1. Introduction; terminology
Most European jurisdictions have developed a special sort of liability for false or misleading prospectuses. Some of these rules may be traced back to the 19th century. In England the leading cases are from 1873 (Peek v Guerney (1873) LR 6 HL 377) and 1889 (Derry v Peek (1889) LR 14 App Cas 337). In Germany the first statutory prospectus liability was introduced in the Börsengesetz of 1896; even before then there was a provision on the liability of promoters in the Allgemeines Deutsches Handelsgesetzbuch (ADHGB).
Prospectus liability denotes the liability for false or misleading prospectuses, ie prospectuses which are false, misleading or incomplete as regards information contained therein. A recent occurrence is the creation of liability for the omission to publish a prospectus at all, which some European jurisdictions have introduced. Prospectus liability rules do not cover all kinds of prospectuses, but only those which have to be published prior to the first public offer of capital investments or prior to the admission of securities to trading on a stock exchange. In these cases, there is a special need for the publication of a prospectus: when a security is first issued (initial public offering—IPO), there is a situation of asymmetric information between the issuer and the investors as regards the expected return on the investment and therefore its present value. Unlike purchasers of goods who are able to verify the quality of the product in question by way of physical examination, subscribers of capital investments need to rely on information given by the issuer or the offeror and, as the case may be, the issuing bank. At the same time, capital investments—especially shares of common stock—are highly standardized. Therefore, it is efficient to use the same information for all potential securities investors. Once the securities have been issued, there will be a market price so that prospective buyers have an indication of the value of the investment. Prospectus liability only covers the issuance of securities (also called the ‘primary market’) whereas the liability for wrong information given to investors who buy securities that have already been issued (the ‘secondary market’) is a relatively new phenomenon in European law (mandatory disclosure (securities markets)).
2. Legal obligations to publish a prospectus
Because of the great importance of reliable information about newly issued capital investments and in reaction to miscellaneous scandals, most western-European countries introduced statutory obligations to publish prospectuses in the 20th century. Sometimes these obligations have been included in the listing rules of the stock exchanges. In the 1980s, the EEC brought forward a minimum harmonization of the particularly important field of the issuance of securities. The Listing Particulars Directive (Dir 80/ 390) contained rules on the prospectus (called ‘listing particulars’) for the admission of securities to official stock exchange listings. In contrast, the Public Offering Directive (Dir 89/298) coordinated the requirements for the drawing-up, scrutiny and distribution of the prospectus to be published when transferable securities were offered to the public. However, many Member States did not follow this division and instead imposed the stricter regime of the Listing Particulars Directive on all securities prospectuses. In the end, this turned out to be a major obstacle to the emergence of a single European capital market. Therefore, the Prospectus Directive (Dir 2003/71) was enacted, which created a single European regime for securities prospectuses by way of maximum harmonization. The distinction between prospectuses relating to stock exchange listings as opposed to securities offered to the public outside the stock exchange was abolished. Maximum harmonization was achieved by way of the enactment of the Prospectus Regulation (Reg 809/2004) implementing the Prospectus Directive. In the framework of the Lamfalussy process this is a level 2 implementation measure which unified the information to be contained in prospectuses as well as its format by way of directly applicable European law. In 2010, Dir 2010/73 amended the Prospectus Directive, thereby introducing the concept of ‘key information’, which is aimed at enabling investors to understand the nature and the risks of the issuer, the guarantor and the securities.
Article 4(1) no 18 of the Markets in Financial Instruments Directive (MiFID, Dir 2004/39, financial instruments) defines securities also for the purpose of the Prospectus Directive. Accordingly, securities are mainly shares in companies, bonds and other securities giving the right to acquire or sell any such securities (derivative securities). Apart from this field of securities prospectuses, where the applicable provisions are unified by European law, some Member States have imposed further obligations to also publish a prospectus for other capital investments which do not fall under the definition of securities. For instance, in Austrian law there is an obligation to publish a prospectus when Veranlagungen are offered to the public. Similarly, in 2005, Germany introduced an obligation to publish a prospectus for the distribution of Vermögensanlagen. These terms describe investments that fall outside the scope of the Prospectus Directive because they are not securitized.
