompting the 1st Respondent to intervene because the shares in effect were not trading at their true value and the public was not aware of this fact because the bonus issue and its effect had not yet been published. Given the foregoing facts, it is understandable why the 1st Respondent suspended trading in view of its duty to protect the unsuspecting public from a trade that was clearly improper.
2. In view of the wide discretion vested in the 1st Respondent to suspend trade in shares and its other regulatory functions, it would be an injustice to the said discretion if it were to be curtailed by finding that it only emanates from rule 4.27 of the Listing Rules. This
is the case with rule 2.02(10) of the Listing Rules as well. Suffice to say that, the rules only represent, two of the various instances in which the 1st Respondent can exercise its power to cancel a trade by way of suspending trade in shares of a certain entity.
3. The 2nd Respondent as agent for the Appellant was obliged to respect the consequences of the regulator's decision to suspend trading in the Third Party's shares. The 2nd Respondent as licensee on the stock exchange was obliged to immediately discontinue the trade in the Appellant's shares. Any act to the contrary would have amounted to aiding and abetting the Appellant in his improper conduct in relation to trade on the stock exchange. This would have been contrary to the 2nd Respondent's obligation to “…observe high standards of integrity and fair dealing ..." prescribed by rule 4(a) of the Securities (Conduct of Business) Rules.
4. The award of costs is in the entire discretion of the court and in the exercise of the said discretion, the court must apply the principle that costs follow the event. Put differently, the losing party must bear the costs of the other party. Having found that the Appellant's case was unmeritorious, there was no basis whatsoever for the Learned High Court Judge to award costs to the Appellant.
ªRule 4.27 of the Listing Rules of 2003 states that "The exchange shall not give assistance to a member to annul a bargain, except where there is an allegation of fraud wilful misrepresentation, or where there is a mistake which in the judgment of the Exchange's staff would warrant its intervention".
ᵇRule 2.03(10) of the Listing Rules 2003 so far as is relevant provides that
"Without prejudice to rule 2.02 and any other provisions in the articles or these Rules, the following powers shall in addition be vested in the Board, to be exercised in such manner, on such terms and at such times as it shall see fit:
(10) to suspend all or part of the trading activities on the exchange in the event of an emergency and to take such remedial actions as it thinks fit;"
ͨ Rule 2.24(1) states in part that "... the General manager, shall have such powers as the Board or any committee may confer upon him including, in particular the following powers:-
(1) To supervise the trading activities in the Exchange and trading systems, the clearing and settlement of trades executed on the Exchange, and to take all necessary steps to maintain orderly and efficient trading in accordance with these rules, and to suspend trading in any issue of securities or by any member as provided for in these rules or as directed or authorised by the Board, any committee or the commission".