Prospectus Liability and Causation
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Arnoud CW Pijls
Abstract
When establishing causation for claims involving prospectus liability, it is the factual basis of the claim and the corresponding line of argumentation that determines the perspective that should be taken as a starting point. There are basically two factual bases that can be distinguished. For the first factual basis of causation, the reliance of the investor on the prospectus is irrelevant. For the second factual basis, reliance is, however, relevant. In its World Online decision, the Dutch Supreme Court adopted a presumption of reliance for both factual bases of causation. This presumption of reliance is based on art 11(2) of the Prospectus Regulation. In my opinion, this provision does not provide a convincing basis for the adoption of such a presumption. Article 11a(1) of the Unfair Commercial Practices (UCP) Directive provides a much more convincing basis.
I Introduction
Investors in listed companies are increasingly seeking to recover losses that they have suffered as a result of (allegedly) misleading disclosures. A well-known and recent example are the liability claims that shareholders and bond holders of Wirecard AG filed against, amongst others, the (former) board and supervisory board members of Wirecard and against EY, Wirecard’s accountant, because of their alleged involvement in the massive accounting fraud that was disclosed in June 2020. A company[1] that publishes misleading information or withholds relevant information resulting in a misleading representation acts unlawfully. If the misrepresentation concerns a misleading prospectus that is published in the context of an Initial Price Offering (IPO) and/or share issuance, and the company is subsequently held liable by the investors who bought their shares[2] on the basis of this misleading prospectus, the doctrine of prospectus liability comes into play.[3] Misrepresentations in a prospectus can lead to an artificially high stock price. As a result, investors who buy shares during the relevant period may suffer an economic loss. This loss will be suffered definitively as soon as the misrepresentation is revealed and the stock price subsequently drops. Investors will, however, only be eligible for compensation, if – and to the extent that – the price loss that they suffered is sufficiently causally related to the misleading information in the prospectus.[4] This causation requirement is the focus of my article.
The structure of my article is as follows. In Section II, I will first explain why the factual basis of the claim of the investor is relevant for establishing causation and why, basically, two factual bases of the claim can be distinguished. Then, in Section III, I will discuss the first factual basis of causation and, in Section IV, the second factual basis of causation. In Section V, I will analyse the investor’s burden of proof with respect to both factual bases of causation. Following this, in Section VI, I will discuss the World Online decision of the Dutch Supreme Court and analyse this decision both from the perspective of substantive law as from the perspective of the law of evidence. Section VII, presents a few concluding remarks.
I would like to make two preliminary remarks. Firstly, one should bear in mind that prospectus liability is not purely governed by national law. Prospectus liability is also, at least in part, governed by European law. Indeed, the Prospectus Regulation[5] contains an intriguing provision on civil liability in art 11(2). Danny Busch and Matthias Lehmann refer to this provision in their contribution to this special issue on prospectus liability[6] and Paola Lucantoni discusses this provision in her contribution.[7] I will address the relevance of this provision for the causation requirement under national private law in Section VI. Secondly, in my line of argumentation, I will assume that it has already been established in court that the prospectus contains misleading information. Thus, in order to establish causation, the question of whether or not the prospectus is misleading is no longer an issue.
II The factual basis of the claim determines the perspective
Establishing causation for claims involving prospectus liability is not uncontroversial. A recurring question is whether establishing causation requires that the investor directly or indirectly relied on the misleading prospectus when purchasing the stock.[8] Different schools of thought arrive at different answers to this question. The strictest view holds that establishing causation always requires that the investor directly or indirectly relied on the prospectus and that his investment decision was influenced by it. With ‘directly relying on the prospectus’, I mean that the investor reads the prospectus himself. With ‘indirectly relying on the prospectus’, I mean that an adviser to the investor reads the prospectus and then advises the investor accordingly. A less strict view regarding causation holds that it suffices that the investor relied on a positive market sentiment induced by the misleading prospectus. In German law, this is called the theory of ‘die Anlagestimmung’. The most liberal view holds that establishing causation does not require the investor to have relied on the prospectus at all. In this view, it suffices that the investor relied on the fact that the stock price was the result of legitimate market forces and that this price was not ‘polluted’ with misleading information. This view thus involves a very indirect reliance on the prospectus. This liberal view resembles the well-known ‘fraud-on-the-market’ theory developed under US federal securities law, although I do realise that, under US securities law, this theory is, in principle, not applicable in cases that involve primary market fraud.[9]
Irrespective of whether a stricter or a more lenient approach is adopted for establishing causation, I would like to emphasise that, in my view, any discussion about causation starts with the facts and arguments upon which the investor bases his claim. One cannot speak of ‘causation’ or ‘the causal link’ in abstract terms. The causal link only gains substance when it is linked to particular arguments and to a particular factual basis.[10] In other words, it is the factual basis of the claim and the corresponding line of argumentation that determines the perspective that should be taken as a starting point when establishing causation.[11] The same applies to establishing damage, by the way, but that is of less relevance for my argumentation in this article.
