PROSPECTUS LIABILITY IN CONFLICT WITH THE PRINCIPLE OF CAPITAL MAINTENANCE – A EUROPEAN COURT OF JUSTICE DECISION

A decision of the European Court of Justice (“ECJ”) (Hirmann v Immofinanz, C-174/12, 19 December 2013), considered the question of whether European Union law can be interpreted as precluding a national law which envisages the liability of a stock company for the breach of its information duties towards its shareholders, and also whether this breach justifies, in such a case, the cancellation of a concluded share purchase agreement and the subsequent repayment of the purchase price of the shares to investors.

Facts of the case

The facts of the case are as follows: a private investor, Mr Alfred Hirmann, purchased

shares of Immofinanz AG, a stock company traded on the Austrian stock exchange. Mr Hirmann purchased the shares on the secondary market and based his decision on the prospectus circulated when the shares were issued. This included misleading and incorrect information. Subsequently, Mr Hirmann brought a claim against the stock company claiming damages as well as the reimbursement of the share price and cancellation of the share purchase agreement. The Austrian Court filed for a preliminary decision at the ECJ, in which it asked the court whether the claim and the reimbursement and cancellation of the share purchase contract is in line with European law.

Merits

In determining the merits of this case, the ECJ clarified that the Prospectus (2003/71/ EC), Transparency (2004/109/EC) and Market Abuse Directives (2003/6/EC) do not oppose national law which states that a stock company may be held liable for incorrect information and the breach of capital market law in a prospectus. In addition, the above mentioned Directives in such cases do not bar national legislation which may impose an obligation on the stock company to cancel the share purchase agreement and repay the purchase price of the shares.

Furthermore, the court held that the backdated cancellation of the share purchase agreement is not in conflict with Article 12 and 13 of the Publicity Directive (2009/101/ EC) and the rules of the Capital Directive (77/91/EC, latest adaption in Directive 2009/109/EC) on capital maintenance and the equal treatment of shareholders.

In substantiating the decision, the ECJ stated that these damages compensation payments cannot be regarded as capital distributions according to Article 15 of the Capital Directive and subsequently, the repurchase of the issued shares by the stock company are not covered by Article 18 of the Capital Directive. As a result, the compensation payment to the shareholder by the stock company shall therefore not be regarded as a payment in relation to the membership of the company, but rather as a third party claim.

Additionally, the ECJ held that according to these regulations, the liability of the stock company is not necessarily limited to the share value at the time of filing the claim. However, in making its decision, the question if the above-mentioned rules also apply to cases where the claims filed by investors subsequently lead to the insolvency of the stock company, has been left unanswered by the court.