On June 10, 2013, the European Securities and Markets Authority (“ESMA”), following a request from the European Commission, published a report comparing the liability regimes applied by member states (“Member States”) of the European Economic Area (“EEA”) in relation to the Prospectus Directive (Directive 2003/71/EC as amended by Directive 2010/73/EU). The Prospectus Directive provides the overarching European regulatory framework for the publication of prospectuses in connection with debt and equity securities being offered to the public or admitted to trading on regulated markets in the EEA.
The report covers the national sanctioning regimes (administrative and criminal) for infringements of national legislation and rules transposing the Prospectus Directive (and Commission Regulation 809/2004 implementing the Prospectus Directive) and also the conditions under national regimes for investors’ right of restitution for losses from persons responsible for the violation (civil liability) and from the government. The report is based on responses to a questionnaire completed by the competent authorities in each Member State (see a comparative table of those responses and read the individual Member State responses). One of the report’s purposes is to provide some clarity to market participants about the different regimes in place.
EU Legislation on Prospectus Liability
It is important to note that liability for prospectuses is not harmonised at the EEA level aside from a few elements of the administrative and civil liability for prospectuses as set out in the Prospectus Directive.
The Prospectus Directive provides that Member States “shall ensure…that the appropriate administrative measures can be taken or administrative sanctions imposed against the persons responsible, where the provisions adopted in the implementation of this Directive have not been complied with.” (Article 25). The only substantive provision in the Prospectus Directive regarding administrative liability is Article 6.1, which addresses the persons responsible, their identification and a statement they have to include in the prospectus:
“Responsibility for the information given in a prospectus attaches at least to the issuer or its administrative, management or supervisory bodies, the offeror, the person asking for the admission to trading on a regulated market or the guarantor, as the case may be. The persons responsible shall be clearly identified in the prospectus by their names and functions or, in the case of legal persons, their names and registered offices, as well as declarations by them that, to the best of their knowledge, the information contained in the prospectus is in accordance with the facts and that the prospectus makes no omission likely to affect its import.”
In relation to civil liability, the Prospectus Directive deals with two matters only. It requires Member States to ensure “that their laws, regulation and administrative provisions on civil liability apply to those persons responsible for the information given in a prospectus”, and it provides that no civil liability attaches to any person solely on the basis of the summary contained in a prospectus “unless it is misleading, inaccurate or inconsistent, when read together with the other parts of the prospectus, or it does not provide, when read together with the other parts of the prospectus, key information in order to aid investors when considering whether to invest in such securities” (Article 6.2). Separately, in limited circumstances, the Prospectus Directive provides that financial intermediaries shall have liability for the contents of a prospectus where they use a prospectus in the context of a retail cascade without the consent of the issuer or person responsible for preparing the initial prospectus.
Liability Regime in Practice
By way of example, in the United Kingdom, the statutory liability regime provides that persons who are responsible for a prospectus will be liable to compensate any investor who suffers loss in respect of the securities to which the prospectus relates as a result of any untrue or misleading statement in the prospectus, or as a result of the omission of any matter required to be included in it. However, a person responsible will not be liable to pay compensation if the court is satisfied that that person (having made such enquiries as were reasonable) reasonably believed that either the statement was true and not misleading or that the matter omitted was properly omitted, and that the person responsible either continued in this belief or took reasonable steps to secure that a correction was published. This right of action is in addition to any other available statutory or common law remedy.
It is important to note that, while the legal liability regimes appear similar to those in the United States, the legal liability risk from investors has historically been much higher in the United States as securities litigation is much more common than in Europe (including in the United Kingdom), due to a number of factors, including the relative ease with which class action suits can be brought.
Key Findings of the Report
Attempting to draw conclusions from the 29 jurisdictions covered by the report, the following is noted:
- The vast majority of Member States indicate in their legislation the specific persons that are subject to civil and administrative liability. The contrary applies to the criminal liability regimes where, in the majority of cases, the legislation does not specify the persons that could be/are liable.
- In relation to the degree of fault that must exist in order to trigger liability, the majority of Member States display a similar approach in all four areas – administrative, civil, criminal and governmental liability regimes – where at least some form of negligence is required. The criminal liability regime shows a more divergent approach between the requirement of either negligence or intent, and strict liability provisions are more present in the administrative liability regime than in others.
- The inclusion in prospectuses of false or incomplete information are subject to both civil and criminal liability in all Member States. The breach consisting of making a public offer without an approved prospectus – considered the most serious of the possible breaches - is generally subject to civil liability and administrative liability.
- The vast majority of Member States apply both fines and/or imprisonment in the criminal liability regime, whereas fines and/or other measures are applied in the administrative regime. Other measures in most Member States include publication by the competent authority of the sanction that has been imposed as well as the identity of the responsible person. The ranges of the fine amounts vary to a large degree across the Member States.
- The majority of Member States provide investors with the right to obtain restitution from the government and/or competent authority for losses suffered.
- A third of Member States permit class action suits both in the civil and governmental liability regimes.
- Notably, the report concludes that an investor can seek compensation and the issuer, offeror or person responsible for drawing up the prospectus or seeking admission to trading could be held liable in more than one jurisdiction as well as possibly in accordance with more than one liability regime. However, the diversity in the different jurisdictions could make it difficult for market participants to assess their risks and rights in accordance with the applicable prospectus liability regimes.
The publication of this report by ESMA serves as a reminder that although there is a well-established pan-European prospectus regime, governing the circumstances in which a prospectus is required or, indeed, when an exemption from the requirement to prepare a prospectus is available, and the detailed content requirements for a variety of different types of prospectus, there remain significant differences across Member States when it comes to assessing the risk and extent of liability under that regime. Accordingly, in any pan-European public offering, these differences in risk and liability – and steps taken to mitigate against them – need to be carefully considered on a jurisdiction-by-jurisdiction basis.