Reform of Capital Market Law - Expert Report on Prospectus Liability
In August 2002 the Federal Ministry of Finance commissioned the Institute under the oversight of its Director Professor Klaus J. Hopt with the completion of a functional comparative law study on the topic “Discussion and Comparison of European Community Member State Provisions with regards to Prospectus Liability”. The background of the assignment is the enactment of Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003, “on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC”. This directive replaces the current directive on the admission of securities to the stock exchange (Directive 2001/34/EG of 28 May 2001) and the directive on prospectus requirements in regards to the sale of securities to the public (Directive 89/298/EEC of 17 April 1989) and for the first time codifies the requirements for the drawing up, approval and distribution of securities prospectuses in an integrated text. The directive is a central component of both the EU Financial Services Action Plan (FSAP) of 11 May 1999 and the initiative to create an integrated European securities market. The prospectus directive has subsequently been incorporated into German national securities law through a corresponding implementation act (Bundesgesetzblatt I [The Official Gazette] 2005, p. 1698) enacted on 22 June 2005 and effective 1 July 2005.
The directive simultaneously pursues two main aims that are mutually dependent as functional and individual protections: firstly, it wants to increase market efficiency in the issuance of securities by improving the basic requirements for Community-wide capital demand and supply and easing to the widest extent possible the access to capital by issuers, particularly small and medium sized enterprises (SME’s). The other major aim of the new prospectus directive lies in strengthening investor protection.
Effective investor protection requires not only a high degree of accurate and complete information in advance of the transaction, but also effective sanctions for failures to comply with the duty to disclose information, since otherwise the parties responsible for the prospectus have little incentive to meet their duty of disclosure. The European Commission has recognized this fact and has set out the prospect of legislative steps and other measures in its 21 May 2003 action plan on company law and corporate governance, (COM (2003) 284 final), whose aims, among others, is enhancing the collective responsibility of, respectively, senior management and board members of a corporation for inaccurate capital market information.
In this regard however, a weakness of the new prospectus directive is revealed. Namely, it does not contain any harmonised liability provisions in respect to civil liability for inaccurate prospectuses; rather, in Article 6 it simply instructs the Member States to make certain that their legal and administrative provisions on civil liability apply to those persons who are responsible for the information given in a prospectus. This will lead in the future to the application of different national liability provisions, which not only tends to create a deterring factor of uncertainty from the injured investor’s point of view, but is also unsatisfactory to an issuing company already taking on enhanced costs and uncertainty by raising capital across national borders.
Under the initiative of Federal Finance Minister Eichel, the German delegation in Brussels therefore argued from an early stage in favour of harmonising Community civil law liability for incorrect prospectuses at least insofar as basic elements are concerned. However, this advancement was made more difficult due to the absence of systematically prepared information on the prospectus liability provisions of individual Member States. Consequently, remedying this shortcoming and highlighting a starting point for the harmonisation of prospectus liability law on a European-wide level were the tasks set forth in the expert report commissioned by the Federal Finance Ministry.
In accordance with this assignment, the study focuses upon the significant features of prospectus liability that are set forth in other Member States. Also included in the study are regulations applicable in Switzerland and the United States as well as an economic analysis of prospectus liability. Additionally, a further emphasis of the study lies in the description of the special laws and tort liability attached to incorrect, misleading or omitted (prospectus) information in cases in which the particular national law – be it due to implementation of the directive on prospectus sales or the directive on the admission of securities to the stock exchange, or be it due to some other reason - makes the sale of securities conditional upon the prior publication and approval of the prospectus. However, the study limits to the margins any discussion of general contract law remedies that could, from a functional perspective, also lead to compensation in cases of inaccurate prospectus representations (e.g., rescission or Anfechtung in German law). Broader issues such as criminal and administrative liability for wrong prospectus representations, liability of investment counsellors for negligent consulting services or general questions regarding consumer protection are not an object of the study.
