In an important judgment rendered on January 28, 2015 (case C-375/13), the Court of Justice of the European Union (“ECJ”) clarified for the first time that a securities issuer from  one EU Member State who notifies a prospectus in another Member State may face civil actions by investors for prospectus liability in the courts of that second Member State.  The same would likely apply to underwriters.

Mr. Kolassa, a retail investor from Vienna, Austria, suffered losses from an investment in  structured certificates of a U.K.-based issuer and filed an action before the Austrian court in the  district of his own residency. The matter posed several jurisdictional questions under Council  Regulation (EC) 44/2001, prompting the Austrian court to refer the matter to the ECJ for a  preliminary ruling under Article 267 of the Treaty on the Functioning of the European Union. The  ECJ’s decision gives useful guidance on the interpretation of Articles 15, 16 (consumer  jurisdiction), 5 n° 1 (place of performance), and 5 n° 3 (torts) in a capital markets context.

I.    Background

It was established in the proceeding before the Austrian court that the certificates were issued in  the form of bearer bonds on the basis of a base prospectus and a supplement. The value of the  certificates was linked to a portfolio of several target funds; this portfolio was established and  administered by a Germany-based company to which the issuer had entrusted the proceeds of the  issue. At the request of the issuer, the base prospectus was distributed in Austria. The initial  purchasers of the bonds were institutional investors who sold them on, in particular, to consumers.

Mr. Kolassa purchased the certificates through his Austrian bank, which in turn ordered them from  its German parent company, which in turn acquired the certificates from the issuer. In each case,  the orders were placed and carried out in the name of the respective bank. The Austrian bank  fulfilled the order vis-à-vis its customer, Mr. Kolassa, in accordance with its general terms and  conditions “in securities credit” (in Wertpapierrechnung). Thus the Austrian bank held the  certificates in its own name at its parent company in Germany on behalf of Mr. Kolassa. Title to  the certificates was not transferred to Mr. Kolassa, who instead obtained a contractual claim  against his bank for delivery of the certificates held abroad.

The German company administering the portfolio had apparently engaged in a fraud scheme. When the  scheme collapsed, most if not all of the money entrusted with that company was lost, and  accordingly the certificates became essentially worthless. Mr. Kolassa was of the view that the  documentation of the issue, upon whose accuracy he had relied, did not comply with Austrian  securities law.   He sought damages before an Austrian court on contractual, precontractual and tortious bases from the U.K.-based issuer. The U.K.-based issuer raised an objection to the jurisdiction of the Austrian court.

II.    The Ruling

1.     No Jurisdiction For Claims On A Contractual Basis

The ECJ held that jurisdiction for contractual claims could not be established pursuant to Articles  15, 16 or Article 5 n° 1 of Council Regulation (EC) 44/2001.

Consumer jurisdiction pursuant to Articles 15, 16 applies as long as the following three  requirements are all met: (i) A party to a contract is a consumer who is acting in a context  outside his trade or profession; (ii) the contract between that consumer and a professional has  been concluded; and (iii) that contract falls within the scope of one of the categories referenced  in Article 15. Article 15 references a sale of goods on installment credit terms; a loan repayable  by installments or any other form of credit, made to finance the sale of goods; or, in all other  cases, a contract concluded with a person who pursues commercial or professional activities in the  Member State of the consumer's domicile or, by any means, directs such activities to that Member  State or to several States including that Member State, and the contract falls within the scope of  such activities.

The first and last requirements having been met, the issue for the ECJ was whether a contract had  actually been concluded between Mr. Kolassa and the issuer. It was established that there was no  such contract; Mr. Kolassa was not the legal holder of the certificates and had only a beneficial  interest in the certificates which his bank held in its own name on his behalf. However, since the  bank had acted as a mere intermediary, Mr. Kolassa argued that the aim of consumer protection would  require the adoption of an economic approach in order to find a contract between himself and the  issuer for purposes of Article 15. The Court rejected such economic approach. It held that there is  no room for a broad interpretation of Article 15 since consumer jurisdiction is a derogation from  the general rule of jurisdiction (in the country of domicile of the defendant, Article 2) and from  the rule of special jurisdiction for contracts (at the place of performance, Article 5 n° 1), and  thus must be interpreted narrowly. The message is clear: For purposes of consumer jurisdiction, a  consumer cannot invoke a contract that he has not concluded. A chain of contracts through which  certain rights and obligations of the professional in question are transferred to the consumer does  not suffice to establish jurisdiction pursuant to Articles 15, 16.

