The influence of the EU prospectus rules on private law
By Danny Busch
26 August 2020
A more detailed version of this article appeared in Prospectus Regulation and Prospectus Liability, edited by Danny Busch, Guido Ferrarini & Jan Paul Franx, part of the Oxford EU Financial Regulation Series.
I. Introduction
The information document (prospectus) that must be published before securities are offered to the public is intended to provide interested investors with the information they need to decide whether or not to purchase them. Once the prospectus has been approved by the competent financial regulator, it serves as a European passport. In other words, the securities to which the offer relates may be offered to the public on the basis of the approved prospectus throughout the EU/EEA.1
The Prospectus Directive2 was replaced by the Prospectus Regulation3, which is directly applicable in all Member States, with effect from 21 July 2019. Like its predecessor, the Prospectus Regulation is primarily regarded as an instrument of EU financial supervision law. In other words, under the Prospectus Regulation the competent financial regulator may enforce information obligations through administrative law in the event of non-compliance, for example by imposing an administrative fine on the issuer.
But there is clearly a close link with civil liability law too. This article examines the extent to which the civil courts are bound under EU law by the EU prospectus rules when judging issues of liability. Many questions arise in this context (and these are discussed further in Prospectus Regulation and Prospectus Liability) but in this article I will focus on the question of whether civil courts may be stricter than the EU prospectus rules.
II. May civil courts be stricter than the EU prospectus rules?
(i) The basic rule
The Prospectus Regulation contains the basic rule that a prospectus must contain the necessary information which is material to an investor for making an informed assessment of the issuer and the securities (Article 6(1) of the Prospectus Regulation). This basic rule has been fleshed out in detail in the various Annexes to Delegated Regulation (EU) 2019/980.4
(ii) Nationale-Nederlanden v. Van Leeuwen
There exists some case law from the Court of Justice of the European Union (‘CJEU’) which suggests that civil courts may not apply stricter standards than the EU prospectus rules. It seems to follow from the CJEU’s judgment in the case of Nationale-Nederlanden v. Van Leeuwen (concerning exorbitant management costs charged in connection with life insurance policies) that EU law is blind to the distinction between public and private law when it comes to implementing rules of EU law.5 After all, in the Nationale-Nederlanden case, the CJEU had no problem with the fact that Annex II to the Third Life Assurance Directive6 was transposed into Dutch law in Article 2 of the 1998 Regulation on the Furnishing of Information to Policyholders (the 1998 Regulation) (public law), whereas the Member State option in Article 31(3) of the Third Life Assurance Directive to furnish additional information may be implemented by means of the requirement of reasonableness and fairness under Article 6:2 of the Dutch Civil Code (private law).
If it is indeed true that EU law is blind to the distinction between public and private law, this also has an important bearing on whether civil courts may impose stricter standards than the information obligations under the EU prospectus rules. These rules provide for maximum harmonisation. If EU law truly makes no distinction between public and private law when it comes to the transposition of EU legal rules, the maximum harmonisation standard will also apply to the civil courts. They may not therefore impose stricter information obligations than those that result from the EU prospectus rules, regardless of whether these are included in a directive or a regulation. In the Immofinanz judgment about the private law impact of, for example, the EU prospectus rules, the CJEU admittedly noted that in the absence of EU legislation it was for the Member States themselves to determine what effect a breach of these rules had under private law, provided that it was not impossible or extremely difficult to recover compensation for the loss or damage suffered, but this referred to the sanction and not to the legal rule itself.
Supposing this line of reasoning is rejected because it is considered that the civil courts may in certain circumstances be stricter than the EU prospectus rules, the Nationale-Nederlanden judgment in any event showed that legal certainty was an important factor that the civil courts had to take into consideration in deciding whether they may impose stricter criteria than apply under the rules of EU financial supervision. To prevent the EU passport function of the prospectus from being undermined, the civil courts should, in my view, in any event attach extra importance to the EU principle of legal certainty (see (iv) below).