With respect to the investor who has allegedly suffered a loss due to a misleading prospectus, basically two factual bases and corresponding lines of argumentation can be distinguished:[12]
(i) Firstly, the investor may base his claim on the fact that he would also have bought the stock in the absence of the misleading information, but then at a lower price. This investor primarily claims damages equal to the amount by which the misleading information inflated the stock price.
(ii) Secondly, the investor may base his claim on the fact that his investment decision was influenced by the misleading prospectus, and that, had he been given correct and complete information, he would not have bought the stock at all. This investor primarily claims damages for the total price loss resulting from the purchase of the stock, possibly supplemented by the profits he would have generated on an alternative investment in the hypothetical situation without any misrepresentation.
III Causation with respect to the first factual basis
With respect to the investor who opts for the first-mentioned factual basis, thus the investor who argues that he would also have bought the stock in the absence of the misrepresentation, but at a lower price, it is, in my opinion, irrelevant whether or not he directly or indirectly relied on the misleading prospectus and whether his investment decision was influenced by it. After all, this investor does not base his claim on the argument that he has suffered a loss because he relied on the misleading information and was thus misled. No, this investor argues that he has suffered a loss because he paid too high a price for the stock as a result of the misleading information. In other words, this investor claims to have relied on the integrity of the stock price when purchasing the stock, and he believes that his trust has been betrayed.[13] If it can be established that the misleading information in fact resulted in a higher stock price, then, for this investor, the causal link is established. Indeed, without any misrepresentation, he would have paid a lower price. The circumstance that the investor purchased the stock without relying on the prospectus does not alter this outcome.
As we will see in Section VI, the Dutch Supreme Court, in its World Online decision, took a somewhat different approach than the approach I am defending here.[14]
IV Causation with respect to the second factual basis
With respect to the investor who opts for the second factual basis, thus the investor who argues that, in the absence of the misrepresentation he would not have bought the stock at all, for establishing causation, it is relevant whether or not he relied on the prospectus. However, here again, careful consideration should be given to the precise manner in which the investor substantiates his claim that his purchasing decision was causally related to the misleading prospectus. In my view, the investor can substantiate this causal link in three different ways:[15],[16]
(i) Firstly, the investor may take the position that he directly relied on the prospectus and that he directly based his purchasing decision upon it. Under US federal securities law, this is called ‘eyeball reliance’. In this case, whether or not the investor relied on the prospectus is clearly relevant to establish causation, simply because the investor states so.
(ii) Secondly, the investor can argue that he made his purchasing decision after consulting an expert adviser. In this case, it must be established that the adviser relied on the prospectus, and that the investor subsequently based his purchasing decision on the advice of this expert.
(iii) Thirdly, the investor may argue that he based his purchasing decision on a positive market sentiment that was induced by the misleading prospectus. In that case, it suffices for establishing causation that the prospectus triggered a misleading, positive market sentiment, and that the investor was subsequently misled by that sentiment.
If it is established that, in the absence of the misrepresentation the investor would not have bought the stock at all, the liability of the company is not yet determined. It will also have to be established that the financial loss that is alleged by the investor is causally linked to the misleading information. A defence that is commonly raised in practice by the defending company is that the investor would have suffered his loss anyway. He would have suffered this price loss if, for example, he had invested in an alternative stock that also would have dropped in value over the same period. Although I do not see any dogmatic objections to honouring this defence in court, the question of course arises as to who bears the burden of proof here. Must the investor prove that, but for the misrepresentation, he would not have suffered a loss, or at least not a loss of the same amount? Or must the defending company prove that the investor would have suffered a price loss on an alternative investment anyway? I will return to the question of the burden of proof later.
