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Part II The New EU Prospectus Rules, 9 The Contents of the Prospectus: Non-Financial Information and Materiality

Victor de Serière

From: Prospectus Regulation and Prospectus Liability

Edited By: Danny Busch, Guido Ferrarini, Jan Paul Franx

From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: null; date: 07 June 2023

Prospectus liability — Securities — Financial regulation — Monetary union

(p. 195) The Contents of the Prospectus

Non-Financial Information and Materiality

I.  Introduction

9.01  This chapter discusses:

  • •  some general aspects of the new Prospectus Regulation;1

  • •  materiality issues; and

  • •  other aspects relevant to issuers and investors relating to the offering of securities where the Prospectus Regulation applies.

The risk of exposure to prospectus liability is the context in which this discussion takes place.

9.02  The basic premise underlying the chapter is that an offer is made of securities issued by an issuer situated in an EU Member State whereby (newly to be issued and/or (p. 196) existing) securities are the subject of an international offering in the EU. We will assume the offering of equity securities (either shares or hybrid capital instruments); in case non-hybrid debt instruments are issued, the analysis contained in this chapter will be largely the same. An institution whose securities are on offer will herein be referred to as the ‘issuer’ (and this term will also, where relevant, include selling shareholders in case existing shares are on offer). It is further assumed that the offering will be advised upon by a syndicate of banks comprising (global) coordinators, (lead) managers, and bookrunners, as well as various (listing, selling, paying, and stabilization) agents; these parties will be collectively referred to by the generic term ‘underwriters’. It is finally assumed that a ‘normal’ underwriting structure is used whereby the issuer makes the offer with the assistance of underwriters, whereby the (lead) managers undertake to take up those securities that are not subscribed for in the primary market.

II.  Principal Rule

9.03  Article 6(1), Prospectus Regulation provides that a prospectus:

shall contain the necessary information which is material to an investor for making an informed assessment of: (a) the assets and liabilities, profits and losses, financial position and prospects of the issuer and of any guarantor; (b) the rights attaching to the securities; and (c) the reasons for the issuance and its impact on the issuer.2

This is the principal general rule that determines which information must be included in a prospectus. All the various specific rules contained in the Prospectus Regulation and delegated legislation must be deemed subservient to this general rule.3 Even if all such specific requirements have been duly complied with, it is still conceivable that this general rule is breached. Accordingly, after all the boxes have been ticked, the general question must still be answered: what else is possibly relevant to investors that was not yet disclosed? Compliance with this general rule will be a difficult challenge for issuers, their underwriters, and other advisers.

9.04  It is noted that Recital (31), Prospectus Regulation states:

As long as they present it in a fair and balanced way, issuers should be given discretion to select the information that they deem to be material and meaningful.

(p. 197) The contradiction between Article 6(1), Prospectus Regulation and Recital (31), Prospectus Regulation is glaring. Certainly, the notion as expressed in this recital—i.e. that issuers have a measure of discretion to decide which information is material or not—is firmly revoked by the text of Article 6(1), Prospectus Regulation. It cannot be argued that the meaning and impact of Article 6(1), Prospectus Regulation is mitigated by this recital.4

9.05  Although differently worded, the general rule as stated in Article 6(1), Prospectus Regulation is the same as that contained in its predecessor Prospectus Regulation, the Prospectus Directive5, but with one notable exception: in Article 5, Prospectus Directive, the materiality test was not expressly included; the corresponding provision of the Prospectus Directive requires inclusion of information which ‘is necessary to enable investors to make an informed assessment’ (italics added). The term ‘necessary’ was deemed by the Committee of European Securities Regulators (CESR) (the predecessor of the European Securities and Markets Authority (ESMA)) to constitute a materiality test; the CESR stated that:

when information is not material in the context of the securities or the issuer, CESR does not expect issuers to mention it.6

The term ‘necessary’ denotes a rather different concept from the term ‘material’ (the former term is much narrower than the latter), but the difference in wording accordingly appears not to have any meaningful consequence. Certainly, the European legislator did not when promulgating the Prospectus Regulation in 2017, intend to amend the intents and purposes of the clause.

III.  Objective versus Subjective Materiality

9.06  The criterion as used in Article 6(1), Prospectus Regulation is worded as an objective test, but is in one sense not wholly objective: the term ‘material to an investor’ implies that it must be determined whether a given item of information is material from the viewpoint of investors. Particular circumstances of individual investors naturally cannot and need not be taken into account, unless the offering is addressed to a particular, defined group of potential investors sharing certain materially relevant characteristics which must be addressed in the prospectus. Accordingly, the requirement is basically to be read as being ‘material to investors generally’.

(p. 198) 9.07  However, if the offering is made to investors in various jurisdictions, and if in one or more of these jurisdictions particular rules of law apply that are of significant interest to investors in such jurisdictions, mention thereof should be made in particular if it is reasonably expected that the offering will to a certain level of magnitude be taken up in these jurisdictions. These rules of law will often amount to offering restrictions, and may accord specific tax treatment to an investment in the securities concerned. In case of a global offering, it is, of course, impossible to take such rules into account as they read in every possibly relevant jurisdiction.

9.08  ‘Exonerations’ in prospectuses to the effect that investors should revert to their own counsel as to the tax treatment of their contemplated investment and as to their ability to subscribe for the securities on offer will not necessarily let issuers and their advisers off the hook. This is a matter to be determined under the law governing prospectus liability issues. Likewise, the question whether an offering is in violation of ‘blue sky’ laws7 or national securities legislation applicable in the jurisdictions concerned cannot simply and definitively be addressed by a statement in the prospectus that the offering may not be deemed made in that jurisdiction if and to the extent in violation of such laws.8 Whether such statement is effective must be determined according to the law of the jurisdiction concerned. To my knowledge there is, however, little case law of offerings being considered illegal in a certain jurisdiction despite inclusion of such statement; this suggests that the problem is of a largely theoretical nature, certainly where ‘outlandish’ jurisdictions are concerned, where subscriptions are unlikely to reach substantive levels. The same comments apply as regards the effectiveness of statements in a prospectus that the offering is only made to professional investors (however, this category of investors may be defined in various jurisdictions, e.g. ‘qualified investors’, ‘qualified institutional buyers (QIBs)’, ‘investment professionals’, etc.).

9.09  In this context, the issue may arise whether transactions, whether effected in the ‘primary’ or in the ‘secondary’ market, are void or voidable if such transactions are entered into in disregard of the type of restrictions referred to in the previous paragraphs. Given that these restrictions are generally phrased as (or may be interpreted as) instructions to underwriters involved in placing the securities concerned, these restrictions should as such generally not lead to nullity or to the risk of nullification. At least, that would be the case under Dutch law, but it seems probable that the same outcome would prevail also in other civil law jurisdictions. Nevertheless, it will always depend on the specific wording of these restrictions and the interpretation thereof according to applicable law whether they have in rem effect (in the sense that a transaction made (p. 199) in violation thereof would be null and void or voidable). Selling restrictions normally follow standardized formats, but deviations will sometimes occur. If they would have such in rem effect, this would create havoc in the capital markets if initial and secondary transactions in the securities concerned would have to be unwound. This analysis then points to an ironic contradiction: to make these clauses have in rem effect would, on the one hand, increase their effectiveness and reduce the likelihood of contravention of local offering rules, whilst on the other hand, giving this effect to selling restrictions would be detrimental to the smooth workings of the capital markets (where finality of transactions is key). These issues will not be explored further in this chapter.9

IV.  The Scope of Article 6(1), Prospectus Regulation

9.10  It is noted that according to its text, Article 6(1), Prospectus Regulation requires inclusion of information that permits an investor to make an informed assessment of certain specified topics relating to the issuer (and to the guarantor, if any). As stated in section II ‘Principle Rule’ (9.03) above, these topics are: assets and liabilities, profits and losses, and financial position and prospects. This appears to be a limitative list, albeit that the topics named can be interpreted as being comprehensive. The question arises nevertheless whether this means that material information that cannot be categorized as falling under one of these topics would be outside of the scope of Article 6(1), Prospectus Regulation. It is doubtful whether such conclusion will be upheld in court. The European legislator did not think it necessary to further specify the topics concerned; it is likely that other topics than those mentioned, such as quality and continuity of (both senior and lower-level) management, the environmental and social impact of the issuer’s business, the quality of its research and development, and other such (somewhat ‘softer’) issues must be deemed included. The narrowly worded approach of the European legislator can most probably be attributed to the fear that further specification might lead to unintended lacunas.

9.11  The limited number of topics listed in Article 6(1), Prospectus Regulation may, however, conceivably still lead to uncertainty as to whether—and if so in which manner—it is necessary to include in the prospectus issues that fall in the (large) grey area between what counts as pertaining to ‘profits and losses’ and ‘financial position and prospects’ on the one hand, and definitively out-of-scope aspects on the other hand. As stated, one could argue that any circumstance, event, or development affecting the issuer will by (p. 200) definition affect the ‘financial position and prospects’ of the issuer. In the end, all issues can be reduced to the effect on the bottom line. Subject to the materiality test, all such issues are thus relevant for inclusion in a prospectus.

9.12  It is particularly noteworthy in this context that issues such as the effect of climate change on the business and prospects of the issuer and the need for the issuer to adapt to more sustainable and/or eco-friendly manufacturing processes are now thought of as increasingly important. As time passes, there will undoubtedly be a more and more coercive pressure for more inclusive discussion of this type of issue in prospectuses, regardless of whether they can be categorized as falling within the scope of Article 6(1), Prospectus Regulation. That may initially perhaps be limited to market expectations or demands from the investment community (e.g. as a consequence of growing concerns of pension fund managers and their constituencies with such issues), but it may be expected eventually to evolve into mandatory legal requirements from the EU regulators, forcing a shift from more generalized signalling of these issues in the risk factors paragraph of prospectuses towards more specific, concrete, data-based analyses of their consequences. We are now at the forefront of these developments, which do not just concern hard-core manufacturing of products such as cars, aircraft engines, marine propulsion, etc., but also the financial sector, and more generally, the service industry at large. Obsolescence of products looms everywhere. But the unfettered right to provide funding and other services to more or less ‘eco-damaging’ undertakings is also at risk, not to mention the changing credit risk for lenders and investors alike caused by these developments and the impact on their customers. The ensuing threat to the profitability of the insurance industry is another such issue. The risks concerned are gradually becoming more specific threats, already now worthy of more attention than generalized statements in risk-factor paragraphs.