(iii) Article 6(1) Prospectus Regulation and Delegated Regulation (EU) 2019/980
The Prospectus Regulation contains the basic rule that a prospectus must contain the necessary information which is material to an investor for making an informed assessment of the issuer and the securities (Article 6(1) of the Prospectus Regulation). As noted previously, this basic rule has been elaborated in detail in the various Annexes to Delegated Regulation (EU) 2019/980. The statutory basis for this is Article 13 of the Prospectus Regulation, which is entitled ‘Minimum information and format’. In my view, the use of the term ‘minimum information’ should not be read as meaning that the general rule allows scope for additional information obligations. Instead, I interpret the heading as meaning that the drafter of the prospectus is, in principle, free to include more information than the information required by law. This interpretation is supported by recital 2 in the preamble to Delegated Regulation (EU) 2019/980:
‘The content and the format of a prospectus depend on a variety of factors […] It is therefore not appropriate to lay down the same requirements for all types of prospectuses. Specific information requirements should be laid down instead and should be combined depending on those factors and the type of prospectus. This should however not prevent an issuer, offeror or person asking for admission to trading on a regulated market to provide in the prospectus the most comprehensive information available [DB’s italics].’
In short, the drafter of a prospectus is, in principle, free to include extra information, but the competent authority cannot compel this by withholding approval of the prospectus. The qualification ‘in principle’ is added is because this power to include extra information may no longer be construed as a licence to swamp investors with information. As previously noted, recital 27 in the preamble to the Prospectus Regulation provides that a prospectus should not contain information which is not material or specific to the issuer and the securities concerned. This could otherwise obscure the information relevant to the investment decision and thus undermine investor protection. Indeed, if this is the case, the competent authority may not approve the prospectus as there would otherwise be a breach of the rule in Article 6(2) of the Prospectus Regulation, to the effect that the information in a prospectus must be written and presented in an easily analysable, concise and comprehensible form.
(iv) The operation of the prospectus as a European passport
It is also important to consider the practical consequences of a decision by a civil court in a given Member State to impose stricter information obligations than the detailed obligations set out in the Annexes to Delegated Regulation (EU) 2019/980. If it is desired to offer securities to the investing public in the relevant jurisdiction, it will, after all, be necessary to take into account the stricter information obligations under private law in order to prevent liability. In such a jurisdiction, it will no longer be sufficient to draw up a prospectus in accordance with the detailed information obligations included in the Annexes to Delegated Regulation (EU) 2019/980, and allowance will have to be made for stricter information obligations under private law. This would seriously undermine the functioning of the prospectus as a European passport. After all, the idea behind the EU prospectus rules is that a prospectus that has been approved by the competent authority in one Member State can also be used to offer securities to investors in all other Member States. Prospectuses could no longer adequately fulfil this function if it were necessary when drawing them up to take into account stricter information obligations under private law, possibly even varying from one Member State to another.7 Such a situation would be at odds with the concepts of the level playing field, legal certainty and maximum harmonisation underlying the Prospectus Regulation. All this is even more true under the current Prospectus Regulation than under its predecessor, the Prospectus Directive;. after all, the instrument of a directly applicable regulation was expressly chosen for this reason, according to recital 5 in the preamble to the Prospectus Regulation:
‘Since a legal framework for the provisions on prospectuses necessarily involves measures specifying precise requirements for all different aspects inherent to prospectuses, even small divergences on the approach taken regarding one of those aspects could result in significant impediments to cross-border offers of securities, to multiple listings on regulated markets and to Union consumer protection rules. Therefore, the use of a regulation, which is directly applicable without requiring national law, should reduce the possibility of divergent measures being taken at national level, and should ensure a consistent approach, greater legal certainty and prevent such significant impediments. The use of a regulation will also strengthen confidence in the transparency of markets across the Union, and reduce regulatory complexity as well as search and compliance costs for companies.’ 8
(v) Example 1
According to the Prospectus Regulation, risk factors should in future be limited to those risks which are material and specific to the issuer and its securities (Article 16(1) of the Prospectus Regulation). A situation may not arise in which an issuer or, for example, a lead manager incurs civil liability because a court holds that the prospectus wrongly failed to mention a risk which, although it has materialised, cannot be classified as a risk that is material and specific to the issuer and its securities. After all, under Article 16(1) of the Prospectus Regulation, the inclusion of risk factors that are not material and specific to the issuer and its securities is no longer permissible and would have meant that the competent authority would have refused to approve the prospectus.9
(vi) Example 2
A civil court holds that a prospectus has wrongly failed to mention a certain risk that has materialised, and that this risk should be considered material and specific to the issuer and its securities. Naturally, the possibility of such a finding can never be entirely excluded, but there is real danger of hindsight bias. The civil court must really give proper consideration to whether it was reasonable for the person who drew up the prospectus to believe that the risks then classified as material and specific to the issuer and its securities had been included. To prevent hindsight bias, the civil courts would therefore do well to exercise restraint in this regard.