Notable domestic and international scholars were won for the production of the country-based reports, including: Prof. Paul Krüger Andersen (Denmark), Prof. Ulrich Ehricke (Germany) Prof. Guido Ferrarini (Italy), Prof. Susanne Kalss/Dr. Martin Oppitz (Austria), Prof. Matti Sillanpää/Prof. Jukka Mähönen (Finland), Prof. Rolf Skog (Sweden) and Prof. Levinus Timmerman/Prof. Marie-Louise Lennarts (Netherlands). Further contributions came from research fellows and other affiliates of the Institute, including: Caroline Bolle (Belgium/Luxemburg), Prof. Ulrich Magnus/Patrick C. Leyens (England/Ireland), Margret Böckel/Andreas Grünewald (Portugal), Christian Eckl (Spain), Dr. Hans-Jürgen Puttfarken†/Anne Schrader/Judith Schnier (France), Menelaos Karpathakis (Greece) and Jörn Kowalewski (Switzerland). Prof. Hans-Bernd Schäfer, University of Hamburg economist, contributed on the law and economics portion of the work. The comparative law general survey was in the hands of Prof. Klaus J. Hopt and Hans-Christoph Voigt.
The 606 page long expert report with 20 pages of annexed material was concluded in December 2002. In a subsequent step, the study was widened to consider liability for false information in the secondary markets and results were updated pending publication. In the aftermath of the crash of the “new markets” and noteworthy international financial scandals (Enron and Parmalat), the working group adopted a broader comparative law and economic analysis and examined capital market liability for corporate announcements and disclosures. Consequently, the published volume available since 2005 offers an extended analysis of secondary market liability (to the extent comparative law results were available) and, more specifically, addresses the law and reform of prospectus and capital market disclosure liability in the European Union, 15 EU member-states (inclusion of newly added member-states was unfortunately not possible), Switzerland and the USA. Legal proposals introduced during the course of the work’s preparation for publication (noteworthy being the now in-effect UMAG, AnSVG and KapMug along with the subsequently withdrawn proposal for KapInHaG) as well as the 19 July 2004 Infomatec judgment of the Bundesgerichtshof (German Federal Court of Justice) were also fully taken into account.
The findings of the study are published in book form:
Klaus J. Hopt/Hans-Christoph Voigt (eds.)
Prospekt- und Kapitalmarktinformationshaftung: Recht und Reform in der Europäischen Union, der Schweiz und den USA, Reihe: Beiträge zum ausländischen und internationalen Privatrecht 79, Mohr and Siebeck (Tübingen) 2005, L, 1209 pages, ISBN 3-16-148548-3
The directive simultaneously pursues two main aims that are mutually dependent as functional and individual protections: firstly, it wants to increase market efficiency in the issuance of securities by improving the basic requirements for Community-wide capital demand and supply and easing to the widest extent possible the access to capital by issuers, particularly small and medium sized enterprises (SME’s). The other major aim of the new prospectus directive lies in strengthening investor protection.
Effective investor protection requires not only a high degree of accurate and complete information in advance of the transaction, but also effective sanctions for failures to comply with the duty to disclose information, since otherwise the parties responsible for the prospectus have little incentive to meet their duty of disclosure. The European Commission has recognized this fact and has set out the prospect of legislative steps and other measures in its 21 May 2003 action plan on company law and corporate governance, (COM (2003) 284 final), whose aims, among others, is enhancing the collective responsibility of, respectively, senior management and board members of a corporation for inaccurate capital market information.
In this regard however, a weakness of the new prospectus directive is revealed. Namely, it does not contain any harmonised liability provisions in respect to civil liability for inaccurate prospectuses; rather, in Article 6 it simply instructs the Member States to make certain that their legal and administrative provisions on civil liability apply to those persons who are responsible for the information given in a prospectus. This will lead in the future to the application of different national liability provisions, which not only tends to create a deterring factor of uncertainty from the injured investor’s point of view, but is also unsatisfactory to an issuing company already taking on enhanced costs and uncertainty by raising capital across national borders.