V.  The Materiality Test Generally

9.13  The exact meaning and impact of the materiality test is of crucial importance in the context of drafting the prospectus. Applying this test will primarily determine what information is to be included in or, conversely, may be excluded from a prospectus. Generally, advisers entrusted with drafting prospectuses are well advised to err on the side of caution in applying the test. Correct compliance with the rule of Article 6(1), Prospectus Regulation is relevant in at least two differing contexts: that of possible breach of regulatory requirements, and that of prospectus liability. Recital (74), Prospectus Regulation requires Member States to:

take necessary steps to ensure that infringements of this Regulation are subject to appropriate administrative sanctions and other administrative measures. Those sanctions and measures should be effective, proportionate and dissuasive and ensure a common approach in Member States and a deterrent effect.

(p. 201) Administrative sanctions and other administrative or criminal law consequences of non-compliance with the Prospectus Regulation requirements will not be discussed in this chapter. Instances where issuers or their advisers are administratively or criminally sanctioned do not frequently occur in Europe; in cases of misleading information or fraud, the focus tends to be on recovery of damages by investors rather than on sanctions. The question arises whether in actual practice administrative law sanctions for violations of the Prospectus Regulation requirements are not too languidly pursued by conduct regulatory authorities in Europe. It has to be acknowledged that the preventive effect of threatened administrative or criminal law sanctions against issuers and persons (as opposed to the entities in which they work) responsible for the contents of prospectuses may be seen to be a rather useful addition to the toolkit of regulators in the context of investor protection.10 The effect of more rigorous imposition of these types of sanctions can be severe, and should be further evaluated. A tougher approach by the regulators (which would likely need expansion of the authority to impose these sanctions) would require considerable additional resources, as it would not only require the establishment of prosecutorial teams, but would also in all probability entail that regulators need to take a more substantive approach when scrutinizing and approving a prospectus pursuant to Article 20, Prospectus Regulation.11 In any event, the question needs to be asked whether a more strict approach is actually necessary: for which existing problem is this approach a possible solution? This chapter will not delve further into this complex and important topic. The focus will be on aspects of prospectus liability, a topic that the Prospectus Regulation does not itself specifically address. Interpreting the term ‘material’ in Article 6(1), Prospectus Regulation is a matter of EU law. The EU Court of Justice has the final say on the meaning of this term and on how the materiality test is to be applied. Generally, national courts, when having to judge on this issue, may (and courts in last instance must) request the EU Court of Justice to pronounce its views.12 However, national courts would not need to do that if there can be no doubt as to the correct interpretation of Article 6(1), Prospectus Regulation, or (p. 202) if the EU Court of Justice has already pronounced thereon (a so-called acte clair or an acte éclairé). Since materiality is not defined in the Prospectus Regulation and the EU Court of Justice has not to my knowledge given its views on this issue, and since there is little guidance thereon by the EU legislator (e.g. in delegated regulations), a court would only in rather clear-cut circumstances be likely to take the view that the issue concerns an acte clair.

VI.  Materiality in the Context of Prospectus Liability

9.14  The notion of materiality in the context of Article 6(1), Prospectus Regulation strictly speaking only addresses the question whether certain information should be included in the prospectus. It does not determine whether or not a failure to include material information, or a failure to present such material information correctly, would lead to prospectus liability. This is because the Prospectus Regulation refrains from addressing the issue of civil prospectus liability,13 and leaves that issue for the national courts to decide upon in accordance with applicable national law. In a sense, this is unfortunate, because if national courts decide on liability issues according to national law, this may lead to widely diverging judgments on prospectus liability claims, depending on the jurisdiction concerned. From this perspective, the statement in recital (27), Prospectus Regulation that ‘harmonisation of the information contained in the prospectus should provide equivalent investor protection at Union level’ seems off the mark. Investor protection is as much dependent on investors’ ability to claim damages as on enforcement of administrative rules.

9.15  The reluctance of the EU legislators to regulate prospectus liability is understandable. Such regulation would require creating supra-national concepts of tort and breach of contract liability applicable across the European Economic Area (EEA), a daunting, if not impossible, task, even if it were limited to the context of securities offerings.

9.16  Under most national laws, a failure to include certain information in a prospectus cannot lead to prospectus liability if the incorrect or incomplete information is not material: how could an investor claim that he would not have made his investment decision if the information on which he bases his claim is not material? In the notorious leading Dutch World Online case concerning prospectus liability,14 the Dutch Supreme Court stated:

A judge may qualify an incorrect or incomplete statement as being misleading only if it may reasonably be assumed that that statement, read in the context within which it is being made, is of material interest to the investment decision of the average investor. (p. 203) This is because in that case it is likely that the incorrectness or incompleteness may reasonably influence the investment decision of the average investor.15

The materiality test here is a test under national law. It is to be distinguished from the criterion of Article 6(1), Prospectus Regulation. Can it be argued that the substance of the test under national law is exactly the same as that of the materiality test of Article 6(1), Prospectus Regulation? The answer must be affirmative. But this would mean that although the notion of materiality under EU law is relevant, the materiality test applied in the context of prospectus liability proceedings is likely to be judged upon in the national courts on the basis of national law. This again entails the possibility that the outcome of this test may vary considerably, depending on the jurisdiction concerned.

9.17  The question whether misleading information is sufficiently material to allow a claim based on the doctrine of ‘error’ induced by misleading information is closely linked to but to be distinguished from the causal link requirements that will also need to be met if a prospectus liability claim is to be successful. This concerns the causal link between the misleading information concerned and the decision of the investor to subscribe, and the causal link between the misleading information and the damage that the investor may have incurred by subscribing for the securities concerned. In most EU jurisdictions, these are distinct causation requirements to be fulfilled if a prospectus liability claim is to be successful, even if the legal concepts concerned would in a particular jurisdiction be worded differently or are given different contexts. Clearly, there will be national variation as to when these requirements can be deemed to be fulfilled (one can think of varying degrees of strictness in the application of the ‘sine qua non’ rule), and in this respect too it can be said that EU law has not, or not yet, achieved harmonization of investor protection.

VII.  ‘Materiality’ not Defined in the Prospectus Regulation or in Delegated Regulations

9.18  The term ‘material’ as used in Article 6, Prospectus Regulation is not defined in the Prospectus Regulation. Nor is any specific guidance offered by the EU legislator in respect of its meaning in the context of Article 6, Prospectus Regulation.16 This is not surprising: it is difficult to imagine a practically useful definition or description. Any effort to define is unlikely to provide any further enlightenment than given by way of, for instance, the formula of the Dutch Supreme Court quoted in section VI ‘Materiality in the Context of Prospectus Liability’ (para. 9.14).

9.19  Unlike in other Member States such as England, Germany, and France, in the Netherlands, prospectus liability is based on two distinct legal concepts. If the person (p. 204) claiming prospectus liability is not a consumer, then the general tort rules relating to misleading advertising would constitute the legal basis for claims.17 However, if such a person is a consumer, the rules on unfair commercial practices would be applicable.18 These latter rules implement Directive 2005/29/EC of the European Parliament and of the Council of 11 May 2005 concerning unfair business-to-consumer commercial practices. This Directive (the CPD) uses a layered materiality standard. An unfair commercial practice is a practice (i) that is contrary to the requirements of professional diligence; and (ii) whereby the economic behaviour of consumers is materially distorted or likely to be materially distorted, and the consumer’s ability to make an informed decision is appreciably impaired, thereby causing the consumer to take a transactional decision that he would not have taken otherwise.19

9.20  The following comments may be made in respect of item (ii) above. If the distortion is required to be material, then a de minimis distortion should not constitute an unfair commercial practice. However, because consumer protection is at stake here, the materiality threshold cannot be set at a high level. If this is correct, then it may be argued that any distortion consumers may conceivably feel ‘in their pockets’ would meet the threshold. The second proviso in item (ii) above—i.e. that they took a decision which they would not have taken otherwise—may be characterized as a sine qua non requirement. The two requirements are inclusive, rather than cumulative: this is because the sine qua non requirement in itself establishes the materiality of the distortion concerned.

9.21  Meanwhile, it must be admitted that literal application of the sine qua non requirement in the context of prospectus liability is problematic. The requirement is simply too restrictive. Why should an investor be deprived of a prospectus liability claim if a correction of the misleading information would not actually have deterred him from subscribing for the securities concerned, but still causes damage simply by virtue of the fact that his securities are worth less than he was originally induced to believe? Accordingly, it is convincingly arguable that the requirement must be broadly interpreted in this context: the term ‘that he would not have taken otherwise’ must be deemed to include:

or that he would not have taken on the same terms, or that he in any way acts to reduce the market value of the securities that he has obtained in the transaction concerned.

A stricter approach would lead to an unacceptably low level of consumer protection under the CPD.

(p. 205) VIII.  The Average Investor

9.22  The CPD takes the ‘average’ investor to measure whether or not infringement of the prohibited commercial practice has taken place. In the Gut/Springenheide and subsequent judgments,20 the EU Court of Justice has clarified that one has to apply the standard of:

the perception of an average consumer of the products or services being advertised who is reasonably well informed and reasonably observant and circumspect.21

Among writers and practitioners, there are subtly different perspectives as to what level of understanding and effort must be deemed to be attributable to a consumer to satisfy the criteria of being ‘reasonably well informed’ and ‘circumspect’. From one perspective, these criteria are not really relevant. Consumers do not read prospectuses. If they were disposed to try, the sheer size, organization, and technical complexity of the information provided therein constitutes a compelling disincentive. The summary as required by the Prospectus Regulation does not really affect the import of these factual observations. Although the EU legislator’s efforts to improve the accessibility of prospectuses are necessary as well as laudable, they do not (and probably cannot) wholly achieve their purpose. Consumers generally follow market perception, as communicated to them by their financial advisers, the press, or the grapevine. These sources are, of course, directly or indirectly determined or influenced by the prospectus contents, and will ultimately more often than not, by the time the offering period opens, be focused on pricing. In that manner, the prospectus contents do influence—albeit not directly—consumers’ investment decisions. Most importantly, the prospectus requirements provide ex post consumer protection: failure to provide material information will generally expose issuers to liability, regardless of whether investing consumers have taken the trouble to try and grasp the portent of the offering; here, we have come full circle back to the causal link discussion mentioned in section VI ‘Materiality in the Context of Prospectus Liability’ (para. 9.14) above, which is not the topic of this chapter. The chapter will not further discuss the above-mentioned interpretation differences as to what intellectual and active attributes an average investor must possess. In the end, these differences are not likely to yield significantly varying results. But it is important to emphasize the relative value of that discussion, as demonstrated here.