If it can be established that, without the misrepresentation, the investor would have suffered no price loss on an alternative investment, or that he would have suffered less of a price loss than he has currently suffered, the company’s liability for the financial loss thus estimated is, in principle, established.[17]Then, the legal question of whether this loss can be fully attributed to the company arises. Under Dutch law, with this legal question, it is up to the defending company to argue that attribution of the total loss suffered is unreasonable. It is deliberate that I speak of ‘arguing’ here because, in principle, this is a legal question. However if, while arguing that attribution of the total loss suffered is unreasonable, the company invokes certain facts, it is up to it to state those facts and, upon challenge, to prove them. The most obvious defence that the company can raise here is that the price loss suffered by the investor was primarily caused by external factors and not by the misleading information. Such external factors may include, for example, macroeconomic, sector-related or company-specific factors unrelated to the misleading information. As far as the price loss suffered by the investor was indeed primarily caused by external factors, I would say that the loss for that amount cannot be attributed to the company, because, in my view, general investment risks should not be eligible for compensation.
V The two distinct factual bases entail different burdens of proof for the investor
The previous has hopefully clarified that the substantive law analysis of causation is different for the two factual bases that I have distinguished. It is, however, not only the substantive law analysis that is different. The two factual bases also play out differently in terms of the burden of proof. Let me explain why.
If the investor opts for the first factual basis, thus the investor argues that he would have bought the stock anyway, but at a lower price, it is up to him to state and, when challenged, to prove that:
(i) the misleading prospectus affected the stock price;
(ii) he therefore purchased the stock at an inflated price; and
(iii) he still held the stock when, at the time of the corrective disclosure, the inflation dissipated.
In practice, this burden of proof will usually amount to making a plausible case for how the stock price would have evolved in the hypothetical situation without any misrepresentation.[18]
If, on the other hand, the investor opts for the second factual basis, thus the investor argues that, in the absence of the misrepresentation, he would not have bought the stock at all, then – taking the main rule of the burden of proof as a starting point – it is up to him to first state and, upon challenge, to prove that he would have made a different investment decision in the absence of the misrepresentation. In other words, he must prove that he relied (directly or indirectly) on the misleading prospectus, and that his investment decision was thus influenced by the prospectus. So, because of the misleading information, he bought the stock. With correct and complete information, he would not have done so.
It is important to emphasise that the onus of proof for the second factual basis concerns a heavy burden. It is by no means apparent that, in the absence of the misrepresentation, the investor would not have bought the stock at all.[19] Here it should be borne in mind that with correct and complete information, the stock would probably have traded at a more favourable price. It would then basically have been a ‘regular’ stock with a market-based risk/return profile. So, in that case, the investor might have been willing to buy the stock at this lower price.[20] At the same time, it can by no means be ruled out that, in the absence of the misrepresentation, the investor would not have bought the stock at all, not even at the lower price. Whether the investor would have refrained from buying the stock mainly depends on his preferences in terms of risk and return.[21] If misleading information is disseminated about a company (for example, a certain risk is presented too optimistically), this changes the profile of that company’s stock in terms of return versus risk. It is quite conceivable that as a result of the misleading information, the presented profile of the stock deviates from the actual profile to such an extent that, with a non-misleading prospectus, the investor would have concluded that this stock does not suit his preferences in terms of return versus risk. Or the investor would have concluded that the stock does not fit into the overall picture of the investment portfolio that he already holds, because when buying the stock, his portfolio is no longer sufficiently diversified.
In addition to proving that his purchasing decision is causally related to the misleading prospectus, the investor who opts for the second factual basis must also prove that his alleged price loss is causally related to the misleading information. In other words, this investor must prove that he suffered a loss due to the misrepresentation. In practice, this means that the investor must provide an insight into his investment behaviour in the hypothetical situation without any misrepresentation. He must make it plausible that, in the absence of the misrepresentation, he would have achieved a better return on an alternative investment than he currently achieved. When it comes to the latter burden of proof, a professional investor can usually be expected to do a bit more than a retail investor. Thus, for the professional investor, it will usually be somewhat more difficult to meet this burden of proof.
