capital market - corp

Capital markets law

Legal rules governing organisation of markets, access to markets, and trading of securities (on-exchange and OTC)

Core functions of capital markets law

Organisation of markets, access for issuers/investors, and trading of financial instruments

Primary goal of capital markets

Channel savings into investment, diversify risk, reduce capital costs and transaction costs

Stock exchanges (historical role)

19th century regulated markets created to prevent fraud and manipulation

Modern trading venues

Regulated markets, MTFs (multilateral trading facilities), OTFs (organised trading facilities)

Regulated market (definition)

A multilateral system operated by a market operator where trading occurs under non-discretionary rules

OTC trading

Over-the-counter trading outside regulated venues between parties directly

Primary market

Market for issuance of new securities (IPO, capital raising)

Secondary market

Market for trading already issued securities

IPO (Initial Public Offering)

Process of offering shares to the public for the first time to raise capital

Underwriting

Banks purchase securities from issuer and resell them to investors, reducing issuer risk

Capital market participants

Issuers, investors, intermediaries, and market infrastructure providers

Intermediaries in capital markets

Banks, brokers, investment firms, analysts, rating agencies

Access to capital markets

Issuers must publish prospectus or disclosure documents to enable informed investor decisions

Why prospectus is required

To ensure investors can assess risks and make informed investment decisions

Collective investment scheme

Pooling investor funds to invest in diversified portfolios of securities

Why investors use intermediaries

Because trading requires expertise, regulation, and access to market infrastructure

Legal nature of securities purchase

Purchase of rights governed by national private law + commercial law rules via intermediaries

Capital markets legal framework mix

Public law, private law, and criminal law combined

Regulatory supervision in capital markets

Highly harmonised EU public law under supervisory authorities

Main regulatory objectives

Efficiency, investor protection, financial stability, and sustainability

Efficiency in capital markets

Ensures capital flows to highest-value uses with low costs and high liquidity

Investor protection goal

Ensures transparency, disclosure, and fair treatment of investors

Why trust matters in capital markets

Markets are anonymous; trust ensures participation and liquidity

Equal treatment principle

All investors must be treated equally in access to information and trading conditions

Financial stability (definition)

Ability of financial system to allocate resources, price risk, and absorb shocks

2007/08 crisis lesson

Systemic risk arises from interconnected financial institutions and trading practices

ESFS system

European System of Financial Supervision framework

EBA

EU Banking Authority

ESMA

EU Securities and Markets Authority

ESRB

European Systemic Risk Board for macroprudential risk

ESMA objective

Ensure financial system stability and effectiveness in EU markets

Sustainability in capital markets

Integration of environmental, social, and governance (ESG) considerations

SDGs role in EU finance

Direct capital flows toward sustainable investments

Sustainable finance goal

Align financial system with Paris Agreement and UN 2030 Agenda

Disclosure function (regulation)

Provides transparency to markets and investors

Regulatory function (disclosure)

Shapes behaviour of issuers and intermediaries

Monitoring function (disclosure)

Allows supervisors and markets to detect risk and misconduct

History of EU capital markets law phases

Evolution from national stock exchange law to Capital Markets Union

Capital Markets Union goal

Create integrated EU capital market to increase investment and competition

CMU benefits

More investment, lower capital costs, deeper integration, greater stability

Lamfalussy process

Multi-level EU regulatory framework for financial services law

Trading venue types

Regulated market, MTF, OTF

Settlement period (T+2)

Standard rule that securities transactions settle within two days

OTC vs regulated trading

OTC is bilateral; regulated markets are structured multilateral systems

Securities definition (MiFID II)

Transferable securities tradable on capital markets excluding payment instruments

Transferable securities

Standardised, negotiable instruments such as shares, bonds, depositary receipts

Debt instrument

Tradable obligation requiring issuer to repay a sum at maturity

Market participants (4 groups)

Issuers, investors, intermediaries, and market infrastructure providers

Primary vs secondary market roles

In primary: issuer sells; in secondary: investors trade among themselves

Market abuse regulation (MAR)

Prohibits insider dealing, disclosure abuse, and market manipulation

Inside information

Non-public, precise, price-sensitive information

Insider dealing

Using inside information to trade or benefit unfairly

Market manipulation

Artificially influencing price or demand through false signals or misinformation

Issuer disclosure duty (MAR Art 17)

Requires public disclosure of inside information

Transparency Directive (TD)

Requires periodic and ongoing disclosure by listed issuers

Prospectus Regulation

Requires disclosure document for public offering or listing admission

Disclosure levels in EU capital markets

Primary (prospectus), secondary (periodic reports), ongoing (inside info)

Capital markets regulatory philosophy

More capital raised = more disclosure obligations

Takeover bid definition

Public offer to acquire control of a company by purchasing shares

Market for corporate control

Takeovers discipline management by allowing replacement of inefficient boards

Hostile takeover bid

Offer made without consent of target management

Mandatory bid rule

Acquirer gaining control must offer to buy all shares from minorities

Purpose of mandatory bid

Protect minority shareholders from control shifts and tunnelling risks

Control threshold (EU)

Usually around 30% voting rights but defined by national law

Equitable price rule

Mandatory bid price based on highest price paid in prior 6–12 months

Takeover Directive (TOD) goal

Harmonise shareholder protection during takeover processes

Passivity rule

Target board must not frustrate bid without shareholder approval

White knight strategy

Target seeks alternative friendly bidder; allowed exception to passivity rule

Breakthrough rule

Removes voting/transfer restrictions during takeover period

Defensive tactics in takeovers

Share buybacks, asset sales, capital increases, mergers

Crown jewel defence

Selling valuable assets to make company less attractive to bidder

Board opinion requirement

Board must publish opinion on bid including effects on company and stakeholders

EU philosophy of ownership

Many EU firms have concentrated ownership; less dispersed than US/UK model