Under the initiative of Federal Finance Minister Eichel, the German delegation in Brussels therefore argued from an early stage in favour of harmonising Community civil law liability for incorrect prospectuses at least insofar as basic elements are concerned. However, this advancement was made more difficult due to the absence of systematically prepared information on the prospectus liability provisions of individual Member States. Consequently, remedying this shortcoming and highlighting a starting point for the harmonisation of prospectus liability law on a European-wide level were the tasks set forth in the expert report commissioned by the Federal Finance Ministry.
In accordance with this assignment, the study focuses upon the significant features of prospectus liability that are set forth in other Member States. Also included in the study are regulations applicable in Switzerland and the United States as well as an economic analysis of prospectus liability. Additionally, a further emphasis of the study lies in the description of the special laws and tort liability attached to incorrect, misleading or omitted (prospectus) information in cases in which the particular national law – be it due to implementation of the directive on prospectus sales or the directive on the admission of securities to the stock exchange, or be it due to some other reason - makes the sale of securities conditional upon the prior publication and approval of the prospectus. However, the study limits to the margins any discussion of general contract law remedies that could, from a functional perspective, also lead to compensation in cases of inaccurate prospectus representations (e.g., rescission or Anfechtung in German law). Broader issues such as criminal and administrative liability for wrong prospectus representations, liability of investment counsellors for negligent consulting services or general questions regarding consumer protection are not an object of the study.
Notable domestic and international scholars were won for the production of the country-based reports, including: Prof. Paul Krüger Andersen (Denmark), Prof. Ulrich Ehricke (Germany) Prof. Guido Ferrarini (Italy), Prof. Susanne Kalss/Dr. Martin Oppitz (Austria), Prof. Matti Sillanpää/Prof. Jukka Mähönen (Finland), Prof. Rolf Skog (Sweden) and Prof. Levinus Timmerman/Prof. Marie-Louise Lennarts (Netherlands). Further contributions came from research fellows and other affiliates of the Institute, including: Caroline Bolle (Belgium/Luxemburg), Prof. Ulrich Magnus/Patrick C. Leyens (England/Ireland), Margret Böckel/Andreas Grünewald (Portugal), Christian Eckl (Spain), Dr. Hans-Jürgen Puttfarken†/Anne Schrader/Judith Schnier (France), Menelaos Karpathakis (Greece) and Jörn Kowalewski (Switzerland). Prof. Hans-Bernd Schäfer, University of Hamburg economist, contributed on the law and economics portion of the work. The comparative law general survey was in the hands of Prof. Klaus J. Hopt and Hans-Christoph Voigt.
The 606 page long expert report with 20 pages of annexed material was concluded in December 2002. In a subsequent step, the study was widened to consider liability for false information in the secondary markets and results were updated pending publication. In the aftermath of the crash of the “new markets” and noteworthy international financial scandals (Enron and Parmalat), the working group adopted a broader comparative law and economic analysis and examined capital market liability for corporate announcements and disclosures. Consequently, the published volume available since 2005 offers an extended analysis of secondary market liability (to the extent comparative law results were available) and, more specifically, addresses the law and reform of prospectus and capital market disclosure liability in the European Union, 15 EU member-states (inclusion of newly added member-states was unfortunately not possible), Switzerland and the USA. Legal proposals introduced during the course of the work’s preparation for publication (noteworthy being the now in-effect UMAG, AnSVG and KapMug along with the subsequently withdrawn proposal for KapInHaG) as well as the 19 July 2004 Infomatec judgment of the Bundesgerichtshof (German Federal Court of Justice) were also fully taken into account.
The findings of the study are published in book form:
Klaus J. Hopt/Hans-Christoph Voigt (eds.)
Prospekt- und Kapitalmarktinformationshaftung: Recht und Reform in der Europäischen Union, der Schweiz und den USA, Reihe: Beiträge zum ausländischen und internationalen Privatrecht 79, Mohr and Siebeck (Tübingen) 2005, L, 1209 pages, ISBN 3-16-148548-3