Extract taken from 'The Securities Ligation Review – edition 5'
Private enforcementi Forms of action
The CFA establishes the legal basis for the majority of civil claims brought before Italian courts in securities litigation. It provides a cause of action for untrue or omitted statements in prospectuses, as well as for breach of the public takeover bid obligation for shareholders exceeding the 30 per cent shareholding threshold, for violations of disclosure requirements and the duty of care of financial intermediaries on the secondary market.
Investors are also allowed to sue CONSOB and other third parties, such as rating agencies and auditing firms, for liabilities arising out of violation of the relevant laws and negligence in relation to their supervision and control duties.
In broad terms, under corporate law provisions set out in the Italian Civil Code, namely Sections 2395, 2396 and 2407, investors may seek compensation of their losses by bringing liability claims for breach of legal or corporate obligations of issuers' or other entities' directors, managers and auditors. Under Section 15 of Legislative Decree No. 39/2010, statutory auditors and auditing firms may be held jointly responsible with the aforesaid persons for their respective violations.Liability for misstatements or incomplete information in prospectuses
Under Section 94, Paragraph 8 of the CFA an investor may seek compensation in the form of damages from the issuer, the offeror, the guarantor and any other entity responsible for untrue or incomplete statements combined in the prospectus. Investors also have a claim under Section 94, Paragraph 9 against the intermediary responsible for the securities' placement, where false or incomplete information is capable of influencing a reasonable investor's decisions.
The Italian Supreme Court has stated in several decisions in recent years that the prospectus liability is a tort that justifies the burden of proof lying with the investor. Nonetheless, alleviations of the burden of proof have been granted for investors by the Supreme Court. In Decision No. 14056/2014, the Supreme Court found that the issuer is to be held responsible where the prospectus is incomplete or misleading because of the issuer's negligence, unless the issuer proves that the defective information did not influence investors' decisions. Moreover, the issuer may be exonerated from responsibility upon demonstrating that he or she had performed due diligence to make sure that the prospectus statements were accurate and did not contain misleading information or omit information.
In cases of prospectus liability, investors may bring actions against issuers, directors and managers under Sections 2395 and 2396 of the Italian Civil Code and, based on Section 17 of Legislative Decree No. 39/2010, statutory auditors and auditing firms might be jointly responsible with the audited firm directors and managers for their part of any damage caused.
CONSOB may also be held liable for violation of Section 95 of the CFA, according to which the authority is required to approve the prospectus upon the prior positive test of completeness, consistency and comprehensibility of the information provided therein. However, Decision No. 23418/2016 of the Supreme Court clarified that CONSOB and its employees are to be held responsible only for wilful misconduct or gross negligence (e.g., when it is particularly evident that the information is untrue).
Breach of the obligation to publish a prospectus may also allow the investor to file a claim against the licensed intermediaries to declare the invalidity of the securities purchase contract and restore the loss suffered through the investment.
Actions for prospectus liability are subject to a short limitation period (five years compared with the standard contractual liability statutory period of 10 years).Liability for breach of the public takeover bid obligation
Pursuant to Section 106 of the CFA, anyone exceeding the 30 per cent shareholding or the corresponding voting rights of a listed company (or of a controlling company of a listed company) as a result of acquisitions or voting rights increases must launch a mandatory public takeover bid to all the shareholders of the stock admitted to trading on a regulated market.
Over the past five years, claims have been brought from shareholders seeking damages arising from violations of the public takeover bid obligation. In several decisions on these claims, the Supreme Court repeatedly held that breach of the aforesaid obligation raises contractual liability, and the claimant is entitled to be restored upon demonstration that the missed public takeover bid has resulted in a loss of the possibility of making profits. Pursuant to the Supreme Court case law, damages are calculated taking into account the alternative share value had the public takeover bid been launched, as well as other events capable of influencing the share value.Liability for breach of disclosure requirements and other statutory obligations
In the context of securities litigation, claims regarding contractual relationships between financial intermediaries and retail investors (i.e., investors who do not have sufficient expertise to make informed investment decisions) have been dominating case law over the past 15 years.
The prominence of this kind of dispute is due to different factors, one of which is that the Italian judicial system makes it more likely for investors to obtain monetary compensation on a contractual liability claim against financial intermediaries rather than on claims against issuers or others related to issuers or involved in market placement of securities.
As a matter of fact, the CFA, namely Sections 21 and 23, and the implementing regulations issued by CONSOB, establishes the maximum protection standard for retail investors. These provisions encompass a comprehensive set of disclosure requirements, a general duty of care in the provision of investment services and several obligations concerning the consistency and appropriateness of securities in relation to the investor risk profile (i.e., suitability rule and best-execution rule).
The majority of claims against financial intermediaries have originated from the bankruptcies of well-known Italian firms, such as Cirio and Parmalat, along with the economic collapse of Argentina.
