Legal Opinion regarding scope of liabilities against buying stock brokerage membership from 3rd party.

Mr. Z

Address….

Dear Sir,

RE:     Legal Opinion regarding scope of liabilities against buying stock brokerage membership from 3rd party.

We refer to your letters no. COMPANY 1/Retail/481 dated 15April 2007 and COMPANY 1/Retail/483 dated April 18 2007 and our letter no. ……………. dated April 18, 2007 on the same subject.

From perusal of your letters and the provided documents it appears that, Company 1 (“COMPANY 1”) is looking into the prospect of acquiring membership of Company 2 (“COMPANY 2”). Since there is no scope for applying for a fresh COMPANY 2 Membership, COMPANY 1 is considering buying a share of COMPANY 2 from an existing member.

In this pursuit, COMPANY 1 has been negotiating the price and formalities with an existing member, COMPANY 2, which bought this membership on April 03, 2006 from COMPANY 1 has yet to obtain registration certificate from Securities Exchange Commission (“SEC”) to act as a stock broker.

In these circumstances, you have requested us to give our legal opinion as to the following:

1)      Legal standing of COMPANY 1 in buying the membership from COMPANY 3, an existing member of COMPANY 2.

2)      Coverage against any future claim from the shareholders of COMPANY 3 and the proprietor of COMPANY 1.

3)      What other issues COMPANY 1 should consider in order to protect its interest before negotiating the said transaction with COMPANY 3.

4)      Any other legal issues that we consider necessary to be addressed regarding the matter.

OUR OPINION:

From perusal of the provided documents, it appears that, COMPANY 1 bought a share of COMPANY 2 being Share No. 08  (“the Share”) on April 03, 2006 from COMPANY 3 by executing a Deed of Agreement for Sale dated 3rd April 2006.

From the letter dated 11 December 2006 of COMPANY 2 signed by Mr. X, Chief Executive Officer (“COMPANY 2 Letter”), it appears that the Council of COMPANY 2 has ‘apparently’ approved the transfer of the Share from COMPANY 1 to COMPANY 3. COMPANY 2 Letter does not state whether the Council of COMPANY 2 has approved the transfer of membership from COMPANY 1 to COMPANY 3.

Please note that according to Article 4 and 5 of the Articles of Association of COMPANY 2, to become a member of COMPANY 2 the following steps has to be followed:

Article 4 (4): Every candidate for membership shall sign and deliver to the Secretary an application in the form contained in this article.

Article 4 (5): The application has to be proposed and seconded by 2 (two) existing members of COMPANY 2. The application has to be accompanied by such admission fee and annual subscription and other documents as may be decided by the Council of COMPANY 2.

Article 4 (6): The application and recommendation shall be placed before a meeting of the Council and if the Council considers it expedient to proceed further, the application shall be posted on the Notice Board of the COMPANY 2.

Article 4 (8): After the notice for application for membership has been on the notice board for 14 (fourteen) days, the Council shall within a reasonable time thereafter proceed to ballot for the election of a member. To be successful in the ballot, the candidate must receive in his favour two thirds of the votes recorded.

Article 5: Every firm elected by the Council as eligible for admission shall as condition precedent to his registration as a member:

(1)   Acquire and submit to the Council for registration a share certificate for one share in COMPANY 2 together with a duly stamped and executed transfer deed or letter of allotment in his favour of such share.

(2)   Pay to COMPANY 2 such sum as may be determined by the Council from time to time as an entrance fee.

From perusal of the COMPANY 2 Letter, it is not apparent whether the steps mentioned above has been followed. We advise COMPANY 1 to inquire at COMPANY 2 and seek whether COMPANY 3. is a member of COMPANY 2.

After COMPANY 1 is sure that COMPANY 3. is a member of COMPANY 2,  COMPANY 1 may enter into a Share Sale Agreement with COMPANY 3, which contemplates and documents the whole implementation of the transactions leading to the transfer, from pre-closing conditions to be fulfilled prior to transfer and post closing conditions to be fulfilled after transfer.

Please note that the share sale agreement shall not transfer the membership of COMPANY 2 to COMPANY 1. For membership COMPANY 1 shall have to apply to COMPANY 2 in the method mentioned above or any other method authorised by COMPANY 2.

Also note that according to rule 6 (1) of the Securities and Exchange Commission (Stock – Dealer, Stock – Broker and Authorised representative) Rules, 2000, if a stock dealer or stock broker wishes to transfer its membership of a stock exchange, that stock dealer or stock broker has to submit its registration certificate to act as a stock dealer or stock broker, issued by SEC, to the stock exchange along with the application for transfer of membership. According to rule 6 (2), from the date the stock exchange approves the transfer of the membership, the registration certificate of the transferor to act as a stock dealer or stock broker, issued by SEC stands void.

Therefore, it is our opinion that, if COMPANY 1 has transferred the membership of COMPANY 2 to COMPANY 3, the registration certificate of COMPANY 1, issued by SEC, to act as a stock dealer or stock broker is at present void.

From your letter it appears that Crest Securities Limited has yet to obtain registration certificate from SEC to act as a stock broker.

So after obtaining the membership of COMPANY 2, COMPANY 1 shall have to obtain the registration certificate from SEC to act as a stock dealer or stock broker. Only after obtaining the registration certificate, COMPANY 1 may start trading as a stock dealer or stock broker.

If you have any further inquiries please do not hesitate to contact us.

Thanking you,

Yours faithfully,

………………….

For: “The Lawyers & Jurists”

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