VI The World Online decision
A Introduction
There is a paucity of case law on prospectus liability in the Netherlands. Notably, there are only a handful of cases that have been brought all the way to the Dutch Supreme Court. Of these, there is one ‘landmark case’ in which the Supreme Court formulated a few general rules and provided some important ‘guidance’ for practice. That landmark case is the already mentioned World Online decision. World Online was an internet company that went public in early 2000, thus at the time of the ‘dotcom bubble’. Its IPO resulted in a major fiasco. It was what one may call a total ‘damp squib’. The investors who had bought shares in this IPO, which were mainly retail investors, lost a substantial part of their investments. The organisation representing those retail investors in the Netherlands, the ‘Vereniging van Effectenbezitters’ (the ‘Dutch Association of Stockholders’), started liability proceedings against World Online and the lead managers in this IPO. Those proceedings eventually culminated in the Supreme Court decision that is discussed here. Because of the importance of the World Online decision for prospectus liability in the Netherlands and because of its relevance from a comparative law perspective, I will discuss the decision in detail here. Given the subject of my article, I will limit this discussion to the paragraphs on causation.
The remainder of this Section is structured as follows. In Section VI.B, I will first present the paragraphs of the World Online decision on causation. Then, in Section VI.C, I will analyse these paragraphs from the perspective of substantive law and, in Section VI.D, from the perspective of the law of evidence. In Section VI.E, I will argue that art 11(2) of the Prospectus Regulation[22] does not provide a convincing basis for the presumption of reliance that is formulated by the Supreme Court. Then in Section VI.F, I will argue that the Unfair Commercial Practices Directive[23] provides a more convincing basis for this presumption of reliance.
B Relevant paragraphs of the World Online decision
I will start with para 4.10.4 of the World Online decision. This paragraph functions as the Supreme Court’s prelude to its paragraphs on causation:[24]
‘... For classifying a statement as misleading it is not required that the investor actually relied on or was actually influenced by the statement, but only that the inaccuracy or incompleteness of the statement is of sufficient materiality in order to mislead the “average” investor ... . Only while determining the liability towards an individual investor the question arises whether ... the investment decision of this individual investor was actually affected by the misleading statement and whether he suffered a loss as a result.’
The paragraphs on causation follow. In para 4.11.1, the Dutch Supreme Court considers that:
‘... In principle, the investor ... bears the burden of proof regarding the causal link. This burden is problematic, however, because an investor will generally be guided by many factors when making his investment decision. Moreover, it is often impossible to prove that he actually took notice of the misstatement, let alone that he was actually influenced by it. That influence may also have been indirect, if the investor relied on advice or prevailing opinions in the market, which were in turn triggered by the misstatement. The problems with respect to the burden of proof regarding the causal link could render the investor protection purpose of the [Prospectus Regulation] illusory. Although the [Prospectus Regulation] does not harmonise the liability of the issuer ..., the [Prospectus Regulation] does require Member States to ensure that their national provisions on civil liability apply to those persons responsible for the information given in the prospectus [art 11(2) of the Prospectus Regulation]. This implies that effective legal protection must be provided in accordance with the rules of national law.’
Subsequently, the Supreme Court formulates a presumption of reliance in para 4.11.2:
‘... For the purpose of that effective legal protection and taking into account the purpose of the prospectus rules to protect (potential) investors against misleading statements ..., the causal link shall in principle be deemed to exist. This therefore means that in principle it must be presumed that, but for the misrepresentation, the investor would not – and in the case of a secondary market purchase: not or not on the same terms – have purchased the stock.’
C Substantive law analysis
Much can be said about these important paragraphs.[25] I will start my analysis with two observations on the substantive law interpretation of the causation requirement.