3. Requirements according to European law
Given the degree of detail and scope of information entailed by the now harmonized obligation to publish a prospectus, the absence of European harmonization with respect to prospectus liability is highly remarkable. In this regard, Art 6 of the Prospectus Directive sets only minimum requirements. Accordingly, the Member States shall ensure that responsibility for the information given in a prospectus attaches at a minimum to, as the case may be, the issuer or its administrative, management or supervisory bodies, the offeror, the person asking for the admission to trading on a regulated market or the guarantor. According to Art 6(1)2 of the Prospectus Directive the persons responsible shall be clearly identified in the prospectus, and the prospectus shall furthermore include declarations by them that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import. Pursuant to Art 6(2)(1) of the Prospectus Directive, Member States shall ensure that their laws, regulations and administrative provisions on civil liability apply to those persons responsible for the information given in a prospectus. Therefore, European law demands solely that there is prospectus liability in the first instance and that it attaches to at least one of the persons or institutions named above.
The adoption of mere minimum requirements with regard to liability rules was due to the insecurities concerning the design of the national liability laws in the several Member States. These were seen as obstacles to material harmonization of prospectus liability. An expert opinion on the laws of the then 15 Member States delivered by the Max Planck Institute for Comparative and International Private Law on behalf of the German Ministry of Finance proved no longer able to decisively influence the negotiations on this subject.
4. The content of the Member States’ laws
Even though liability for false or misleading prospectuses has diverse legal origins in the laws of the different Member States, the prerequisites for liability are similar.
a) Legal basis
A number of Member States have introduced explicit statutory provisions on prospectus liability. Most countries with Roman legal traditions apply the general clause on tort liability. For instance, in France, most civil prospectus liability cases are decided by courts in criminal matters according to Art 1382 Code civil in the form of adhesion procedures which allow victims of a crime to bring their restitution claims before the criminal court. Sometimes (eg until recently in Spanish law) prospectus liability of the issuer is seen as a liability for breach of pre-contractual disclosure duties. In the Netherlands, pursuant to Art 6:194 Burgerlijk Wetboek (BW) prospectus liability is a subset of the tort law provisions concerning misleading advertisement. Often the general liability rules remain applicable in addition to the special statutory prospectus liability regime. In England, in particular, remedies provided for by the common law supplement the provisions of the Financial Services and Markets Act 2000.
b) Claimants and defendants
According to the laws of all Member States, the first subscribers of newly issued securities are entitled to file prospectus liability claims. Less obvious is the standing of those investors who bought a security in the secondary market relying on a false or misleading prospectus. Within certain boundaries—driven by the attempt to restrict liability risk for the defendants to a manageable extent—some Member States (eg Germany and Austria) award damages to follow-up buyers. This is also the case in England in the context of liability for deceit if the wrongful statement was addressed not only to the first subscribers but to follow-up buyers as well.
Throughout all European jurisdictions issuers are amongst the potential defendants of prospectus liability claims. Objections which existed especially in the Scandinavian countries as regards compatibility with capital maintenance rules have been dispelled in the course of implementing the Prospectus Directive. The legal situation is quite divided, however, pertaining to the personal responsibility of directors and officers. Though the majority of European jurisdictions permit claims against the directors and officers of the issuer, often the special statutory provisions do not apply. Instead these claims need to be based on general principles of tort law which normally establish stricter requirements (eg the requirement of a deliberate act). A similar situation concerns the liability of auditors and other experts who participated in drawing up the prospectus. Claims against such persons often need to be based on tort law or quasi-contractual grounds which tend to impose stricter requirements on the claimants. In contrast, the liability of the issuing bank is specifically recognized by most Member States’ prospectus liability laws.