9.23  Whether or not the CPD applies, the materiality test using the average investor threshold as described above will be applied, therefore also if an investor instituting a (p. 206) prospectus liability claim is not a consumer as defined in the CPD. At least this would be the position under Dutch law. The idea is that if the offering is general in the sense that it is addressed to both consumers and sophisticated investors, the issuer is in principle barred from denying liability for misleading information on the grounds that the claiming investor is a professional investor. However, this is not to say that a defence based on culpability of a sophisticated investor (‘who should have known better’, so to speak) would not be available to issuers and their advisers. Of course, securities offerings may be limited to a specific group of investors or a specific category of investors. In the case of such limited offering, the courts ought to apply the test taking into account characteristics of the particular group of investors concerned: their investment experience to date, their general knowledge of financial markets, their knowledge about securities such as the ones on offer, etc. It is ironic in this context that the 2008–2009 financial crisis disconcertingly demonstrates that the ability of financial professionals generally to analyse and understand investment risks is not all that impressive.

9.24  In section III ‘Objective versus Subjective Materiality’ (para. 9.06) above, the issue of the effectiveness of selling restrictions is addressed. If an offering is restricted to professional market parties but the restriction is not legally effective so that retail investors also have an opportunity, one way or another, to subscribe for the securities on offer, then presumably retail investors will have the benefit of the same limited protection that such professional market parties would have: arguably, is it reasonable that the issuer bears the risk of retail investors ignoring the relevant warnings in the prospectus concerned?

IX.  Materiality in the Context of the Prospectus Summary

9.25  In the provisions on the prospectus summary (Art. 7, Prospectus Regulation),22 the term ‘key information’ is used, begging the question whether ‘key’ information can be regarded as equivalent to ‘material’ information. Obviously not: other information than key information to be included in a prospectus summary may well be considered ‘material’, whilst such other information would not necessarily be appropriate for inclusion in the summary given the brief, high-level approach that the Prospectus Regulation requires the prospectus summary to maintain. In other words, the materiality test for inclusion of information in the summary is different from that for inclusion (p. 207) of information in the long-form prospectus. One could argue that the key information criterion is stricter than that of materiality. For the purposes of the summary, a ‘double’ test applies: combining materiality per se with the notion of sufficient importance and impact to be included in the summary.

X.  Materiality in Relation to Risk Factors

9.26  The Regulation’s provisions on risk factors (Art. 16, Prospectus Regulation) impose a materiality test along the same lines as Article 6(1), Prospectus Regulation. Only risks which are ‘material for taking an informed investment decision’ may be included in the risk paragraph. This limitation, along with limitations requiring risk factors to be specific to the issuer or to the securities, reflects the EU legislator’s wish, on the one hand, to reduce the risk paragraph in order to make it more relevant and meaningful for prospective investors, and on the other hand, to prevent this paragraph being unduly used to limit the potential liability of the issuer, the guarantor (if any), and the underwriters.23 Materiality of risks must in this context, according to the EU legislator, be measured on the basis of ‘the probability of their occurrence and the expected magnitude of their negative impact’.

Interestingly, it is stated that the assessment of the materiality of the risk factors ‘may also be disclosed by using a qualitative scale of low, medium or high’. Obviously, this scaling option is inspired by internal and external auditors’ penchants to qualify risks in this way in their audit reports (preferably using the colour codes green, orange, and red). Perhaps by chance the combined concept of probability and magnitude of negative impact as applied by the EU legislator neatly mirrors the vision of the US Supreme Court, where it states that materiality should be assessed using a probabilistic, expected value framework that balances the probability of the event and its anticipated magnitude.24

9.27  But: how to determine probability? Here one could use an intuitive approach, perhaps bolstered by historic data, or a more mathematical or statistical approach (e.g. using a Bayes theorem-based calculation25). Lack of guidance on this point means that issuers and their advisers are given discretion, although here also they would be well advised to err on the side of caution. Combining the probability of occurrence with the magnitude of potential impact may anyhow be problematic. One may ask: how misleading can the exclusion of a risk factor description be to an investor, (p. 208) if that factor concerned is given a ‘green colour code’ because of high improbability, whilst if the event concerned would materialize, the effect would be to collapse the stock price? Imagine, for instance, the initial public offering (IPO) of a promising young technology company whose stock price is largely dependent upon a certain technical application considered to be unique, and that to a large extent determines the value of the issuer. The risk of that application being made redundant because of a better competing technology having been developed unforeseen elsewhere in the world may be qualified as highly improbable, but if such other technology would nevertheless unexpectedly emerge, the stock price would nosedive towards zero. Another example would be where important patents on which the issuer relies are unexpectedly successfully contested. The conclusion must be that the criteria of probability of occurrence and magnitude of the impact must be gauged cumulatively and independently of each other.

9.28  In its consultation on the Guidelines on risk factors under the Prospectus Regulation, ESMA states that:

Although the Prospectus Regulation or these draft guidelines do not define materiality, the IFRS [International Financial Reporting Standards] conceptual framework has defined materiality as: ‘Information is material if omitting it or misstating it could influence decisions that the primary users of general purpose financial reports make on the basis of those reports, which provide financial information about a specific reporting entity. In other words, materiality is an entity-specific aspect of relevance based on the nature or magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report’ (section 2.11 of the IFRS Conceptual Framework).26

Apparently, the IFRS approach may be regarded to be leading also in the rather broader context than that of financial reporting. In the ESMA Guidelines27 themselves, the materiality concept is not further elaborated on, but the Guidelines (which actually address the national supervisory authorities, not issuers and their advisers) do require these authorities to examine the materiality aspects of risk factors, albeit that they do this in somewhat vague language; see for instance Guidelines 3, 4, and 5.

9.29  Can the risk-factor approach be applied more generally to determine the meaning of the materiality criterion? I think not. The determination of the materiality of risks as a measure for inclusion in a risk paragraph in compliance with Article 16, Prospectus Regulation is an altogether different exercise from that of determining whether any factual information is material enough for inclusion in the prospectus. However, the definition in the IFRS Conceptual Framework is generally useable. The continuing debate on this definition at the level of the International Accounting Standards Board (p. 209) (IASB) and other accounting standards agencies28 signifies how complex the defining issue actually is.29 The discussion on ‘obscuring’ information illustrates this point. Also, information that is obscured may be deemed material if that information so obscured could reasonably be expected to influence decisions of (prospective) investors, according to the IFRS approach. This is strictly speaking not a discussion on whether or not certain information is material. Rather, it is a discussion on whether material information that is included in the prospectus but which is ‘hidden’, either because it is inserted in an unusual place in the prospectus or because it is ‘submerged’ in a barrage of other (immaterial) information, is capable of being misleading. The discussion focuses on whether the term ‘obscured’ can actually be defined so as to provide accountants practical guidance. In connection with this latter aspect, the US Supreme Court pointedly stated that:

[I]f the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management's fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information—a result that is hardly conducive to informed decisionmaking.30

The discussion on ‘obscuring’ information is distinct from the debate on whether it is possible that although perhaps no individual piece of information is in itself material enough to be misleading, the overall picture (in German literature, this is called the Gesamteindruck31) painted in a prospectus might nevertheless be misleading in a material way. Most likely, Article 6, Prospectus Regulation should be understood as also having been breached if the ‘overall picture’ is misleading in this sense.

XI.  Materiality Thresholds as Applied by External Auditors

9.30  In section X ‘Materiality in Relation to Risk Factors’ (para. 9.26) above, the IFRS Conceptual Framework was mentioned. The IASB draft Conceptual Framework states, somewhat obliquely:

Information is material if omitting it or misstating it could influence decisions that users make on the basis of financial information about a specific reporting entity, In other words, materiality is an entity-specific aspect of relevance based on the nature and magnitude, or both, of the items to which the information relates in the context of an individual entity’s financial report.

(p. 210) Under International Accounting Standard 1 (IAS 1),32 the formula is comparable. The following language is added there:

Assessing whether an omission or misstatement could influence economic decisions of users, and so be material, requires consideration of the characteristics of those users. The Framework for the Preparation and Presentation of Financial Statements states . . . that ‘users are assumed to have a reasonable knowledge of business and economic activities and accounting and a willingness to study the information with reasonable diligence.’

9.31  This added language is very much aligned with that developed in EU and national civil law; see section VIII ‘The Average Investor’ (para. 9.22) above. In practice, a materiality test is often applied using monetary criteria in external auditors’ examinations of annual financial statements of public companies. Typically, auditors use a threshold of 3–5 per cent of average income before tax (after eliminating extraordinary income items) in their audits of larger public companies. In addition, supervisory board audit committees of banks usually require external auditors (as well as the internal audit department) to report incidents directly to them above a certain threshold that is significantly lower (e.g., euro 4m or 5m) than that mentioned above.33 This monetary approach in the context of financial reporting that actually by and large serves the same purpose as that regarding information in a prospectus (both lay down factual information relevant to investors when determining whether to invest or divest), has the clear advantage of simplicity and clarity. But it is not useful for the purposes of prospectus liability standards because it may not capture information which in terms of immediate impact falls short of the threshold but which is still material in other than just direct monetary terms. In these cases, it will often be difficult to translate the immediate impact in financial terms from the uncertain but still possibly threatening longer-term effect. An example of this would be prior dealings in the securities on offer by the institution concerned by management or selling shareholders. If one measures such transactions in financial terms, this may not be significant. However, investments or divestments by management may be seen as respectively an act of faith or a significant warning signal. Another such example is the situation where changes other than those to be expected in the management of the institution concerned have occurred. One can also think of the situation where management board members or supervisory board members have conflicts of interest; this may arise in particular in take-over situations, where the acquiring company already wields influence in the decision-making process of the target company. Such take-over situations may well involve the offering of securities in respect of which a prospectus requirement applies. Numerous other examples (p. 211) could be given. In each such case, the directly attributable monetary impact may not be significant (and in any event difficult to quantify), but such circumstances may well be of significant concern to prospective investors. Accordingly, application of a monetary threshold is never in itself sufficient.34

XII.  Materiality as a Concept in Various Jurisdictions: A High-Level Overview

9.32  A comparative study as to the legal regimes on prospectus liability in various Member States was made in May 2013 by ESMA, with a comparative study by Hopt and Voigt.35 These studies predate the introduction of the Prospectus Regulation, and the national prospectus regimes are, of course, now largely replaced by that regulation and the Delegated Commission Regulations (DCRs). However, national law remains highly relevant for civil law aspects of securities offerings, because the Prospectus Regulation regime does not address civil law issues in this context. In this chapter, a summary overview is given of how the materiality concept is seen in three jurisdictions: the Netherlands, the US, and Germany.