Firstly, I infer from the World Online decision that, in the case of prospectus liability, establishing causation always requires that the investor relied on the misleading prospectus.[26] After all, the Supreme Court repeatedly refers to the influence of the misleading statement on the investment decision, without making a distinction as to how the investor frames his claim for damages. Thus, not only when the investor argues that, without the misrepresentation, he would not have bought the stock at all, his investment decision must actually have been affected by the prospectus. This reliance on the prospectus is also required when the investor argues that, without the misrepresentation, he would have bought the stock at a more favourable price. Consequently, if the investor can prove that the misleading prospectus affected the stock price and that, as a result, he bought the stock at an inflated price, but when purchasing the stock he did not rely on any information except for relying on the integrity of the market price, according to the Supreme Court, the causation requirement has not been met. The investor’s claim is then simply rejected. This is a different approach than that adopted under US federal securities law pursuant to sec 11 of the Securities Act of 1933.[27]
Secondly, it seems to follow from the World Online decision that establishing causation does not require that the investor directly relied on the prospectus, thus by reading it himself.[28] According to the Supreme Court, he may also have indirectly relied on the prospectus through an adviser or through prevailing opinions in the market. Although the Supreme Court does not explicitly state the latter, it does explicitly consider that the investment decision may also have been indirectly affected by the prospectus (and thus that the investor may also have been indirectly misled). By doing so, the Supreme Court seems to at least imply that indirect reliance on the prospectus is also sufficient for establishing causation.[29] I also note that what the Supreme Court refers to as ‘prevailing opinions in the market which were ... triggered by the misstatement’ can, in my view, also be understood as a positive market sentiment that was induced by the misleading prospectus (recall the German theory of ‘die Anlagestimmung’).
D Law of evidence analysis
I will continue my analysis of the World Online decision with four observations on the law of evidence.
Firstly, I note that the way in which the Supreme Court interprets the causation requirement – there must always be a causal link between the misrepresentation and the investment decision – potentially imposes an onerous burden of proof on the investor. The Supreme Court overcomes this problem by adopting, immediately after having formulated the reliance requirement, the ‘principle’ that the causal link between the misrepresentation and the investment decision is deemed to exist. The Supreme Court thus alleviates the investor’s onerous burden of proof by adopting a presumption of reliance. More precisely, this construction for the burden of proof amounts to the principle that, based on the finding that the prospectus is misleading for the average investor, the causal link between the misrepresentation and the investment decision of the individual claimant is deemed to exist. In legal proceedings, it is up to the defending company to rebut that presumption. Much can also be said about the arguments and related facts with which the defending company can attempt to rebut the presumption, but I will not elaborate thereupon.
Secondly, I note that the application of the reliance presumption as adopted by the Supreme Court is not limited to one specific case. As a principle, the presumption is always applicable if an issuer published a misleading prospectus. After all, the Supreme Court explicitly considers that ‘in principle it must be presumed’ that, without the misrepresentation, the investor would have made a different investment decision. The presumption thus has more the character of a ‘rule of law’.
Thirdly, I note that the presumption of reliance as adopted by the Supreme Court is prescriptive or normative in nature. After all, based purely on empirical rules and/or the facts of the World Online case, the presumption cannot be properly explained. It is, for instance, common knowledge that the average investor does not even take notice of the prospectus;[30] his investment decision cannot therefore be affected by it either. Moreover, recall that the internet company World Online went public at the time of the ‘dotcom bubble’, when retail investors in particular invested massively in internet firms. In the specific case of World Online, it is for most investors therefore highly doubtful whether they would actually have made a different investment decision if the prospectus had been correct and complete. I conclude that the presumption of reliance as adopted by the Supreme Court in World Online provides a remarkable example of how the burden of proof can contribute to:
(i) the enforcement of a certain rule of conduct (in this case, the obligation to publish a correct and complete prospectus); and
(ii) ensuring effective legal protection for investors.
Fourthly, I note that the importance of the presumption of reliance as adopted by the Supreme Court lies in particular in the substantive law basis of the presumption. This basis concerns the European law principle of effectiveness (‘effet utile’).[31] In adopting the presumption, the Supreme Court refers to the protective purpose of the Prospectus Regulation and specifically invokes art 11(2) of the Prospectus Regulation. This provision requires Member States to ensure that their national provisions on civil liability apply to those persons responsible for the information given in the prospectus. The Supreme Court’s reasoning is apparently that the ‘full’ effect of European law entails that this liability must be realised effectively in national law. If the main rule of the burden of proof were applied too strictly, this liability becomes illusory, according to the Supreme Court.
E Article 11(2) of the Prospectus Regulation does not provide a convincing basis for the presumption of reliance
I will now elaborate in more detail on the Supreme Court’s reasoning that is based on art 11(2) of the Prospectus Regulation. Although I do, in principle, agree with the idea that the investor’s burden of proof is alleviated by applying a presumption of reliance, the Supreme Court’s reasoning can be criticised. My main point of criticism is that, in my opinion, art 11(2) of the Prospectus Regulation does not provide a convincing basis for applying such a presumption. I have three arguments to support this view.