Investors claimed in particular that the intermediaries, on one hand, failed to provide investors with material information on the credit risk of the securities, and, on the other, breached their adequacy-rule obligations, as the securities at stake were not suitable considering the investors' risk profile. The Supreme Court held that such claims are based on contractual liability but do not affect the validity of contracts between investors and intermediaries. The investor may ask only for compensation for the loss suffered as a result of intermediaries' breaches. In a recent decision, the Supreme Court also held that the issuer is jointly responsible with the intermediary if the former does not reimburse its bonds, so that the investor is entitled to damage compensation from both the issuer for not reimbursing the bond and the financial intermediary for breach of disclosure requirements or other obligations set out by the law.
According to Section 23 of the CFA, the burden of proving compliance with legal obligations and diligence standards rests with the intermediary. The case law also allows investors to prove causation and damage by mere presumption. Furthermore, no proof at all is requested as to the causation of damage in some cases, such as breaches of the adequacy rule in stock purchase cases.Secondary liabilities
Investors may also bring claims against subjects other than issuers and financial intermediaries.
Apart from auditors' liability mentioned above, investors may sue (1) CONSOB for breaches in licensing, supervision and monitoring of firms and individuals authorised to operate on the securities market, and (2) credit rating agencies for violations of law in performing their credit rating assessment.
As to CONSOB liability, claims on prospectuses mentioned above are embedded in the broader provision under Section 24, Paragraph 6 bis of Legislative Decree No. 262/2005, which sets forth CONSOB's, and its employees', liability for unduly exercising with intent or gross negligence its supervisory and monitoring powers.
For instance, the Supreme Court held that CONSOB failed in its supervision function by licensing a company that belonged to a larger business group that provided investment services without proper authorisation.
Under Section 35 bis of Regulation (EC) No. 1060/2009 – amended by Regulation (EU) No. 462/2013 – investors and issuers are entitled to seek compensation from credit rating agencies where a credit rating assessment is a result of a violation of legal obligations with wilful misconduct or gross negligence. Credit rating agencies are held responsible if the claimant provides detailed and specific proof both of the breaches committed by the credit rating agency and of the impact of the breaches on the credit rating assessment. There are only two decisions on this subject, both from the Rome Court of First Instance, and both of them rejected the investor's claim, although they provided useful clarification on how the cause of action applies.Class actions
Class actions may be brought only by consumers and users, that is, individuals acting for purposes other than professional and commercial ones. Section 140 bis of Legislative Decree 206/2005 (i.e., the Italian Consumer Code) provides that consumers acting through their associations and committees may initiate class actions aimed at obtaining damage compensation and refunds.
Section 32 bis of the CFA allows investors to bring collective-interest claims against financial intermediaries. Only associations included on a specific Ministry of Economic Development list are entitled to bring the aforesaid claims. Under Sections 139 and 140 of Legislative Decree No. 206/2005, the remedies provided for such representative associations' claims include injunctions and measures aimed at correcting or removing negative consequences for consumers caused by counterparties' violations.
As to the case law, in 2014, the Florence Court of First Instance rejected a class action brought by shareholders against the issuer. The Court held that the claim was beyond the scope of Section 140 bis of Legislative Decree No. 205/2006 for several reasons, one of them being the fact that shareholders cannot be considered consumers.
However, the Supreme Court recently held that Section 140 bis is applicable to individual investors. In Decision No. 23304/2016, the Supreme Court also granted the option to investors' representative associations included on an ad hoc Ministry of Economic Development list to be a supporting party in claims brought by single investors.
It is worth noting that on 3 October 2018 the Italian House of Representatives, one of the two branches of the Italian Parliament, approved the Draft Law No. 844 regarding the reform of the Italian class action.
According to this Draft Law, class actions may be brought not only by consumers and users but by any homogeneous individual rights holders.
The class action would be conducted according to the simpler and faster procedure ruled under Article 702 bis to 702 quater of the Italian Civil Procedure Code. After the decision on the class action is issued, an opt-in procedure would be opened, allowing other people with homogeneous rights to join the action.
However, the Italian Senate must approve this Draft Law in order to actually enact the class action reform.ii Procedure
The securities litigation claims described above are predominantly common civil claims and are therefore subject to civil proceedings rules set out by the Italian Code of Civil Procedure.
Civil proceedings concerning banking, finance and insurance must be preceded by an attempt to settle the dispute through formal mediation proceedings governed by Legislative Decree No. 28 of 4 March 2010. The claimant can then choose either a general civil procedure trial, or, if the claim is relatively simple, to opt for an expedited procedure. The general civil procedure commences with the service of a written statement of claim containing and indicating the hearing for the commencement of the proceedings. The defendant is given a term of not less than 70 days (up to 130 days if the defendant is not resident in Italy) to file his or her written defence. Afterwards, a first hearing takes place, where parties are normally assigned parallel terms within which to submit three corresponding defence briefs containing the definitive presentation of all facts and allegations, and the relevant documents and evidence to support their case. Parties may also request evidence to be produced by the counterparty or third persons, as long as it is assumed that the evidence required is necessary for the claim and may not be achieved otherwise.
As in similar civil law systems, there are no discovery proceedings in the Italian judicial system. A crucial rule in civil proceedings in Italy is that it is up to the parties to select the relevant facts and evidence to be disclosed before the judge. Nevertheless, under Section 210 of the Code of Civil Procedure, parties are provided with the option to request that the judge impose evidence production on the counterparty or others, as mentioned above.