1.  The Netherlands

9.33  As far as materiality as a concept under Dutch law is concerned, there is no more authoritative guidance than the Dutch Supreme Court judgment of 27 November 2009, quoted in section VI ‘Materiality in the Context of Prospectus Liability’ (para. 9.14) above. As already noted, that judgment provides little in terms of practically useful guidance. Dutch legal literature has not accorded much attention to the materiality concept in the context of prospectus liability, but the concept of the average investor, and the question as to what intellectual abilities the average investor can be considered to have, does enjoy some considerable interest in Dutch legal doctrine.36 See also Jan Paul Franx, Chapter 24 ‘The Netherlands’, this volume.

2.  The US

9.34  The following is only a brief summary, belying the complexity of the subject and the wealth of jurisprudence and literature on the (p. 212) subject.37 In the US, section 11 of the 1933 Securities Act states that securities purchasers have ‘an express right of action for damages . . . when a registration statement contains untrue statements of material fact or omissions of material fact’ (italics added). Rule 10-b5, which covers not only prospectuses but also information that may otherwise be disseminated in the context of a securities offering or transaction, prohibits a misstatement or omission of material facts. The US Supreme Court stated in a decision (albeit not concerning prospectus liability per se) that:

[T]he question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or misrepresented fact to a reasonable investor. Variations in the formulation of a general test of materiality occur in the articulation of just how significant a fact must be or, put another way, how certain it must be that the fact would affect a reasonable investor’s judgment. There must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.38


. . . if the standard of materiality is unnecessarily low, not only may the corporation and its management be subjected to liability for insignificant omissions or misstatements, but also management’s fear of exposing itself to substantial liability may cause it simply to bury the shareholders in an avalanche of trivial information—a result that is hardly conducive to informed decisionmaking.

9.35  This formula has been repeatedly used and referred to in later Supreme Court39 and lower court cases in the context of prospectus liability, as well as in US Securities and Exchange Commission (SEC) pronouncements on materiality; it seems to have considerable staying power. The formula has been criticized as giving too little practically useful guidance.40 The ‘substantial likelihood’ criterion is vague; it leads to arbitrary judgements. The term ‘reasonable investor’ seems inadequate on the premise that behavioural economics suggest that reasonability of investors is generally a somewhat questionable concept.41 A stock market bubble can make reasonable investors a rare phenomenon.42 In its Basic Inc. judgment, the Supreme Court stated that a materiality test does not:

(p. 213)

attribute to investors a child-like simplicity [or] an inability to grasp the probabilistic significance

of the event in question. This coincides nicely with European law notions of average investors being deemed to be circumspect and prudent (see section VIII ‘The Average Investor’, para. 9.22, in fine).43

3.  Germany

9.36  A clear general overview of German law in relation to prospectus liability is found in Matteo Gargantini, Chapter 19 ‘Competent Courts of Jurisdiction and Applicable Law’, this volume, and again in the conclusion of Advocate-General Timmerman in the World Online case (see n. 14). Again, this concerns the position of German law as at 2009. Unlike in the Netherlands, the concept of materiality is given wide attention in German literature.44 The following quote may give a useful indication of the German approach:

Unter berücksichtigung der Zielsetzung der Prospekthaftung, für die Richtigkeit und Vollständigkeit von Angaben zu sorgen, die einer durchsnittlicher, verständiger Anleger braucht, um eine informierte Chancen und Risiken erkennende Anlageentscheidung treffen zu können, lassen sich als wesentlich alle Angaben über Umstände bezeichnen die objektiv zu den wertbildenden Factoren einer Anlage gehören und die einer durchschnittlicher, verständiger Anleger “eher als nicht” bei seiner Anlageentscheidung berüchsichtigen würde.45

It is further stated in literature:

Angesprochen sind insoweit diejenigen Angaben, die die wertbildenden Faktoren des Wertpapiers betreffen, darunter namentlich die derzeitige und zu erwartene Ertragslage, finanzielle und rechtlichen Risiken, Produkt- und Markenstrategien, nicht dagegen Angaben technischer Art wie etwa die Zahl der Hinterlegungsstellen oder gänzlich unbedeutende Bilanzpositionen.46

(p. 214) 9.37  It is interesting to see that the ‘eher als nicht’ criterion mentioned in the first quote above closely mirrors the approach under the CPD as advocated in this chapter in section VII ‘Materiality not Defined in the Prospectus Regulation or in Delegated Regulations’ (para. 9.18), in fine. Also noteworthy is that the German approach places specific emphasis on factors that determine the value of the securities on offer (the ‘wertbildenden Faktoren’), whilst, for instance, the Dutch and the US approach as summarized in sections XII.1 ‘The Netherlands’) (para. 9.33) and XII.2 ‘The US’ (para. 9.34) above focus on the relevance of the information concerned to the investor’s investment decision more generally. It would appear, though, that this subtle difference should not lead to significantly varying outcomes.

9.38  German literature also examines at some length the intellectual abilities that ought to be accorded to the so-called ‘durchschnittlicher, verständiger Anleger’ when determining whether information is material in this context or not. Here, one sees the same basic uncertainty as is manifest in other jurisdictions (such as the Netherlands, see section XII.1 ‘The Netherlands’, para. 9.33 above). It seems difficult to strike the right balance between the necessary level of consumer protection on the one hand and paternalism on the other. This aspect will not be further dealt with in this chapter; reference may be made to the discourse on this topic in Gross, Kapitalmarktrecht/WpPG (containing further German references).47

XIII.  Accommodating Funding Needs

9.39  In some instances in the Prospectus Regulation, the EU legislator specifically mentions the importance for issuers of retaining access to funding. In Article 14, Prospectus Regulation, for instance, providing for simplified rules in case of secondary issuances, it is stated that:

The Commission shall take into account the need to facilitate fundraising on capital markets and the importance of reducing the cost of capital. In order to avoid unnecessary burdens on issuers [ . . . ], the Commission shall also take into account the information which the issuer is already required to disclose under [the transparency directive] and [the market abuse regulation].

The alleviated regime of Article 15, Prospectus Regulation expresses a similar concern in relation to the EU Growth Prospectus, stating that:

. . . the Commission shall calibrate the requirements to focus on [ . . . ] (a) the need to ensure that the EU Growth Prospectus is significantly lighter than the standard (p. 215) prospectus, in terms of administrative burdens and costs to issuers; (b) the need to facilitate access to capital markets for SMEs [small and medium-sized enterprises] and minimise costs for SMEs while ensuring investor confidence in investing in such companies.

9.40  The concern here is, of course, legitimate. According to a 2018 KPMG report, the average cost of debt in Europe fell from 3.4 per cent in 2015 to 2.8 per cent in 2018. But it appears that the cost of funding through the issuance of capital market instruments remains at an undesirably high level. A comparison with the average cost in the US is difficult to make, given the central bank interest rate differences, but it is clear that in terms of funding through the issuance of capital markets instruments, the deeper and more competitive US markets will lead to relatively cheap corporate funding there.

9.41  However that may be, there is a delicate balance to be struck here. Reduced disclosure requirements do not necessarily significantly alleviate issuing costs. It is still necessary to carry out costly due diligence and other preparatory work, and to weigh up which information is to be included and which not; this is an effort which has not so much to do with reduced disclosure requirements, but rather with assessing the risk of prospectus liability. There is an apparent conflict and inherent danger here: it will not take more than a few prospectus liability or fraud incidents to fundamentally undermine the confidence of investors in a light regime. Perhaps a better (or additional) approach to costs could be to permit national governments to develop state-owned agencies that would take over underwriters’ functions and bring SME bonds to the market on the basis of standardized documents and standardized procedures at subsidized fee levels; it would also perhaps be possible to provide fiscal incentives to issuers, enabling their access to capital markets at reduced costs. These approaches have the advantage that investor protection is not jeopardized. They would leave it to the market to determine which level of reduced investor protection is still acceptable.

XIV.  Possibilities for Omitting Sensitive Information

9.42  More often than not in the context of drafting the prospectus, the issue will come up whether the inclusion of sensitive information relating to the company in the prospectus can be avoided. Issuers may be confronted with actual or possibly competitive disadvantages if having to disclose certain information. This can relate to all sorts of issues: the development of new products (whether or not subject to patent applications), threatened litigation, recent mishaps, labour unrest, regulatory inquiries, etc. But not only competitive aspects are relevant. It may also be that inclusion of a certain factual situation in a prospectus gives that situation more prominence and more attention than it objectively deserves. In this connection, one can think of frivolous lawsuits against an issuer or guarantor where the claim is sizable but where the chances of success are zero, or close to zero. It is also possible that there is a real litigation risk but that disclosure thereof might jeopardize the procedural position of the issuer or guarantor. One can (p. 216) also think of regulatory inquiries into possible license breaches where, for instance, the theoretical risk is factory closure or discontinuation of commercial activities, but where realistically the risk is limited to exposure to a manageable administrative fine. Many more examples can be given.

