Comparative Securities Law

Perspectives from Kuwait, the UK and US

Abdullah Alshebli

• Publisher: Routledge
• Year: 2022
• ISBN:
  9781000613377
• Edition: 1
• Topic: Jura
• Subtopic: Rechtstheorie & -praxis

Providing a clear introduction to securities laws and how they are applied in different countries, this book compares the enaction and enforcement of securities laws in Kuwait, the UK and the USA.

It explores the philosophy behind securities laws and methods of application in Kuwait, the US and UK to consider the benefits and the risks associated with trading in securities. Using case studies from each jurisdiction, the book takes a comparative approach to examining the different laws that have been enacted with a view to addressing problems that have developed on stock exchanges and in corporate governance. It details the different regulatory authorities in the different countries and the rules and laws that are used to ensure that markets continue to trade and that investors are protected, highlighting the differences in common law, civil law and Middle Eastern law approaches to securities and the bearing of these in the modern securities trade.

Contributing to the general discipline of securities law and providing valuable insights into Middle Eastern law, the US and UK, this book will be of interest to students of international law, scholars, policy makers and government officials.

1 What Are Securities?

DOI: 10.4324/9781003301875-2

This chapter gives a clear and simple definition of what securities are, which provides the foundation of the book. The purpose of securities, the benefits of trading in securities, and the risks associated with securities are set out in detail. In the second part of the chapter, different types of securities are discussed and examples of each are provided.

1.1 What Are Securities?

To understand the subject of securities law one needs to appreciate what is meant by the term securities. ‘Securities’ is a broad term that refers to any form of ownership or beneficial interest in a business entity. A security is a tradeable financial asset that can further be categorised into debt securities (e.g., banknotes, bonds, and debentures) and equity securities (e.g., common stocks).

Securities law relates to the group of laws that seeks to regulate the sale or transfer of these securities or business interests. Typically, securities are investments traded on a stock market. They can include such items as:

• Bonds: a creditor relationship with a government body or a firm (bonds, sukuk,¹ and debt securities).² 1 An alternative financial investment to bonds are sukuk instruments, which perform an equivalent function to bonds and loans used in the Western financial system, but use Sharia-compliant financial instruments. They are structured to pay a return linked to the assets that the bond has funded, so that they are not paid in a conventional sense. They are a form of asset-based and profit-sharing instrument. Iain G MacNeil, An Introduction to the Law on Financial Investment (2nd edn, Hart Publishing Ltd 2012) 146. 2 Debt securities are proof of a monetary debt which must be repaid according to certain terms that define the interest rate and maturity/renewal data. <www.imf.org/external/np/sta/wgsd/pdf/051309.pdf>.
• Equities: an ownership position in a publicly traded company’s shares.³ 3 Three rights are given to an investor who buys shares. The first is the right to vote. The second is the right to take delivery of a corporation’s residual cash flows. The third is the right, after all claimants have been paid, to the residual assets in liquidation. Stephen J Choi and A C Pritchard, Securities Regulation: The Essentials (Aspen Publishers 2008) 10.
• Derivatives: rights to ownership as represented by an option.⁴ 4 The purchaser has an option rather than an obligation to buy or sell, so the consumer buys the option against a sum of money. The premium paid is the highest loss that the purchaser of an option can suffer. MacNeil (n 1) 154.

Each of these categories can furthermore consist of different types as will be discussed in the following.⁵

5 Each of the securities has advantages and disadvantages. For example, one of the advantages of issuing shares is that the issuing companies do not have to repay the borrowers’ money except in the event of liquidation.

Securities in the US are defined by the Securities Act of 1933. Section 2 (a)(1) of this Act defines securities as follows:

(1) The term ‘security’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, pre-organisation certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘security’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

From the above definition, it is clear that the term ‘security’ includes several different items and has a fairly wide application. However, it should be noted that in general, the term applies to stocks and bonds as traded on the stock exchange.