(vii) Securities not covered by the Annexes to Delegated Regulation (EU) 2019/980
Naturally, it is always possible that at some point securities are offered that are not covered by the Annexes to Delegated Regulation (EU) 2019/980. This situation is addressed in recital 24 in the preamble to Delegated Regulation (EU) 2019/980:
‘Due to the rapid evolution of securities markets, there is the possibility that certain types of securities that are not covered by the Annexes to this Regulation will be offered to the public or admitted to trading. In such a case, to enable investors to make an informed investment decision, competent authorities should decide in consultation with the issuer, offeror or person asking for admission to trading on a regulated market which information should be included in the prospectus.’
(viii) Investor protection and a European capital market
In view of what has been said above, it seems to me that investor protection is adequately guaranteed by the information obligations under the EU prospectus rules and that consequently civil courts do not have a good reason to impose stricter information obligations under private law than those arising from the EU prospectus rules. In addition, while investor protection is a key objective of the EU prospectus rules, it is not the only one. Another key objective is the creation of a European capital market. See recital 4 in the preamble to the Prospectus Regulation:
‘In the absence of a harmonised framework to ensure uniformity of disclosure and the functioning of the passport in the Union it is therefore likely that differences in Member States’ laws would create obstacles to the smooth functioning of the internal market for securities. Therefore, to ensure the proper functioning of the internal market and improve the conditions of its functioning, in particular with regard to capital markets, and to guarantee a high level of consumer and investor protection, it is appropriate to lay down a regulatory framework for prospectuses at Union level.’ 10
(ix) Differentiation between retail and wholesale investors?
The fact that an offer of securities is directed solely at retail investors should not be a reason for the civil courts to impose stricter information obligations than those arising from the EU prospectus rules. As Delegated Regulation (EU) 2019/980 explicitly differentiates between offers to retail investors and offers to wholesale investors in the case of non-equity securities, this distinction has already been incorporated in the EU prospectus rules. See also recital 7 in the preamble to Delegated Regulation (EU) 2019/980:
‘The information contained in prospectuses for non-equity securities should be adapted to the level of knowledge and expertise of each type of investor. Prospectuses for non-equity securities in which retail investors can invest should therefore be subject to more comprehensive and distinct information requirements than prospectuses for non-equity securities that are reserved to qualified investors.’
Delegated Regulation (EU) 2019/980 does not make this distinction where the offer relates to equity securities. In those cases, the European legislator apparently saw no reason to differentiate between information obligations on the basis of whether the offer relates to retail or wholesale investors. The civil courts should consider themselves bound by this, and, in my view, differentiate between retail and wholesale investors with regard to the content of the information obligations only in so far as the EU prospectus rules do the same.
(x) Use of language
The Prospectus Regulation also sets requirements for the use of language and the manner of presentation. See Article 6(2) of the Prospectus Regulation:
‘The information in a prospectus shall be written and presented in an easily analysable, concise and comprehensible form, taking into account the factors set out in the second subparagraph of paragraph 1.’
Although this does not strictly follow from Article 6(1) and (2) of the Prospectus Regulation, it is apparent from recital 27 in the preamble to the Regulation that the application of the rule is influenced by the type of investor to whom the offer is addressed. It may be assumed that the language used in a prospectus will have to be somewhat less specialised in the case of an offer of securities addressed solely or partly to retail investors than if the offer is addressed solely to wholesale investors. In short, the civil courts may, in my view, differentiate between retail and wholesale investors with regard to the language requirements. For example, a civil court may hold that a prospectus addressed partly to retail investors may contain all the information items that are required under the EU prospectus rules, but that Article 6(2) of the Prospectus Regulation has nevertheless been infringed because the information has been formulated in such technical terms that it misleads retail investors.