9.43  A distinction has to be made here between information that is sensitive but not material and information that is both sensitive and material. In the former case, the information concerned can be omitted from the prospectus. In the latter case, the facility of Article 18, Prospectus Regulation will have to be invoked. The distinction makes a significant procedural difference. The distinction is, however, blurred, and issuers will therefore sometimes have to make complex judgement calls; complex also because permissible omissions under Article 18, Prospectus Regulation are narrowly formulated. An omission under Article 18, Prospectus Regulation is permissible if: (i) disclosure would be contrary to the public interest;48 (ii) disclosure would be seriously detrimental to the issuer or the guarantor; or (iii) it concerns information of minor importance in relation to a specific offer or admission to trading on a regulated market and would not influence the assessment of the financial position and prospects of the issuer or the guarantor. In relation to the exclusion under (ii), an additional condition is imposed: the omission is not likely to mislead the public with regard to facts and circumstances essential for an informed assessment of the issuer or the guarantor, and of the rights attached to the securities on offer.

9.44  A few comments on Article 18, Prospectus Regulation are offered. In the previous paragraph, it is stated that if sensitive information is not material, it need not be included in a prospectus (unless a specific provision in the Prospectus Regulation regime requires inclusion), and would not fall within the scope of Article 18, Prospectus Regulation. The question arises whether the permitted omission under (iii) should be interpreted as requiring authorization under Article 18, Prospectus Regulation, even if the information concerned is immaterial. This appears arguable if meeting the test of ‘minor importance’ under Article 18, Prospectus Regulation must be interpreted to be the same as not meeting the materiality test of Article 6, Prospectus Regulation. This line of reasoning, however, comes across as unconvincing, and, in the author’s view, it can be safely assumed that these tests do not address the same issue.49

9.45  The permitted omissions under Article 18(1) sub (b), Prospectus Regulation are narrowly formulated. Disclosure ‘would be seriously detrimental to the issuer or the guarantor’ (italics added) if the exclusion is to be permissible. Note that the word ‘would’50 is used here, rather than the word ‘could’. This choice of words appears to indicate that (p. 217) there must be a level of certainty that the detrimental effect will as a matter of fact occur, and that the omission would not be permissible if there is only a possibility of detriment.

9.46  In this respect, the text of the clause is more restrictive than the (more or less) corresponding clause in the Market Abuse Regulation51 (the MAR): in clause 17(4) sub (a), MAR, the terminology used is ‘immediate disclosure is likely to prejudice the legitimate interests of the issuer . . .’ (italics added). The difference in terminology in the two Regulations is remarkable, not only because of the notions of certainty and probability discussed above, but also because of the use of the term ‘legitimate interests’ in the MAR clause.52 Is the absence of this term in the Prospectus Regulation clause significant? It may well be. Serious detriment relates primarily to the suffering of losses, financial or otherwise, and detriment may be serious regardless of whether or not this falls within the scope of legitimate interests. Thus, the Prospectus Regulation clause in this sense appears to be more permissive than the corresponding MAR clause.

9.47  In a strict literal interpretation of the Prospectus Regulation clause (i.e. there must be certainty of a serious detriment), its application in practice would be severely limited, and the question arises whether such interpretation is compatible with the intents and purposes of the EU legislator. This is a matter of interpretation where the EU Court of Justice has the final say. However, in first instance, the matter is to be decided upon by the competent authority of the home Member State. A more permissive interpretation by the regulators would arguably be better aligned with the intents and purposes of the clause: where the issuer or the guarantor has a justifiable economic interest in not disclosing sensitive information, that concern ought to be taken into account and honoured, and not be disregarded simply on the basis of the fact that there is perhaps some measure of doubt whether or not the incident or circumstance to which the information relates will materialize. A permissive interpretation seems defensible (even though the differing textual approach in the MAR admittedly indicates otherwise).

9.48  A second comment relates to the additional condition in the PR clause under (ii), that ‘the omission of such information would not be likely to mislead the public with regard to facts and circumstances essential for an informed assessment of the issuer or guarantor, and of the rights attached to the securities to which the prospectus relates’. Note here the use of the term ‘essential’. This seems to indicate that the competent authorities have somewhat more leeway here to permit the omission than in the case that the more inclusive term ‘ material’ had been used.53 Nevertheless, the very fact that information is sensitive from a competitive point of view will in practice often be a rather strong indication that that information is essential to prospective investors. (p. 218) If information is ‘essential’ in the sense of (ii), then by definition omission thereof is likely to mislead the public. All of this would then lead to the conclusion that the possibilities for omission under (ii) are hardly usable at all. That cannot be the intention of the EU legislator, and it can reasonably be argued that this condition is misconceived and ought to be ignored or narrowed down. The same issue arises under Article 17(4) sub (b), MAR, where a similar condition is imposed for postponing the publication of inside information.54

9.49  Under Article 17, MAR, companies may make use of the postponement facility ‘on their own responsibility’. This means that under the MAR, there will in any event be no need to consult the regulators on the admissibility of the delay. This language is not included in Article 18, Prospectus Regulation. This then means that national competent authorities may, at their discretion, impose individual prior regulatory consent requirements or grant a more general dispensation by way of regulation. (In the Netherlands, the second option is used.) In the context of the second option, the issuer concerned may find itself having to make a difficult judgement as to whether the omission conditions have been met. Unlike the MAR, the Prospectus Regulation does not specifically require justification of the omission to the competent authority. However, Member States may (and generally will) require such justification, either in the process of prospectus scrutiny and approval pursuant to Article 20, Prospectus Regulation, or by way of an ex post administrative process.55 Whether or not the language ‘on their own responsibility’ is included, issuers misjudging the ability to use the permission of Article 18, Prospectus Regulation are exposed to the risk of both administrative sanctions and civil liability.

9.50  Two comments can be made in conclusion. The first relates to the question as to at which stage information becomes material information subject to the rule of Article 6(1), Prospectus Regulation or becomes information to which the permission regime of Article 18, Prospectus Regulation may be applied. At what stage is information sufficiently concrete to fall under these rules? This question becomes acute, for instance, in cases of product development, or if litigation on substantive disputes is threatened against the issuer or the guarantor. Clearly, there are phases in which it will be unclear whether product development will lead to a realistic window of commercial success, or when it is still too early to gauge whether a litigation threat becomes realistic. Until such time, there will be a possible argument either that the information concerned is too uncertain and therefore as yet immaterial, or that disclosure would be to the serious detriment of the issuer or the guarantor and therefore not required. The same issue arises also with respect to disclosure obligations under the MAR; under both regimes, there (p. 219) is a grey area where the decision to omit (under the Prospectus Regulation) or to delay (under the MAR) may be a difficult judgement call.

9.51  The second comment relates to Article 18(2), Prospectus Regulation. This clause provides that if certain information is required to be included in a prospectus (by virtue of a specific provision to that effect in the Prospectus Regulation or relevant Delegated Commission Regulation (DCR), one must assume) but is ‘inappropriate to the sphere of activity or of the legal form of the issuer or the guarantor, or to the securities to which the prospectus relates’, the issuer will instead need to include equivalent information unless no such information exists. This is a potentially important ‘catch-all’ provision, widening the scope of the specific disclosure requirements in the Prospectus Regulation or relevant DCR if such specific requirements do not accurately address the characteristics of the issuer, its business, or the securities on offer. In other words, if such specific requirement does not ‘fit’ the factual position of the issuer or the securities concerned, that issuer will at its peril ignore such requirement rather than analyse whether Article 18(2), Prospectus Regulation nevertheless requires some form of equivalent disclosure.

9.52  Finally, see also Paola Leocani, Chapter 15 ‘Omission of Information, Incorporation by Reference, Publication, and Language of the Prospectus’, this volume, in relation to the topics discussed in this paragraph.

XV.  Exculpations

9.53  Can a person (be it the issuer, the guarantor or other entity, or even an individual) responsible for the contents of a prospectus exculpate himself? In other words, are limitations of liability permissible under the Prospectus Regulation? The Prospectus Regulation itself addresses this question in its Article 11. Member States are required to ensure ‘that their laws, regulations and administrative provisions on civil liability apply’. As commented on in section VI ‘Materiality in the Context of Prospectus Liability’ (para. 9.14) above, civil law liability is thus made dependent on the national laws of the Member States. In this respect, there is no EU harmonization. The consequences of acting in contravention of the Prospectus Regulation and the relevant CDRs may thus vary considerably, depending on the law of the Member State concerned. In this context, it can make a considerable difference in which jurisdiction prospectus liability proceedings are brought and which law is applied. Principles of private international law will determine this; see section XVI ‘Applicable Law and Jurisdiction’ (para. 9.62) below.

9.54  The language of Article 11(2), Prospectus Regulation lacks precision. If the provisions on civil law liability in a given Member State generally permit exclusions or limitations of liability (as they will often do) in contractual relationships or in extra-contractual relationships (tort), then such limitations must be considered part of the civil liability regime of that jurisdiction; could Article 11(2), Prospectus Regulation accordingly be (p. 220) interpreted as also permitting the same? Limitation of liability undeniably thwarts the intents and purposes of this EU provision. The provision is clearly designed to offer investors protection in case they base (or are deemed to base) their investment decisions on incorrect or incomplete information. That protection might largely fall away if limitation of liability were allowed. Investors would be barred from instituting meaningful damages claims, and the corresponding incentive to issuers and their advisers to scrupulously abide by the EU disclosure rules would be lost. It is arguable that the so-called effet utile principle of EU law comes into play here.56 This chapter will not discuss this principle, save to say that its exact scope is unfortunately far from clear.

9.55  Apart from this principle, it is noted that limited liability protection would anyway not be available in case of breach of provisions of the Unfair Commercial Practices Directive (Directive 2005/29/EU of 11 May 2005). Whilst this directive is expressed to apply in relationships with ‘consumers’, it seems logical to extend the scope of its protection to other categories of investors, particularly in the case of public securities offerings that are not limited to qualified investors (as such term is defined in Art. 2 sub (e), Prospectus Regulation). If this approach is correct, then there is no need to resort to the hazy effet utile principle discussed above.