Furthermore, under Section 212 of the Code of Civil Procedure, the judge may request that public bodies file with the court written information on facts and documents that appear necessary for the judgment. Should the judge need assistance to evaluate technical, financial or accountancy issues, an expert of his or her choice may be appointed. This is often the case, for instance, when it is necessary to determine the financial loss suffered by the investor.
Admission and taking of evidence hearings (such as witness hearings) are usually followed by a hearing where parties are invited to make their final requests to the court and followed by a subsequent exchange of final briefs and responses. After this stage, the judge is expected to issue a decision within a short time. A first instance decision becomes definitive if it is not appealed within six months (or in a short term of 30 days if the decision is served on the other party), whereas appeal rulings become definitive if not challenged before the Supreme Court (for law violations) within a year (or in a short term of 60 days if the appeal ruling is served on the counterparty).
As a final remark, injunctions, freezing orders and other interim measure proceedings are also available and treated with simpler and more expeditious proceedings.iii Settlements
Generally speaking, civil procedure rules provide the judge with the option to attempt an amicable settlement of the claim on his or her own initiative (Section 185 bis of the Code of Civil Procedure) or upon joint request of the parties (Section 185).
Although several provisions on extrajudicial settlement of disputes have been approved by the Italian lawmakers, their application has not been very successful so far. The most important provisions of this kind – and yet the least effective – are laid down in Legislative Decree No. 28/2010, which introduces in broad terms facultative settlement proceedings for civil and commercial disputes conducted by private conciliation and mediation entities. Along with the facultative conciliation, the aforesaid Legislative Decree establishes mandatory pretrial mediation for disputes falling into some subject categories, one of which is financial contracts.
As to the securities litigation sector, since 2017 investors have been provided with a specific settlement entity, namely the Arbitrator for Financial Disputes (ACF). The ACF arbitration board consists of the president and four members, two of whom, along with the president, are nominated by CONSOB, while the remaining two members are appointed by the most representative consumers' associations and financial intermediaries' associations, one by each of them. The ACF has competence for claims not exceeding €500,000 and regarding breaches of disclosure requirements and the duty of care of the financial intermediaries in the provision of investment services to retail investors. Subscription to the ACF is mandatory for financial intermediaries licensed or authorised to operate in Italy. Prior to accessing the ACF, the investor must have submitted a complaint against the intermediary that has not been responded to within 60 days or has been responded to in unsatisfactory terms for the investor. The CONSOB regulation provides for interruption of the ACF proceedings if alternative settlement negotiations are attempted by either party. The decision of the ACF, which is based only on documentary evidence, does not have res judicata effect and cannot be enforced in court. However, should the intermediary fail to comply with an award, it will be subject to reputational sanctions, such as the publication of its breach on the ACF website. According to the ACF first-year activity report, circa 800 rulings were issued by the ACF out of the approximately 1800 claims filed by investors. The ACF approved about 190 claims, granting over €5 million for damages incurred in the provision of financial services. The 2018 annual relation has not been published yet by the ACF.
As to attorneys' fees in the event of settlement, under Section 13, Paragraph 8 of Law No. 247/2012, both parties are jointly obligated to pay the attorneys' fees and expenses if a dispute pending before courts or arbitrators is settled. The joint obligation of the parties may be waived by the attorneys.iv Damages and remedies
As a general rule, the claimant is entitled to compensation for loss suffered as a consequence of the defendant's violation.
In prospectus liability cases, the damage for the investor is calculated as a difference between the amount the investor has paid and the amount that would have been actually paid in absence of the alleged violation. In cases of claims against financial intermediaries for breach of their obligations, the damage is quantified as the difference between the securities' value at the time of the purchase and their value at the time the investor's claim was filed. Full compensation will be granted in the aforesaid cases if the claimant shows that had the infringement not been committed he or she would have not performed the securities transaction.
In other circumstances, damage consists in loss of opportunity to make profits, namely the higher value of the securities had the breach not taken place, which is the case in the public takeover bid obligation violation.
Indemnification normally encompasses expenses related to the securities transactions. Sometimes, especially in financial intermediary liability claims, judges grant a supplementary compensation for the lost profit of the investor upon demonstration of the alternative use of the amount by the investor or even in a presumptive way.
Punitive damages are not granted, although there is broad debate on the admissibility of this category of damages in the Italian legal system. In this respect, the Italian Supreme Court recently opened the doors to punitive damages, although in the context of the enforcement of a foreign sentence. In fact, in Decision No. 16601/2017 the Court, while excluding the admissibility of punitive damages as a general remedy in the current domestic system, held that punitive damages awarded by foreign judgments may be enforced in Italy, provided that punitive damages cases and applicability conditions thereof are set forth by the law in the state of origin of the judgments.
Although compensation in the form of damages is the main remedy in securities litigation, even the only one in some cases, other remedies for specific claims are provided by law, such as contract termination for gross violations by financial intermediaries, and contract invalidity provided by Section 100 bis of the CFA where an investor bought securities for which a prospectus was required by law and for which the prospectus was not published.