Firstly, the Prospectus Regulation does not aim to harmonise prospectus liability law amongst Member States. All the Prospectus Regulation requires in this respect is that Member States ensure that their legal provisions on civil liability apply to those that are responsible for the information in the prospectus. In my view, art 11(2) is more like a compromise, by which the European legislator intended to ensure that, under national law, there should at least be a possibility of civil liability for those responsible for the prospectus. This means, for instance, that, under national law, such liability cannot be generally excluded.
Secondly, and this argument is closely related to the first, the Prospectus Regulation has a rather strong focus on supervision. This focus is reflected, inter alia, in its Chapter IV (‘Arrangements for approval and publication of the prospectus’), Chapter VII (‘ESMA and competent authorities’) and Chapter VIII (‘Administrative sanctions and other administrative measures’). These chapters contain a variety of rules for the approval of the prospectus by the competent authority and the powers that this authority must have.[32] This focus on supervision is also reflected in art 38(1) of the Prospectus Regulation, which provides that ‘... Member States shall, in accordance with national law, provide for competent authorities to have the power to impose administrative sanctions and take appropriate other administrative measures which shall be effective, proportionate and dissuasive’ (emphasis added). From the focus on supervision of the Prospectus Regulation, I draw two conclusions:
(i) Firstly, when considering the Prospectus Regulation, the principle of effectiveness is, in my view, mainly relevant for the question of whether the prospectus rules are adequately and effectively enforced administratively, and whether the measures and sanctions imposed in that respect are effective, proportionate and dissuasive.[33]
(ii) Secondly, I do not consider it plausible that the European legislator intended to intervene extensively in Member States’ prospectus liability law. Prescribing a presumption of reliance to Member States would be a far-reaching intervention.
My third argument supporting the view that art 11(2) of the Prospectus Regulation does not provide a convincing basis for applying a presumption of reliance is based on the Hirmann/Immofinanz decision of the Court of Justice of the European Union (CJEU). In that decision, the CJEU ruled that Member States have a ‘wide margin of appreciation’ when choosing the sanctions to be applied in the case of a violation of the prospectus rules.[34] Based on this wide margin of appreciation, I do not consider it plausible that the Prospectus Regulation requires a presumption of reliance to be adopted under national private law. In other words, given the Hirmann/Immofinanz decision, I cannot imagine that the CJEU would find, as an answer to a preliminary question focused on that issue, that a Member State fails to meet the requirements of the Prospectus Regulation if it does not adopt such a presumption, of course provided that (i) the competent authority of this Member State has the enforcement powers just mentioned under the second argument, and (ii) this Member State has a regime for prospectus liability as required under art 11(2) of the Prospectus Regulation.
F The Unfair Commercial Practices Directive provides a more convincing basis for the presumption of reliance
So much for the Supreme Court’s reasoning in World Online. I would like to emphasise that, also in my view, there are good reasons to alleviate the investor’s (onerous) burden of proof by applying a presumption of reliance. I only question the reasoning that art 11(2) of the Prospectus Regulation requires to adopt such a presumption under national private law. A more convincing reasoning is, in my opinion, based on the UCP Directive.[35] To explain my position, I would like to make a few preliminary remarks about the UCP Directive.
The UCP Directive applies to unfair business-to-consumer commercial practices before, during and after a commercial transaction in relation to a product.[36] One of the main objectives of the UCP Directive is to achieve a high level of consumer protection.[37] To this end, art 5(1) of the UCP Directive contains a general prohibition on unfair commercial practices. Under art 5(4) of the UCP Directive, commercial practices are particularly unfair if they are misleading in the sense of its arts 6 and 7. Article 7(1) of the UCP Directive then provides that ‘[a] commercial practice shall be regarded as misleading if ... it omits material information that the average consumer needs ... to take an informed transactional decision ...’. Furthermore, art 7(5) of the UCP Directive states that ‘[i]nformation requirements established by [EU] law ... shall be regarded as material’ (emphasis added). Annex II of the UCP Directive contains a non-exhaustive list of European law information requirements that are considered to be ‘material’. This list includes the key disclosure requirements of the Prospectus Regulation. The disclosure requirements of the Prospectus Regulation can thus be considered as ‘material’ for UCP Directive purposes. This means that if an issuer publishes a misleading prospectus, it engages in an unfair commercial practice towards retail investors.