9.56  On the other hand, an argument could conceivably be developed to the effect that national law does not necessarily undermine the effectiveness of EU law in this instance. This would in particular not be the case if under national law an exculpatory clause can anyhow not be invoked under any circumstances (e.g. if invoking such clause is limited by principles of equity, or if the extent of culpa of the issuer is such as to prevent invocation). Most civil law jurisdictions cater for a defence in one form or another against invocation of limitation of liability clauses, if the result of such invocation would lead to a manifestly unjustifiable result. The argument would then be that if there is uncertainty whether or not a limitation of liability could be invoked, the possibility of civil liability would in itself be sufficient to ensure the effectiveness of the EU prospectus rules concerned. Whilst such an argument could perhaps justifiably be invoked in the context of the Markets in Financial Instruments Directive II (MiFID II), for example57, (where the effectiveness of the relevant EU law provisions is in any event safeguarded by a more or less well developed system of preventive administrative sanctions), it seems less convincing in the context of prospectus liability.

9.57  All in all, arguments developed in legal literature that limitation of prospectus liability is not permissible58 appear more convincing than counterarguments. The EU Court of (p. 221) Justice has regrettably to date not yet been given an opportunity to answer prejudicial questions on this point.59 Practice bears out that limitations of liability are generally not resorted to by issuers, underwriters, and others involved. It is difficult to say whether this is attributable to historically prevailing market practice or to uncertainty as to whether these clauses are effective; inclusion of these types of clauses would certainly trigger investor unease if current market practice would, in a given securities offering, unexpectedly be deserted . . .

9.58  The answer to this question on admissibility of limitation of liability protection may be different in case the incorrect or incomplete information included in a prospectus is not originated by the issuer or its advisers, but rather is provided by and attributable to third parties. A prospectus will often contain information which is not generated by the issuer or its advisers, but is purveyed by third parties: auditors’ reports, fairness opinions of investment bankers, legal opinions, valuation reports of real estate valuers, actuarial reports, etc. There appears to be a broad consensus that, in contrast to persons more directly responsible for the contents of a prospectus, these third parties could limit their liability in case their findings as published in a prospectus would prove to be erroneous or incomplete.60 In practice, third parties tend indeed to include exculpatory protection in their contractual relationship with the issuer or its advisors. Given their third-party status, their limited involvement in the securities offering itself, and their limited financial interest in that offering concerned (their interest being disproportionately small relative to the vastly greater amount of their potential liability exposure), it seems logical to allow these exculpations to extend also to the relationship of these third parties with investors. However, this general observation would not necessarily apply to the external auditor’s statements on financial accounts included in a prospectus.61

9.59  If third parties were permitted to exclude or limit their liability, why shouldn’t lead underwriters and issuers likewise also be permitted to exclude liability for the correctness and completeness of third parties’ statements included in a prospectus? In the so-called CoopAG prospectus liability case,62 where investors in bonds were wrongfooted by unduly optimistic audited financial statements of CoopAG, the Dutch Supreme Court acknowledged the possibility for underwriters to exclude their liability (often referred to as a so-called ‘disclaimer’) for information in the (p. 222) prospectus provided by third parties, provided that such disclaimer was specifically stated in the prospectus and it was made clear to which specific part of the prospectus the disclaimer applied. In this particular instance, such disclaimer was not made, but the Supreme Court fortunately used the opportunity in these proceedings to clarify this point. It was reiterated in the Supreme Court’s World Online judgment in 2009.63 In both these proceedings, the highest court did not find it opportune or necessary to revert to the EU Court of Justice to clarify related points of EU law.

9.60  The question posed in paragraph 9.59 above can also conversely be phrased as follows: if the persons responsible for the contents of the prospectus would not be permitted to seek protection under the umbrella of limitation of liability clause, shouldn’t the currently prevailing dictates of maximum investor protection prescribe that that same regime should also apply to third parties? If that approach were taken, the associated risks might discourage tapping the capital markets, and would in any event increase issuing costs. The attraction of pursuing this route is that the risks will ultimately be collectively shouldered by the capital markets community at large: the premiums they pay to their indemnity insurers would ensure that.

9.61  There is one final question on this topic. Were the EU legislators right to desist from regulating these predominantly civil liability questions? Arguably they were, on the basis that creating a supra-national civil liability regime with respect to prospectus issues is likely beyond their remit, and even if it were within their remit,64 it would require developing and adopting a massive and complex set of rules for which political consensus and acceptance would be difficult, if not impossible to obtain. But this is not a complete answer to the question at hand. If it was not possible to devise an overarching liability regime setting aside national law in this limited context, surely it would have been possible to devise and include in the Prospectus Regulation a number of principles to which national laws would be required to submit? Wouldn’t it have been possible to develop principles on, for instance (i) whether or not third parties could exonerate themselves; (ii) whether or not those responsible for the contents of the prospectus are permitted to exonerate themselves; (iii) under which national law liability issues are to be decided upon and which courts have jurisdiction; (iv) issues of causal links between misinformation and damage; and (v) issues of what damages could be claimed in case of such misinformation, to name but a few such generalized topics that could perhaps be addressed without unduly interfering with the national legal regimes involved? This is an admittedly tall but seemingly not impossible order.

(p. 223) XVI.  Applicable Law and Jurisdiction

9.62  The topic of this paragraph is discussed in Matteo Gargantini, Chapter 19 ‘Competent Courts of Jurisdiction and Applicable Law’, this volume; I will here only proffer a few general observations. In section XV ‘Exculpations’ (para. 9.53), it was noted that whether or not a person can be held liable for a misleading prospectus is largely a matter of the applicable national law, rather than of EU law. In the context of prospectus liability, the applicable law is therefore of crucial importance. The applicable law is in turn dependent on the national courts where the prospectus liability claim is submitted. These national courts will apply their own jurisdiction’s private international law rules65 to determine the applicable law. Most, if not all, securities offerings will nowadays be international; offerings that are limited territorially are a thing of the past. This means that many jurisdictions are involved: for example the country where the issuer is located; any country where the prospectus was published or made available; the country where the prospectus was approved under Article 20, Prospectus Regulation; any country where the selling agents perform their placement activities; the country where the investor concerned is located; the country where that investor maintains his securities account to which the securities on offer are credited if the investor’s subscription is successful; the country where the investor maintains his cash account from which the purchase price for the securities concerned was paid out; the country where a relevant giro book-entry transfer system is located; the country where the relevant central securities depositaries (CSDs) and international central securities depositaries (ICSDs)66 are located; the country where the stock exchange is located on which the securities are being admitted to trading; and the country where the securities are physically held in custody. The complex conflicts-of-law issues that arise are in principle governed by Rome II in so far as non-contractual obligations are concerned, and by Rome I in so far as contractual obligations are concerned. The damage caused by contractual or tortuous prospectus misinformation can also arise in various jurisdictions. This may conceivably expose the issuer concerned with the unattractive prospect of multiple litigation in different jurisdictions.

9.63  The question where losses are actually suffered as a consequence of tortuous actions has meanwhile been the subject of a number of judgments by the EU Court of Justice: the Kolassa judgment, the Universal Music judgment, and the Löber judgment.67 In Kolassa, the EU Court of Justice determined that a court can assume competence inter alia if the losses are suffered in the bank account maintained with a bank in that court’s territorial jurisdiction. In Universal Music, the EU Court of Justice clarified that the fact (p. 224) alone that the loss was suffered on a bank account maintained with a bank in the jurisdiction concerned would in itself be insufficient to assume competence. It would be necessary to be able to point to further circumstances to arrive at a conclusion as to the so-called ‘Erfolgsort’ (locus damni68). In Löber, the EU Court of Justice followed these earlier judgments to their logical conclusion in stating that the factual circumstances supporting the determination of the Erfolgsort in this case was in full compliance with the requirements of the Brussels I Regulation.69

9.64  Is it possible for an issuer or guarantor to make a choice of applicable law and jurisdiction in relation to matters arising out of the publication of a prospectus and the securities offering in question? Conceivably it might be attractive if an issuer could effectively state that all issues of prospectus liability will be determined according to the law of a specific Member State and may only be adjudicated upon in a specified court of law in that Member State. Initial subscribers to the securities on offer could perhaps be held to that contractual restriction by making that restriction part of the offering terms and conditions. That approach would appear to satisfy the requirements of Article 3, Rome I. For secondary buyers of the securities concerned, of course, that would not work. In that case, the provisions of Article 14(1), Rome II are in any event likely be a stumbling block. These provisions state the principle that a choice of law can only be made after the occurrence of the event giving rise to the damage incurred. This does not apply in cases where ‘all the parties are pursuing a commercial activity’. However, the scope of this exemption is uncertain, since all investment activities can in principle be considered commercial, also (arguably) for instance where the investor is a consumer investing for his personal pension plan. However that may be, the exemption, if usable, would only give limited relief.

9.65  In practice, these choice-of-law and forum clauses are rarely, if ever, used. Presumably, this is in some measure due to historically developed market practice, but also because of severe doubts as to the effectiveness of these clauses in the various jurisdictions in which securities are being offered and invested.

9.66  In connection with exclusive forum choices, the judgment of the EU Court of Justice in Profit v Ossi70 deserves mentioning. In this judgment, the court considered a choice-of-forum clause set forth in the terms and conditions applicable to the securities concerned, not just to relate to the relationship between issuer and bondholder with regard to the debt thereby assumed by the issuer, but also more generally to the relationship between the issuer as offeror of the securities concerned and the investor subscribing for these securities. This is remarkable. Because two distinct legal relationships are involved here that cannot be regarded to be one and the same, one may doubt whether the court got this right. It is simply not correct that a choice-of-forum clause unilaterally (p. 225) inserted by the issuer in terms and conditions of securities was intended by the issuer and the subscriber to encompass all aspects of their distinct relationships in relation to the offering concerned.

9.67  However, the judgment is also interesting because—subject to certain stringent conditions—the court acknowledges that contractual provisions such as a choice-of-forum clause agreed between the issuer and the subscriber in the primary market can also be applicable to a subsequent purchaser in the secondary market. This can be accomplished in two ways. One possibility exists if there is an agreed choice-of-forum clause between issuer and first subscriber. Agreement to that choice may be assumed only if the contract executed between the parties in the primary market transaction expressly mentions the acceptance of that choice or contains an express reference to the prospectus in which that choice is specified. The subsequent purchaser may be deemed bound by that original choice if acceptance of the choice is expressed or the prospectus is referenced also in his contract with the subscriber again. If not, then the subsequent purchaser will be bound if he succeeds in the rights and obligations attached to the securities under the applicable national law and the subsequent purchaser had the opportunity to become acquainted with the contents of the prospectus concerned.

