Cases of Shareholders’ Right to Claim Compensation

His Excellency Mr. Mohammad bin Abdullah Al-Quwaiz, Chairman of the Board of the Capital Market Authority, stated that the proceeds of judicial rulings in compensation for those affected amounted in 2021 AD more than (366) million riyals, a rise of (291%) compared to 2020.

On the other hand, Committee for the Resolution of Securities Disputes (specialized in stocks, violations of speculators and compensation of shareholders) announced on its website: The increase in the value of compensation in class actions and the increase in the number of affected shareholders who have been compensated, as a result of errors and violations related to securities, noticed to be a steady increase, as it increased by (128%) until the third quarter of 2021 AD compared to 2020, while the rate of increase was (132%) during 2020 AD compared to 2019 AD. The total compensation during 2021 AD reached (214) million riyals in favor of (515) affected compared to (92) million riyals to compensate (445) affected investors in 2020 AD, and (40) million riyals to compensate (60) affected people in 2019.

Actually, we thank the efforts of the Commission and the Adjudication Committee in achieving these notable results in order to held responsible and compensate those victims, and those who advocated in Committee. We appreciate the pace of its action and being accurate.

As a contribution to the legal culture, and derived from laws, regulations and cases, we will show the most important prohibited cases in the law which result in right of shareholders to claim compensation, namely:

First: Fraud and Circulation according to internal information:

(Which criminalize that by articles 49 and 50 of the Capital Market Law). We mean the right of the affected shareholder by a contrary behavior to sell or buy based on what he obtained by a family relationship, a business relationship or a contractual relationship through internal information from the company which trade by its shares directly or indirectly based on the information he obtained which was not available to the public, and it is a criminal behavior. It grants the shareholders the right to claim compensation, by filing a lawsuit individually or by arrangement with lawyers to file a class action. One of the most famous examples of this: What happened in Mobily and Al-Khudari companies.

Second: Manipulating the prospectus, its information and financial statements:

(Which criminalize that by article 55 of the Capital Market Law). We mean the right of the affected shareholder by a behavior of the person who tampered with the prospectus, by including incorrect data on essential matters. In the same time, the person who purchased or subscribed based on that prospectus has the right to claim compensation and he has the right to demand either the company issuing the security, or its senior employees, or members of the company’s board of directors, or providers, as well as accountants, appraisers, engineers and others. This determines the different facts for each case with careful adaptation by the lawyers and the committee and one of the most famous examples of this: What happened in Al-Moajil Company.

 Third: Declaration of incorrect facts, or omission of declaration of a fundamental data:

(Which criminalize that by article 56 of the Capital Market Law). We mean the right of the affected shareholder to be compensated for his damages resulting from misleading or incorrect statements about essential facts or omission of the statement, which leads to misleading the shareholder in buying and selling it. The best-known examples for this: What happened in Mobily.

Fourth: Trading in violation of article (49) of the Capital Market Law and articles (2 and 3) of the Market Conduct Regulations which prohibit actions and practices that involve manipulation or deception, such as:

• Making a fake trading transaction.
• Entering purchase orders with the aim of affecting the share price and then selling.
• Implementing a share transaction that does not involve a change in its real ownership.
• Entering sales orders, knowing in advance that similar purchase orders in terms of size, timing and price will be entered.
• Doing any act with the aim of creating a false or misleading impression that suggests the existence of active trading operations on a share contrary to the truth.

The affected shareholder has the right to claim compensation and the committee often issues judicial decisions against offending speculators and invites those affected to claim compensation.

In this regard, we refer to para (4) of article (59) of the Capital Market Law has made among the penalties for offenders obligating them to pay no more triple the illegal gains he achieved or threefold losses he avoided as a result of this violation to the authority’s account in order to compensate the affected persons. By the time, the authority has established a special fund related to compensation,  its most significant resources is the illicit profits  imposed on the offenders and collected to the authority’s account.

In conclusion, through my knowledge of the efforts of the Commission and the Committee, and compensation cases, especially class actions.. It is expected that the amount of compensation God willing, for those affected will be bigger than in 2021 AD, and the compensation in 2023 AD will be more than that in 2022 AD, and then we will see.

Asem Alessa

Lawyer and Certified Arbitrator in Banking and Securities cases

Former Adviser to the Banking Disputes Committee