The Civil Courtroom of the Supreme Court has recently settled a new case law criterion with its judgments numbers 23/2016 and 24/2016, of 3rd February, related to two appeals lodged by the financial entity BANKIA against the invalidation of the acquisition of its stock under the Takeover Bid in 2011.

In both cases, the Supreme Court has dismissed the appeals lodged by BANKIA against Judgments of 7th January 2015, of the Ninth Section of the Provincial Appeal Court of Valencia, and of 11th May 2015, of the Fifth Section of the Province Appeal Court of Oviedo, which, broadly speaking, agreed the following:

a) They declared the subscription-acquisition of BANKIA shares by some retail clients null and void.

b) They sentenced BANKIA to refund the amounts paid out by such retail clients under the subscription-acquisition of shares, plus interests.

Against such decisions on the appeal stage, the financial entity brought the relevant extraordinary appeals for procedural default and cassation, which, as we have advanced, have been dismissed by the Civil Courtroom, together with the existence of criminal prejudiciality related to the criminal proceedings followed before the National Appeal Court for alleged fraud in the public stock offering of BANKIA. The former ministers Mr. Rodrigo Rato and Mr. Ángel Acebes appeared, among others, as suspects (now “under investigation” after the last Criminal Procedure Act reform).

(…) serious inaccuracies in the prospectus prepared by BANKIA (…) led the small savers/investors to error (…) and thus of the possible profitability of their investment (…)

Regarding the adjournment of the ongoing Civil Proceedings due to criminal prejudiciality argued by BANKIA, the Civil Courtroom has rejected such claim for the following reasons:

a) Adjournment due to criminal prejudiciality must be interpreted on a restrictive basis since each jurisdiction may lead to prosecution and charge qualification in independent legal levels with different outcomes depending on the application of the assessment criteria of one jurisdiction or another.

b) Although the decision of the Criminal Court were in favour of the defendant, this would not lead to the dismissal of the claim filed in the Civil Proceedings, since in this kind of proceedings (regarding claims for avoidance in the BANKIA stock purchase) the principal criteria are the accounting and the stock exchange rules and the evidence requirements are less demanding than in the criminal jurisdiction.

c) The differences that may arise in the evidence examination in the Criminal and Civil jurisdiction do not infringe articles 9.3 and 24 of the Constitution to the extent each jurisdiction has its own independent assessment criteria, according to its function and the characteristics of the claims filed before each jurisdiction.

d) In turn, adjournment of the Civil Proceedings for criminal prejudiciality would render the liability for damages set forth in former article 28 of the Stock Exchange Act (current article 38 of the redrafted text) ineffective, if before claims of such nature we should wait for termination by final ruling of the criminal proceedings that may be followed against the corporate directors for forgery in the annual accounts or other documents that may reflect the legal or economic situation of the entity.

e) Finally, the plaintiffs (in this case, small investors) are entitled to an effective protection of courts which excludes the existence of undue delays, since Criminal Proceedings as those followed before the former directors of BANKIA are extremely long-lasting considering the complexity of the issues litigated, which would unduly violate the shareholders’ rights to court proceedings without undue delays in the civil jurisdiction.

As regards the other pleadings filed by BANKIA in its appeals, the Supreme Court elaborates on each of the arguments put forward by the entity, underlining that the serious inaccuracies in the prospectus prepared by BANKIA for the Stock Public Offering and Admission to Trading in 2011 led the small savers/investors to error (contrary to large investors or the so-called institutional investors, which may have access to another type of supplementary information), thus causing them a mistaken representation of the entity solvency and thus of the possible profitability of their investment. Otherwise, they had to handle the stock acquisition of a financial entity on the brink of insolvency and with non-admitted multimillion losses (on the contrary, they asserted the existence of profits).

Similarly, one of the rulings in the Supreme Court under analysis sentences that “small investors (…), contrary to other more qualified investors, lack other means (other than the prospectus) to obtain information on the economic data affecting the company whose stock are to be traded and which are important to take the investing decision.”

(…) with these two new judgments on avoidance for stock subscription, the Supreme Court raises the prospects that this type of liability will apply to small investors only (…)

Consequently, these two new Judgments of the Supreme Court cause an immediate effect for this financial entity, to the extent:

a)They open the door to thousands of small investors to file the corresponding legal actions to claim the amounts paid out for the subscription of shares of such entity, which shall be joined to other court claims in which BANKIA has been recently immersed, such as the complaints filed by the clients affected by the subscription of preference stakes and subordinated debt.

b)They force BANKIA to procure itself a high volume of economic resources to meet the possible liabilities they shall face up to in the next months, either in currently pending proceedings or new proceedings to be initiated as a consequence of the two new judgments of the Supreme Court.

Notwithstanding the foregoing, it is not all bad news for BANKIA, since with these two new judgments on avoidance for stock subscription, the Supreme Court raises the prospects that this type of liability will apply to small investors only, thus excluding large investors or the so-called institutional investors.

Currently, large or the so-called institutional investors are expected to have assigned 1,237 million Euros in the acquisition of BANKIA shares, which ended up losing 80% of the purchase value after the collapse of its shares.

Therefore and until the Supreme Court does not agree a thousandth interpretative turn, we should understand that the financial entity BANKIA shall be allegedly released from any liability for the sale of its shares to large or institutional investors which underwrote them, since this type of investors are supposed to, as determined by the Supreme Court in two recent rulings, “have access to another type of supplementary information additionally to the one provided by the financial entity to know its state of solvency.”