CJEU considers issuer liability for prospectuses marketed to both retail and qualified investors

The Court of Justice of the European Union (CJEU) has confirmed that qualified investors (as well as retail investors) can bring an action for damages on the basis of inaccuracies in a prospectus published to the public at large, as a matter of interpretation of Directive 2003/71/EC (the Prospectus Directive): Bankia SA v Unión Mutua Asistencial de Seguros [2021] EUECJ (C 910/19). The CJEU's decision follows and confirms the opinion of the Advocate General (see our previous blog post: EU Advocate General considers interpretation of Prospectus Directive in relation to an issuer’s liability for a prospectus marketed to both retail and qualified investors).

The relevant provisions considered by the CJEU were Articles 3(2)(a) and 6 of the Prospectus Directive, which were implemented in UK law (before the UK left the EU) by virtue of s.90 of the Financial Services and Markets Act 2000 (FSMA). While the CJEU decision is unsurprising in the context of s.90 FSMA, the ruling provides helpful clarification on an important legislative framework that forms the bedrock of European securities litigation.

Although the UK is no longer a member of the EU, the CJEU decision may still be of relevance to the interpretation of s.90 FSMA claims, which represents “retained EU law” post-Brexit because it is derived from an EU Directive. In interpreting retained EU law, CJEU decisions post-dating the end of the transition period are not binding on UK courts, although the courts may have regard to them so far as relevant (see our litigation blog post on the practical implications of Brexit for disputes).

The CJEU decision is considered in more detail below.

Background

In 2011, the appellant Spanish bank (Bank) issued an offer of shares to the public, for the purpose of becoming listed on the Spanish stock exchange. The offer consisted of two tranches: one for retail investors and the other for qualified investors. A book-building period, in which potential qualified investors could submit subscription bids, took place between June and July 2011. As part of the subscription offer, the Bank contacted the respondent (UMAS), a mutual insurance entity and therefore a qualified investor. UMAS agreed to purchase 160,000 shares at a cost of EUR 600,000. The Bank’s annual financial statements were subsequently revised. This led to the shares losing almost all their value on the secondary market and being suspended from trading.

UMAS issued proceedings in the Spanish court against the Bank seeking to annul the share purchase order, on the grounds that the consent was vitiated by error; or alternatively for a declaration that the Bank was liable on the grounds that the prospectus was misleading. Having lost at first instance, the Bank appealed to the Spanish Provincial Court, which dismissed the action for annulment but upheld the alternative action for damages brought against the Bank on the grounds that the prospectus was inaccurate.

On the Bank’s appeal to the Spanish Supreme Court, the court held that neither the Prospectus Directive nor Spanish law expressly provided that it is possible for qualified investors to hold the issuer liable for an inaccurate prospectus where the offer made to the public to subscribe for securities is addressed to both retail and qualified investors.

The Spanish Supreme Court decided to stay the proceedings and referred two key questions to the CJEU for a preliminary ruling as to the interpretation of Article 6 of the Prospectus Directive.

Opinion of the Advocate General

The Advocate General's opinion is considered in further detail in our banking litigation blog post.

In summary, the Advocate General concluded that Article 6 of the Prospectus Directive, in the light of Article 3(2)(a), must be interpreted as meaning that, where an offer of shares to the public for subscription is directed at both retail and qualified investors, and a prospectus is issued, an action for damages arising from the prospectus may be brought by qualified investors, although it is not necessary to publish such a document where the offer concerns exclusively such investors.

The Advocate General also concluded that a Member State has the discretion to provide in its legislation or regulations that awareness by a qualified investor of the true situation of the issuer should be taken into account, in the event of an action for damages being brought by a qualified investor on the grounds of an inaccurate prospectus (i.e. that Article 6(2) does not preclude this principle). However, this is subject to the condition that the principles of effectiveness and equivalence are observed.

CJEU decision

We consider below each of the issues addressed by the CJEU.

Issue 1: Inaccurate prospectus as the basis for a qualified investor’s action for damages

The CJEU agreed with the Advocate General that an investor who has participated in an offer of securities where a prospectus has been published, may legitimately rely on the information given in that prospectus, whether or not the prospectus was issued for that investor. On that basis, an investor is entitled to bring an action for damages on the grounds of that information, again whether or not the prospectus was issued for that investor. In reaching this conclusion, the CJEU made the following observations:

• Context. Interpreting Article 6 of the Prospectus Directive, the court was required to take account of its context and the provisions of EU law as a whole. With this in mind, the CJEU noted that the Prospectus Directive does not identify the investors who may bring an action for damages, but merely identifies the potential defendants.
• Objectives. Turning to the objectives pursued by the Prospectus Directive, which must also be taken into account in the process of interpretation, the CJEU focused on the objective of investor protection. It emphasised that the publication of a prospectus contributes to the implementation of safeguards designed to meet the objective of protecting the interests of actual and potential investors.
• Language used. The CJEU noted that Article 3(2) lays down a series of exemptions from the general obligation to publish a prospectus, including an exemption from publishing a prospectus for securities offered exclusively to qualified investors. However, it could not be inferred from this that qualified investors are denied the opportunity to bring an action for damages. In the view of the CJEU, the distinction between retail investors and qualified investors at Article 3 of the Prospectus Directive did not cast doubt on its interpretation of Article 6.

Issue 2: Qualified investor’s awareness of the true situation of the issuer

The CJEU agreed with the Advocate General that Article 6(2) grants a broad discretion to Member States to lay down the rules for bringing an action for damages on the grounds of the information given in the prospectus. Accordingly, that provision must be interpreted as not precluding the qualified investor's awareness of the true situation of the issuer being taken into consideration, in the event of an action in damages being brought by a qualified investor.

This point is illustrated by the legal framework in the UK, because the awareness of the true position of the issuer is expressly included in the list of potential defences to a s.90 FSMA claim, which appears at Schedule 10. A contrary ruling from the CJEU would, therefore, have contradicted the way in which the UK implemented the Prospectus Directive.