1.1.1 Purpose of Securities

Securities allow an entity issuing them (known as the issuer) to attract people or institutions willing to invest money (known as the investor). By issuing securities, the entity can raise capital or gain investment in a specific project. For investors, buying and later selling securities allows them to increase the value of the money invested, or to earn dividends paid out over time.

The most well-known type of securities is publicly traded shares. The terms ‘stocks’, ‘shares’,⁶ and ‘equities’ are synonyms for each other and are terms used to describe units of ownership in a company. The owner (known as a shareholder) has a right to a part of the company’s earnings if a dividend payment is made, as well as voting rights.

6 There are different types or categories of shares, such as ordinary shares and preference shares. These can be further categorised into deferred ordinary shares, non-voting ordinary shares, redeemable shares, preference shares, cumulative shares, and redeemable preference shares. Each of these shares carries a different kind of ownership and confers different kinds of rights within the company to the holder or owner of the share. This will be discussed in greater detail later in this book.

1.1.2 Benefits of Securities

The main aim of investors is to increase the value of their money. By investing in debt securities, such as bonds or by buying shares or equity, investors can grow the value of their investments. In most cases, investors aim to improve their financial position through capital gain (growth),⁷ or income (interest payments of dividends),⁸ whilst retaining the ability to convert their investments to cash quickly (in the case of shares).^{9 , 10}

7 This means when the companies increase in value, the share price will usually go up and they will be worth more. 8 Dividends are an income similar to interest. However, interest is paid to depositors who place their money in a bank, while dividends are paid to shareholders who buy shares of a company. Deposits in a bank pay an income which depends on interest rates. It is automatic. No one needs to approve it. Dividends from shares are not automatically paid if the company makes a profit. It is the board’s decision. 9 This means owners of shares have the right to sell their shares at any time during the listing period in a stock exchange in an easy way. 10 Thomas Anthony Guerriero, How to Understand and Master Securities Laws and Regulations (Trafford: E-Books 2012, isbn: 978-1-4669-5490-8 (e)) 78.

Owners of ordinary shares share in the profits of the company (dividends), vote in company decision-making, and have the right to attend an annual meeting.¹¹ Usually, the buyers of ordinary shares in particular companies will be the part-owners of those companies.¹²

11 Rodney Hobson, Shares Made Simple: A Beginner’s Guide to the Stock Market (2nd edn, Hamman House 2012) 3. 12 It is generally accepted that the separation of ownership and control of the company is at the root of the corporate governance problem. How owners and managers interact with each other is the subject of different theories, the most popular of which is the agency theory. Agency theory describes the relation between shareholders and managers as a contractual one similar to that between a principal and an agent where the latter has a fiduciary duty to the former. However, it is debatable whether shareholders are actually owners of the company. Lynn Stout stated that shareholders own a share but the company owns itself. It is a separate legal unit and according to company law, directors owe a fiduciary duty to the company. Lynn Stout, ‘Corporate Governance – What Do Shareholders Really Value?’ (YouTube) <www.youtube.com/watch?v=s5Eoy988728>.

1.1.3 Risks of Trading in Securities

Although debt equities and shares have a better financial return over the long term, they are not entirely without risk. Whilst the risk associated with government bonds is low, there have been occasions when sovereign states have defaulted on debt repayments. Corporate bonds, too, have proved to be risky investments. However, the risk associated with debt equities is generally low when compared with the stock market.

The main risk associated with buying stocks is the changing value of the shares. Share prices fluctuate daily which affects the value of the money invested. Furthermore, in the event of a company getting into financial difficulty or going bankrupt, the share price falls to zero meaning a loss of the money invested by the shareholder.

There are three main ca...

Table of contents

• Cover
• Half-Title
• Title
• Copyright
• Contents
• Introduction
• 1 What Are Securities?
• 2 Securities Law
• 3 Laws Related to Securities
• 4 Stock Exchanges
• 5 Regulatory Authority
• 6 Disclosure of Inside Information
• 7 Securities Crimes
• 8 Sanctions
• 9 Corporate Governance
• Conclusion
• Index