In order to make my point about the reliance presumption in the World Online decision, it is also relevant to know that the Dutch legislator has chosen – this was not a European law obligation! – to implement the UCP Directive in national private law. Thereby it made the choice to implement it as a species of the tort. By doing so, it decided to designate Dutch tort law as the primary enforcement instrument of the UCP standards. The European law consequence of these choices of the Dutch legislator is that Dutch tort law must provide for ‘adequate and effective measures’ with the corresponding ‘effective ... and dissuasive sanctions’ as required by the UCP Directive (see, respectively, arts 11 and 13 of the UCP Directive).
Let me explain why this is all relevant for proving causation in cases of prospectus liability. If we wish to adopt a presumption of reliance under national private law based on arguments of European law, in my view, the UCP Directive provides a convincing basis for doing so. The reasoning is that the investor’s burden of proof regarding reliance should be alleviated in order to achieve an effective and dissuasive remedy under national law, as required by the UCP Directive. This effective and dissuasive remedy will, of course, contribute to achieving a high level of consumer protection, which is one of the main objectives of the UCP Directive.[38]
Now, one might argue that this reasoning particularly applies to the Netherlands, because the Dutch legislator has chosen to implement the UCP Directive in national tort law. Until recently, that argument could have had some persuasive power, but I think nowadays it no longer has any merit. This is related to an important amendment that was made to the UCP Directive at the end of 2019. A new art 11a, under the title ‘Redress’, was added to the Directive. This provision requires Member States to provide for the civil liability of traders who engage in an unfair commercial practice, whereby consumers who have been harmed by such a practice must be given access to effective remedies, including compensation for damage:[39]
‘Consumers harmed by unfair commercial practices, shall have access to proportionate and effective remedies, including compensation for damage suffered by the consumer and, where relevant, a price reduction or the termination of the contract. Member States may determine the conditions for the application and effects of those remedies ....’
Therefore, my final contention is that if other Member States also wish to apply a presumption of reliance in prospectus liability cases under national law and if they wish to base that presumption on European law arguments, the UCP Directive provides a convincing basis for doing so. That basis is the new art 11a(1) of the UCP Directive (read in conjunction with arts 11 and 13 of the UCP Directive).
VII Conclusion
In conclusion, when establishing causation for claims involving prospectus liability, it is the factual basis of the claim and the corresponding line of argumentation that determines the perspective that should be taken as a starting point. In my opinion, there are basically two factual bases that can be distinguished. For the first factual basis of causation, the reliance of the investor on the prospectus is, in my view, irrelevant. For the second factual basis, reliance is, however, relevant. In its World Online decision, the Dutch Supreme Court adopted a presumption of reliance for both factual bases of causation. This presumption of reliance is based on art 11(2) of the Prospectus Regulation. In my opinion, this provision does not provide a convincing basis for the adoption of such a presumption. Article 11a(1) of the UCP Directive (read in conjunction with arts 11 and 13 of the UCP Directive) provides a much more convincing basis.
Note
This article is partly based on his doctoral thesis ‘Misleading Reports on Stock Markets. Issues of Causation and Damages’ (written in Dutch). I would like to thank Mathijs Giltjes for his valuable comments on a draft version of this article.
© 2023 Walter de Gruyter GmbH, Berlin/Boston
Dieses Werk ist lizensiert unter einer Creative Commons Namensnennung 4.0 International Lizenz.
Artikel in diesem Heft
- Frontmatter
- Frontmatter
- Uniform Prospectus Liability Rules for Europe
- US Prospectus Liability – An Overview and Critique
- Prospectus Liability in Europe: The Relevant Breach of Duties
- Prospectus Liability and Causation
- Book Review
- Laura Vitale, La perte de chances en droit privé (LGDJ, Paris 2020, Bibliothèque de droit privé). xv + 581 pp. ISBN: 978-2-275-07302-6. € 62 (paperback).
Artikel in diesem Heft
- Frontmatter
- Frontmatter
- Uniform Prospectus Liability Rules for Europe
- US Prospectus Liability – An Overview and Critique
- Prospectus Liability in Europe: The Relevant Breach of Duties
- Prospectus Liability and Causation
- Book Review
- Laura Vitale, La perte de chances en droit privé (LGDJ, Paris 2020, Bibliothèque de droit privé). xv + 581 pp. ISBN: 978-2-275-07302-6. € 62 (paperback).