c) Standard of fault
In most European jurisdictions, the standard of fault for prospectus liability claims is negligence. However, depending on the remedy, liability sometimes requires a deliberate act. Only Germany (and, in part, Austria as well) restricts the statutory prospectus liability to grossly negligent behaviour. This is due to the practice of German courts to presume that the breach of a statutory duty itself constitutes negligence. Since this was viewed as too strict a standard, the statutory requirement of gross negligence obliges the courts to conduct a further review of the facts in terms of personal responsibility.
d) Extent of liability; causality
There are different ways in the Member States to define the recoverable damage which the harmed investor may claim. Some European jurisdictions (eg Greece, Italy and Sweden) limit the liability to the difference between the price paid and a hypothetical fair price. However, most prospectus liability law regimes provide for restitution. When the investor is allowed to recover the price he paid in exchange for the securities, he has the chance to shift the general risk of price loss on to the issuer.
In most Member States it is not a condition of the prospectus liability claim that the investor actually took notice of the false or misleading prospectus prior to the purchase of the securities. These states rather apply the principle that a false or misleading prospectus has a negative influence on the pricing of the securities itself and each investor who buys the securities at the distorted price suffers a causal loss.
5. Private international law
The Prospectus Directive does not contain any rules regarding the connecting factors for prospectus liability claims. In national conflict of laws provisions, only Art 156 of the Swiss regulation on conflict of laws (IPRG) contains an explicit conflict rule. According to this provision, prospectus liability claims are governed either by the law applicable to the issuing company or by the law of the country where the issuance was conducted (market place). It is widely agreed that, for the purpose of private international law, prospectus liability claims are to be characterized as tort law. Claims therefore fall under the scope of the Rome II Regulation (Reg 864/2007); they are not excluded by Art 1(2)(c) and (d) of the Rome II Regulation. After the enactment of the Prospectus Directive it would appear most convincing to apply the law of the Member State which governs the obligation to publish the prospectus itself. According to Art 2(1)(m) of the Prospectus Directive, all obligations are governed by the laws of a ‘home Member State’. The other Member States are under a duty to recognize the substantive law of this Member State in the sense of a ‘European passport’ for securities. Therefore, prospectus liability claims are, in terms of Art 4(3) of the Rome II Regulation, manifestly closer connected with the home Member State according to the Prospectus Directive.
6. Development trends
Having missed the chance to unify prospectus liability law in the course of the enactment and reform of the Prospectus Directive and after the implementation of the European Commission’s Financial Services Action Plan (FSAP), harmonization of prospectus liability on the European level is not imminent. Recently, the Board Responsibilities Directive (Dir 2006/46) introduced minimum standards of responsibility for the annual accounts of listed companies but did not establish rules on prospectus liability.
Different regimes of prospectus liability may impede the raising of cross-border capital if issuers as well as investors are unable to anticipate the content of the applicable liability rules. The demand for unified prospectus liability rules will, however, re-appear on the agenda, at the latest by the time Europe is hit by its next stock market scandal. A new unification attempt may also be inspired by a harmonization of general tort law.
Guido Ferrarini, La responsabilità da prospetto—Informazione societaria e tutela degli investitori (1986); Klaus J Hopt, Die Verantwortlichkeit der Banken bei Emissionen—Recht und Praxis in der EG, in Deutschland und in der Schweiz (1991); Catarina af Sandeberg, ‘Prospectus Liability from a Scandinavian Perspective’ (2003) 13 EBLR 323; Eilís Ferran, Building an EU Securities Market (2004); Klaus J Hopt and Hans-Christoph Voigt (eds), Prospekt- und Kapitalmarktinformationshaftung (2005); Eilís Ferran, ‘Cross-border Offers of Securities in the EU—The Standard Life Flotation’  ECFR 461; Stefan Grundmann, European Company Law (2007), § 20; Paul L Davies, Gower and Davies’ Principles of Modern Company Law (7th edn, 2008) ch 26; Niamh Moloney, EC Securities Regulation (2nd edn, 2008) ch II.6; Wolf-Georg Ringe and Alexander Hellgardt, ‘The International Dimension of Issuer Liability—Liability and Choice of Law from a Transatlantic Perspective’ (2011) 31 Oxford J Legal Stud 23.