Nor was jurisdiction held to be established on the basis of Article 5 n° 1 (a), which, in matters  relating to a contract, provides for jurisdiction of the courts at the place of performance of the  obligation in question. Since the certificates were held by Mr. Kolassa’s bank (“in securities  credit”) and not by Mr. Kolassa himself, and no claims had been assigned to him, Mr. Kolassa could  not possibly have a contractual claim against the issuer. It was thus not necessary to determine  the place of performance of the claims evidenced by the certificates.

2.   Possible Jurisdiction For Tort Claims

For tort claims, the ECJ held that jurisdiction of the Austrian courts at the domicile of Mr.  Kolassa could be established. “In matters relating to tort, delict or quasi-delict,” Article 5 n° 3  confers jurisdiction on the courts of the place “where the harmful event occurred or may occur.”  Damage claims brought against the issuer on the basis of prospectus liability and for breaches of  other legal information obligations towards investors fall under Article 5 n° 3 if and to the  extent they are not contractual matters within the meaning of Article 5 n° 1.

Pursuant to the established case law of the ECJ, the expression “place where the harmful event  occurred or may occur” covers both at the place where the damage occurred and at the place of the  event giving rise to it. The claimant can elect where to bring the action.

In Kolassa, the events giving rise to the damage could not be deemed to be located in Austria since  nothing suggested that the decisions regarding the arrangements for the investments proposed by the  issuer and the contents of the prospectus or its distribution were taken anywhere other than in the  U.K. (where the issuer had its seat). In its discussion of this alternative, the ECJ did not focus  on the fact that the issuer had notified the prospectus in question in Austria.

As to the place where the damage occurred, the Court held that “the courts where the applicant is  domiciled have jurisdiction, on the basis of the place where the loss occurred, to hear and  determine such an action, particularly when the damage alleged occurred directly in the applicant’s  bank account held with a bank established within the area of those courts.” In the ECJ’s view, such  interpretation of the place where the loss occurred meets the objective of the Regulation, which is  to strengthen the legal protection of persons established in the European Union. The ECJ explained  that it would enable “the applicant to identify easily the court in which he may sue and the  defendant reasonably to foresee in which court he may be sued, given that the issuer of a  certificate who does not comply with this legal obligations in respect of the prospectus must, when  he decides to notify the prospectus relating to that certificate in other Member States, anticipate  that inadequately informed operators, domiciled in those Member States, might invest in that certificate and suffer loss.”

III.    Implications

The EJC’s rulings on jurisdiction pursuant to Articles 15, 16 and 5 n° 1 are consistent with the  Court’s previous rulings. They are useful clarifications in light of the fact that banks frequently  hold securities in securities credit on behalf of their customers, in particular when the  securities are located in another country than the bank.

It follows from the Court’s explanation of Articles 15, 16 that consumer jurisdiction for  contractual claims against the issuer would also not be available if a private investor’s bank,  instead of holding the securities in securities credit on his behalf, had purchased them in the  secondary market in its own name and then transferred legal title to him, for the reason that the  issuer was not involved in these transactions. The issuer entered into a contract (only) at the  time of the issuance. In a typical issuance in which the initial purchasers are banks and other  institutional investors, consumer jurisdiction is thus a non-issue.  The reason is that what has not been a consumer contract at the outset cannot become a consumer contract subsequently merely because a consumer has acquired a security in the secondary market.

The ruling on jurisdiction pursuant to Article 5 n° 3 is a remarkable addition to the Court’s case  law. Its significance lies in the fact that now if an issuer publishes a prospectus in a Member  State, the issuer may be subject to the jurisdiction of the courts of that Member State when  prospectus (tort) liability is at issue. The same would likely apply to the underwriters.

The ECJ’s findings will likely remain valid under the Regulation’s recast Council Regulation (EU)  No. 1215/2012, as it does not include any substantive changes in respect of any of the bases for jurisdiction discussed in Kolassa.