9.68  The judgment is not very helpful to the position of the subsequent purchaser and further purchasers of the securities in question. Purchases in the secondary market, especially in the case of quoted securities that are traded in book-entry systems, are not normally documented in the way described above. And under the national law concerned,71 it will often not be possible to construe that the purchaser ‘succeeds’ in the rights of the seller. Also, one has to realize that the conditions imposed by the court would have to be met each time in respect of each subsequent sale. Accordingly, the continued application of the choice-of-forum clause seems unlikely in the case of ordinary trading of the securities concerned on the capital markets.

9.69  There is, however, a second way in which the clause may survive beyond the first primary market transaction: a third party may be deemed bound by the clause if it is established market practice that such a third party is considered to have consented to the choice-of-forum clause. But the court sets quite stringent conditions as to how the existence of such market practice may be determined. It follows that this alternative possibility will be rather difficult to pursue. Generally, the existence of a certain market practice is extremely difficult to prove conclusively.

9.70  The foregoing summarizes how the EU Court of Justice interprets Article 23 of Regulation (EC) 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (this regulation is the predecessor of the regulation referenced in n. 69). The judgment is not very helpful in the context of an effort by an issuer to impose an exclusive choice of jurisdiction with (p. 226) respect to prospectus liability proceedings. This observation arguably applies correspondingly to choice-of-law clauses. Although the provisions of Article 23 of the regulation (Art. 25 of Regulation (EU) 1215/2012) do not actually correspond with those of Article 3, Rome I, the interpretation thereof relating to the question whether contractual arrangements can ‘filter through’ to subsequent purchasers of securities should not vary in any substantive respect.

9.71  So it is not surprising that choices of governing law and exclusive forum are in practice seldom, if ever, made in respect of securities offerings.

XVII.  Concluding Remarks

9.72  This chapter has examined some issues relating to non-financial information to be included in a prospectus under the new Prospectus Regulation regime. The decision whether certain information is required to be included in a prospectus is determined not only by specific inclusion requirements as contained in the Prospectus Regulation and the DCR, but also, and more generally, by application of Article 6(1), Prospectus Regulation: the materiality test. Whether or not this test is met is a matter of EU law. Whether or not a failure to include certain required information leads to prospectus liability will in most, if not all, Member States also be dependent on whether that information is material. However, this latter materiality test concerns a criterion under the applicable national law, rather than under EU law.

9.73  If this analysis is correct, it entails that the new Prospectus Regulation regime falls short of achieving a unified prospectus liability regime across the EU, simply because the national laws of the Member States concerned have not been harmonized. This not only relates to the application of the materiality test, but also to other civil and common law aspects of the law of tort, such as causality requirements. A level playing field in terms of uniform investor protection within the EU accordingly has regrettably not been achieved. This chapter argues that the Prospectus Regulation could have achieved more by requiring Member States to impose certain uniform tort law requirements in their national prospectus liability regimes. This is perhaps something to be considered for a forthcoming Prospectus Regulation 2?

9.74  Another topic addressed in this chapter relates to the possibility for offerors of securities to obtain liability protection by including exoneration clauses in prospectuses. The Prospectus Regulation does not regulate this topic, but the analysis in this chapter shows that the possibilities appear to be severely limited; practice in any event shows that exoneration is seldom (if ever) stipulated. The same applies with regard to efforts of offerors of securities to seek some protection by stipulating exclusive choice-of-law and forum clauses.

9.75  All this appears to be relatively good news in terms of investor protection generally, but the lack of harmonization stands in the way of a unified EU capital markets (p. 227) union, where prospectus liability risks for offerors of securities should ideally be transparent and measurable across the EU borders. Although the (negative) effects on access to the EU capital markets by issuers are rather difficult to quantify, it is certain that a more comprehensively level playing field should enhance such access in significant ways.(p. 228)


1  Regulation (EU) 2017/1129 of the European Parliament and of the Council of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market, and repealing Directive 2003/71/EC, [2017] OJ L168/12 (Prospectus Regulation).

2  Italics added. Generally, with respect to this clause, see J. P. Franx, ‘Prospectusaansprakelijkheid uit onrechtmatige daad en contract’, in: B. Bierens et al. (eds), Handboek Beursgang, Onderneming en Recht, no. 68 (Deventer: Kluwer, 2017) 97 ff.

3  An exception to this general rule is given in Article 14(2), Prospectus Regulation in relation to prospectuses for secondary issuances where, subject to certain conditions, simplified rules apply. Article 14(2) specifically states that these rules apply ‘by way of derogation’ from Article 6(1), Prospectus Regulation. That language is notably not included in Article 15, which provides for the information to be included in an EU Growth Prospectus; the principle as stated in Article 6(1), Prospectus Regulation thus fully applies to that category of prospectuses.

4  See also Recital (24), Prospectus Regulation, which likewise seems to imply a measure of flexibility. The above comments apply equally to this recital.

5  Directive 2003/71/EC of the European Parliament and the Council of 4 November 2003 on the prospectus to be published when securities are offered to the public or admitted to trading and amending Directive 2001/34/EC (Prospectus Directive).

6  See ‘ESMA Update of the CESR Recommendations’ dated 23 March 2011, ESMA 2011/81, to be found on the ESMA website.

7  Blue sky laws are typically defined as state law in the US (as opposed to federal law), intended to protect investors from investment fraud.

8  Typical language may read: ‘Nothing herein constitutes an offer of Securities for sale in the United States or any other jurisdiction where it is unlawful to do so.’ Often, the gist of this language will be repeated in various formulas for other specific jurisdictions, e.g. Canada, Japan, the UK, Australia, and the European Economic Area. Which jurisdictions are specifically addressed in this context seems to be a matter of market practice as much as an analysis of where the offer is likely to be taken up.

9  See, for a Dutch law analysis, V.P.G. De Serière, Effectenrecht (Deventer: Kluwer, 2018) 938 ff. (in Dutch), with further references; L.J. Hijmans van den Bergh and M.C. Schouten, ‘Grensoverschrijdende biedingen’, in: M.P. Nieuwe Weme et al. (ed.), Handboek Openbaar Bod (Deventer: Kluwer, 2008) 174 (in Dutch). It is noted that the new Prospectus Regulation regime does not require any substantive changes to selling restrictions, but any references to the ‘old’ Prospectus Directive regime must, of course, be changed for new offerings, and Brexit may also require changes to references as currently used. Representative organizations such as The International Capital Markets Association (ICMA) and The Association for Financial Markets in Europe (AFME) are active in developing new standard language for different categories of selling restrictions. See, for AFME, https://www.afme.eu/globalassets/downloads/publications/20190327-afme-ecm-selling-restrictions-for-equity-transasctions.pdf.

10  Sanctions in this context include fines and other criminal law measures that may be taken against persons responsible for a prospectus.

11  Article 20, Prospectus Regulation actually contains a sanction in the sense that the regulator may withhold its approval of a prospectus; in the context of public offerings, such denial of approval would in all likelihood be disastrous for the intended securities offering, and, of course, issuers would in practice not let matters get that far out of hand. The scrutiny and approval process under Article 20, Prospectus Regulation as further detailed in Article 36 ff., Commission Delegated Regulation (EU) 2019/980 of 14 March 2019, (CDR), however, does not require the competent authority to make an in-depth substantive determination of whether the prospectus is ‘PR compliant’, even though the requirements of Article 36 ff., CDR impose tougher rules for the national competent authorities than under the Prospective Directive regime. Prospectuses will in practice normally contain warning language to that effect, such as:

This Prospectus has been approved by the [name competent authority], as competent authority under Regulation (EU) 2017/1129 (the Prospectus Regulation). The [competent authority] only approves this Prospectus as meeting the standards of completeness, comprehensibility and consistency imposed by the Prospectus Regulation. Approval by the [competent authority] should not be considered as an endorsement of the Issuer. Investors should make their own assessment as to the suitability of investing in the Securities.

See also Chapter 16 of this publication.

12  Article 267, Treaty on the Functioning of the European Union (TFEU).

13  Apart from the provisions of Article 11, Prospectus Regulation, stating generally that Member States ‘shall ensure that their laws, regulations and administrative provisions on civil liability apply to those persons responsible for the information given in a prospectus’.

14  Dutch Supreme Court, 27 November 2009, NJ 2014/201, point 4.10.4.

15  Informal translation by the author.

16  Some ‘clues’ can be found here and there. For instance, Recital (34), Prospectus Regulation states, ‘Any new matter liable to influence the assessment of the investment . . .’ (italics added).

17  Article 6:194 ff., Dutch Civil Code (DCC). It is somewhat of an anomaly that the rules on misleading advertising apply, since a prospectus should not and cannot be characterized as advertising.

18  Article 6:193a ff., DCC. A consumer is defined as a natural person not acting in the conduct of a profession or trade.

19  Articles 2 and 5, Directive 2005/29/EC.

20  EU Court of Justice, 16 July 1998, C-210/96 (Gut Springenheide) and 19 September 2006, C-356/04.

21  Interestingly in this connection, International Accounting Standard (IAS) 1 notes that the Framework for the Preparation and Presentation of Financial Statements states that ‘users are assumed to have a reasonable knowledge of business and economic activities and accounting, and a willingness to study the information with reasonable diligence’. This, incidentally, mirrors the view of the Dutch Supreme Court in the World Online judgment that an average investor is a person who may be expected to be willing to examine the information offered to him (see para. 4.10.3 of that judgment, referenced in n. 14). See also section XII ‘Materiality as a Concept in Various Jurisdictions: A High-Level Discourse’ (para. 9.32) below, where the term ‘reasonable investor’ is coined by the US Supreme Court; the use of this broad term has been widely criticized.

22  Expanded on in Commission Delegated Regulation (EU) 2019/979 dated 14 March 2019. This Regulation provides more detailed information requirements, distinguishing between summaries for respectively non-financial entities issuing equity securities, non-financial entities issuing non-equity securities, credit institutions, insurers, special-purpose vehicles (SPVs) issuing asset-backed securities, closed-end funds, and guarantors. Issuers outside of these categories should follow the requirements for the type of securities that correspond most closely to their securities on offer. The Regulation itself does not offer any specific guidelines as to which information is key and which information does not qualify. The Annexes to the Regulation, however, do provide some insight in that they specify in particular the basic financial information that issuers are required to include in the summary. They do not provide insight into which non-financial information is deemed necessary to be included in the summary.