(xi) Inclusion of non-material information
The same applies if a prospectus contains all kinds of information which is not material or specific to the issuer and the securities concerned. This could otherwise obscure the information relevant to the investment decision and thus undermine investor protection (see recital 27 in the preamble to the Prospectus Regulation). A civil court will be able to hold, for example, that although a prospectus contains all the information items required under the EU prospectus rules, these rules have nonetheless been infringed because the prospectus contains too much superfluous information. This will probably mainly play a role if an offer is wholly or partly aimed at retail investors, but even where an offer is intended solely for wholesale investors it is quite conceivable that a large amount of superfluous information would violate the EU prospectus rules (Article 6(2)).
III. Conclusions
The influence of the EU prospectus rules on private law is potentially considerable, but the subject is unfortunately surrounded by much uncertainty. EU legislation on prospectus liability would be the best solution, not only for reasons of legal certainty but also for the sake of uniform investor protection and a truly level playing field in Europe. However, in the current political climate (less rather than more Europe), that is likely to be a non-starter for the time being. Our hopes must therefore be pinned on the CJEU, which will hopefully provide more clarity in the years ahead. But to achieve this the CJEU is dependent on the willingness of national civil courts to submit preliminary rulings with precisely formulated questions that give it sufficient insight into the facts of the case. Otherwise there is a considerable risk of abstract judgments capable of varying interpretations, which are of little help in developing either theory or practice. It is an open secret that supreme court judges are sometimes reluctant to refer questions to the CJEU for a preliminary ruling. They would rather not have their freedom curtailed. Moreover, they are well aware that it is better not to ask a question if the answer may well not be to their liking. Naturally, however, the litigants and their lawyers can urge the civil court to refer questions for a preliminary ruling.
Professor Dr. Danny Busch, M.Jur. (Oxon.) is Chair in Financial Law and Director of the Financial Law Centre (FLC), which is part of the Radboud Business Law Institute of Radboud University Nijmegen. He is also Research Fellow at Harris Manchester College, Fellow at the Commercial Law Centre, University of Oxford, and Visiting Professor at the Université de Nice Côte d’Azur, Università Cattolica del Sacro Cuore di Milano and Università degli Studi di Genova. He is a member of the Appeals Committee of the Financial Services Complaints Tribunal (KiFiD) and of the Banking Disciplinary Tribunal.
The article was completed on 15 July 2020. No account could be taken of developments since that date.
1.See Article 24 of the Prospectus Regulation (see note 3).
2. Directive 2003/71/EC [2003] OJ EU L345/64 (Prospectus Directive).
3. Regulation 2017/1129 [2017] OJ EU L168/12 (Prospectus Regulation).
4. [2019] OJ EU L166/26. Delegated Regulation (EU) 2019/980 replaces Regulation (EU) No. 809/2004,[2004] OJ EU L149/1.
5. CJEU 29 April 2015, no. C-51/13, ECLI:EU:C:2015:286 (Nationale Nederlanden v. Van Leeuwen). But see: M.W. Wallinga, EU investor protection regulation and private law. A comparative analysis of the interplay between MiFID and MiFID II and liability for investment losses (dissertation, University of Groningen 2018, p. 69.
6. Directive 92/96/EEC, OJ L 360/1. This has now been repealed and replaced by more recent versions. See CJEU 29 April 2015, C-51/13, ECLI:EU:C:2015:286 (Nationale Nederlanden v.Van Leeuwen), paragraph 3.
7. See also P.O. Mülbert, EU-rechtliche Kapitalmarktinformationsvorschriften und mitgliedstaatliche Haftungsregeln – Möglichkeiten und Grenzen am Beispiel der Prospektverordnung (EU) 2017/1129, in: M. Dreher, I. Drescher, P.O. Mülbert and D.A. Verse (Hrsg.), Festschrift für Alfred Bergmann zum 65. Geburtstag am 13. Juli 2018, De Gruyter 2018, pp. 529-540, at pp. 538-539.
8. See also recitals 27 and 60 in the preamble to the Prospectus Regulation.
9. Cf. P.O. Mülbert, EU-rechtliche Kapitalmarktinformationsvorschriften und mitgliedstaatliche Haftungsregeln – Möglichkeiten und Grenzen am Beispiel der Prospektverordnung (EU) 2017/1129, in: M. Dreher, I. Drescher, P.O. Mülbert and D.A. Verse (Hrsg.), Festschrift für Alfred Bergmann zum 65. Geburtstag am 13. Juli 2018, De Gruyter 2018, pp. 529-540, at pp. 537-538.
10. See also recital 1 in the preamble to the Prospectus Regulation.