23  ESMA also requires issuers to resist general risk factors (e.g. climate change, etc.) that do not have specific relevance to the issuer’s business concerned. See ESMA Guidelines on risk factors under the Prospectus Regulation of 29 March 2019 (reference ESMA31-62-1217), https://www.esma.europa.eu/sites/default/files/library/esma31-62-1217_final_report_on_guidelines_on_risk_factors.pdf, in particular Guideline VI.1 (ESMA Guidelines on Risk Factors).

24  Basic Inc. v. Levinson, 485 US, 224 (1988).

25  See e.g. D.H. Kaye, ‘What is Bayesianism? A Guide for the Perplexed’, Jurismatics Journal (1988) 28, 161 ff; Enrico Guerra-Pujol, ‘Visualising Probabilistic Proof’, Washington University Jurisprudence Review (2014) 39, 71.

27  ESMA Guidelines on risk factors.

28  In the US, this would be the Financial Accounting Standards Board (FASB) and the Public Company Accounting Oversight Board (PCAOB).

29  See IFRS, ‘Definition of Material—Amendments to IAS 1 and IAS 8’, October 2018, 19, https://www.ifrs.org/news-and-events/2018/10/iasb-clarifies-its-definition-of-material.

30  TSC Industries, Inc. v Northway, Inc., 426 US 438 (1976).

31  H.-D. Assmann and R.A. Schutze, Handbuch des Kapitalanlagerechts (Munich: Verlag C. H. Beck, 2007) 299 ff.

33  See e.g. the External Auditors Report in relation to the Nationale Nederlanden NV 2018 Financial Statements, in relation to Aegon NV’s Financial Statements, to be found respectively at https://www.nn-group.com/Investors/2018-Annual-Report.htm, 187 and https://www.aegon.com/contentassets/79a288251c844944933a1b189dc02d82/aegon-integrated-annual-report-2018.pdf, 325.

34  There is an abundance of literature and research papers on materiality standards as used in the accountancy profession. These will not be discussed in this chapter. For a useful introductory publication see W.F. Messier, N. Martinov-Bennie, and A. Eilifsen, ‘A Review and Integration of Empirical Research on Materiality: two Decades Later’, Auditing: A Journal of Practice and Theory (2005) 24(2), 153 ff.

35  Report of 30 May 2013, ESMA/2013/619; K.J. Hopt and H.-Chr. Voigt (eds), Prospekt- und Kapitalmarktinformationshaftung (Tübingen: Mohr Siebeck, 2005).

36  See De Serière, Effectenrecht, 751 (in Dutch) for an overview.

37  A clear summary of prospectus liability under US law is to be found in para. 4.1 of the conclusion of Advocate-General Timmerman in the World Online case (see n. 14). One has to bear in mind that this summary reflects the position in 2009, now some ten years ago.

38  TSC Industries, Inc. v Northway, Inc., 426 US, 438 (1976).

39  For instance: Basic Inc. v Levinson, 485 US, 224 (1988) and other Supreme Court and lower court cases cited in the publication mentioned in n. 37.

40  See e.g. K.S. Schulzke and G. Berger-Walliser, ‘Towards a Unified Theory of Materiality in Securities Law’, Columbia Journal of Transnational Law (2017) 56(6), with further references.

41  See e.g. R.H. Thaler, Misbehaving: the Making of Behavioural Economics (New York: Norton, 2015) 205, 231.

42  See e.g. Gerding, Bubbles and Financial Regulation (New York: Routledge, 2014): ‘In a bubble, investors become like turkeys merrily enjoying the good food they are being served right up to their rude awakening to their fate at Christmas . . .’ (Free after Taleb’s The Black Swan).

43  See also W. Joachim, ‘The “Reasonable Man” in United States and German Commercial Law’, Comparative Law Yearbook of International Business (1992) 15, 341 et seq. , who draws a parallel between the US concept of a reasonable man (investor) and the concept, largely comparable, prevailing in Germany.

44  See e.g. M. Habersack, P.O. Mülbert, and M. Schlitt, Handbuch der Kapitalmarktinformation (2nd edn, Beck Online, 2013) para. 29; H.-D. Assmann and R.A. Schütze, Handbuch des Kapitalanlagerechts (4th edn, 2015) 131 ff; H. Harrer, F. Drinkhausen and H.-M. Eckstein, Handbuch der AG (13th edn, C.H. Beck, 2018) 329.

45  H.-D.Assman and R.A. Schütze, Handbuch des Kapitalanlagerechts, 4th edn (n. 44), 141. In English:

Taking into consideration the objectives of prospectus liability, in order to ensure the completeness and correctness of information an average sensible investor needs to arrive at an informed investment decision in which the chances and risks concerned are recognised, all information with respect to circumstances constituting the factors that determine the value [of the securities concerned] and that an average sensible investor would more likely than not take into consideration when making his investment decision, must be deemed material [Translation by the author].

46  In English:

In this respect such information must be addressed [in the prospectus] that concern the factors that determine the value of the securities concerned, including in particular past and to be expected earnings, financial and legal risks, product and brand strategies, but on the other hand not technical information such as the number of depositary agents involved or totally unimportant balance sheet items [Translation by the author].

47  W. Gross, Kapitalmarktrecht/WpPG (6th edn, C.H. Beck, 2015) para. 21, nn. 35 ff.

48  Note the parallel with Article 17(5), Regulation (EU) 596/2014 of the European Parliament and of the Council of 16 April 2014 on market abuse (MAR), where a disclosure exemption is created specifically for banks and insurance companies if disclosure would disrupt the stability of a financial institution and of the financial system.

49  This would appear also to be in line with ESMA’s approach: see Final Report (Technical Advice under the Prospectus Regulation) dated 28 March 2018, ESMA 31-62-800, 210.

50  In the German text ‘würde’, and in the Dutch text ‘zou’.

51  Regulation (EU) 596/2014 of 16 April 2014.

52  The term ‘legitimate interests’ is not defined in MAR. The ESMA Guidelines (ESMA 2016/1478) also provide no definition, but the Guidelines give various examples of situations/circumstances where legitimate interests are involved.

53  See, in comparison, the discussion on the terms ‘material’ and ‘necessary’ in para. 9.03 above.

54  See e.g. T.M. Stevens, ‘Openbaarmaking van voorwetenschap’, in: D.R. Doorenbos et al. (eds), Handboek Marktmisbruik (Deventer: Kluwer, 2018), 7.6.4 (in Dutch).

55  The scrutiny and approval process pursuant to Article 20, Prospectus Regulation, as further detailed in Article 36 ff., CDR, should in theory, when checking the completeness of the prospectus, bear out whether information has been left out. But this is only possible where the competent authority has knowledge of that missing information, which it will usually not have.

56  See e.g. T. Tridimas, The General Principles of EU Law (Oxford University Press, 2006) 418; K. Van Gerven, ‘Of rights, remedies and procedures’ 37 Common Market Law Review, Issue 3 (2000) 501 ff ; L.A.D. Keus, Europees Privaatrecht (Deventer: Kluwer, 2010) 61; K. Lenaerts and P. Van Nuffel, European Union Law (London: Sweet & Maxwell 2011) 150; R. Meijer, ‘The Rewe/Comet “Doctrine” and its Implications for Dutch Law’, in: A. Hartkamp et al. (eds), Influence of EU Law on National Private Law (Deventer: Kluwer, 2014), 44; D. Busch, MiFID II/MiFIR: Nieuwe Regels voor Beleggingsondernemingen en financiële markten (Deventer: Kluwer, 2015) 211 (in Dutch); De Serière, Effectenrecht, 743 (in Dutch).

57  Directive 2014/65/EU of 15 May 2015.

58  The legal debate on this topic has focused more on this question in the context of MiFID II rather than with regard to the Prospectus Regulation.

59  The EU Court of Justice has in numerous judgments invoked the effet utile principle; however, without clearly defining its scope. See e.g. CJ EU 16 December 1976, 33/76, Jurispr. 1976, 1989 (Rewe); CJ EU 20 September 2001, C-453/99 (Courage/Crehan); CJ EU 30 May 2013, C-604/11, JOR 2013/274 (Genil48/Bankinter).

60  See amongst others J.P. Franx, Prospectusaansprakelijkheid uit onrechtmatige daad en contract (Deventer, Kluwer 2017) 295 ff (in Dutch); C.H.J. Jansen, E.R. Schreuder, and H.L.E. Verhagen, Prospectusaansprakelijkheid (Amsterdam: NIBE-SVV, 2003) 42 (in Dutch) ; De Seriere, Effectenrecht, 625 ff (in Dutch);

61  There appears to be a level of divergence between the European and the Anglo-Saxon approach here. For instance, whilst under Dutch law liability of accountants in case of investors’ reliance on audited financial statements is acknowledged, the so-called proximity doctrine may stand in the way of the liability of accountants under Anglo-Saxon law: see e.g. Gupta, Contemporary Auditing (6th edn, 2005) 1009 ff.

62  Dutch Supreme Court 2 December 1994, NJ 1996/246. The Dutch Supreme Court reiterated this in its World Online ruling (see n. 14).

63  See n. 14.

64  One could argue that harmonizing prospectus liability is an essential part of the more general effort to harmonize capital markets rules, and therefore trumps any subsidiarity concern one might otherwise have.

65  To the extent Regulation (EC) 864/2007 of 11 July 2007 on the law applicable to non-contractual obligations (Rome I) or Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome II) would not determine the outcome.

66  These are the central securities depositaries or international securities depositaries, such as Euroclear Bank in Brussels and Clearstream in Luxembourg, used for the settlement of securities transactions.

67  Respectively: Kolassa C-375/13 of 28 January 2015; Universal Music C-12/15 of 16 June 2016, and Helga Löber C304/17 of 12 September 2018

68  The place where the damage must be considered to have occurred.

69  Regulation (EU) 1215/2012 of 12 December 2012.

70  C-366/13 of 23 April 2015.

71  The question arises: which national law would that be? Presumably the law determined according to the provisions of Rome I.