Rivista Orizzonti del Diritto CommercialeISSN 2282-667X
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Harmonisation of Prospectus Liability. The Listing Act as an Opportunity for a Major Step Towards a Capital Markets Union (di Rüdiger Veil, Professor for Private and Company Law at Ludwig Maximilian University of Munich and Executive Director of the Munich Center for Capital Markets Law – Marc Wiesner, PhD candidate at Professor Veil’s chair and currently an LL.M. student at Yale Law School)


While the EU Listing Act focuses on addressing the shortcomings and reducing the complexity of the current securities prospectus regime, it does not tackle the issue of prospectus liability. Although harmonisation of civil liability is a sensitive issue, it is important to include it in the current reform agenda. Stakeholder responses to the Commission’s Consultation on the Listing Act highlight that the current regime is not adequately calibrated. Moreover, the lack of harmonisation is perceived as a major obstacle to an integrated European capital market [1]. Given that the effectiveness of capital markets law depends critically on its enforcement [2], these findings should be of concern to the European legislator. As the Listing Act Initiative aims to enhance the attractiveness of European capital markets and promote their integration, harmonisation of prospectus liability is fully in line with the objectives of the Initiative. Given that only a fraction of global IPOs take place in Europe (11% in 2021) [3], reflecting a negative trend over the last decade, the European legislator would be well advised to also consider harmonisation of civil liability as a core aspect of prospectus regulation.

L'armonizzazione della responsabilità da prospetto. Il Listing Act come opportunità per un significativo passo avanti verso l'Unione dei mercati dei capitali

Se per un verso il Listing Act dell’UE si concentra sull’eliminazione delle carenze e sulla riduzione della complessità dell’attuale regime del prospetto, per altro verso esso non affronta la questione della responsabilità da prospetto. Sebbene l’armonizzazione della responsabilità civile sia una questione delicata, è importante che essa sia inserita nell’at­tuale programma di riforma. Le risposte degli stakeholders alla consultazione avviata dalla Commissione sul Listing Act evidenziano come l’attuale regime non sia adeguatamente strutturato. Ancor più importante è l’osservazione secondo la quale la mancanza di armonizzazione costituisce un considerevole ostacolo per la creazione di un mercato dei capitali integrato a livello europeo. Dato che l’efficacia della normativa sui mercati dei capitali dipende in modo decisivo dalla sua concreta attuazione, questi rilievi dovrebbero essere motivo di preoccupazione per il legislatore europeo. Dal momento che l’iniziativa del Listing Act mira a migliorare l’attrattività dei mercati dei capitali europei e a promuoverne l’integrazione, l’armonizzazione della responsabilità da prospetto appare pienamente in linea con gli obiettivi di tale iniziativa. Visto che solo una minima parte delle IPO globali ha luogo in Europa (l’11% nel 2021), il che riflette una tendenza negativa nell’ultimo decennio, il legislatore europeo farebbe bene a considerare anche l’armonizzazione della responsabilità civile come un aspetto centrale della disciplina del prospetto.

Sommario:

1. Status Quo of Prospectus Liability. - 2. Benefits of Further Harmonisation. - 2.1. Reducing Transactions Costs for Issuers. - 2.2. Reducing Information Costs for Investors. - 2.3. Improving Legal Certainty. - 2.4. Increasing Investor Confidence. - 2.5. Developing a Coordinated and Efficient Approach to Enforcement. - 3. Harmonisation as the Preferable Regulatory Strategy. - 4. Competence of the European Legislator. - 5. Conclusions. - NOTE


1. Status Quo of Prospectus Liability.

Currently, Art. 11 of the Prospectus Regulation (PR) provides for a minimum level of harmonisation of prospectus liability within the EU by only requiring Member States to ensure that there is some form of civil liability for misleading or omitted information in a prospectus. However, the provision does not contain any specific requirements. The Member States are therefore relatively free in the way they design prospectus liability [4]. Art. 11 PR has been carried over from the Prospectus Directive (PD 2003) without any significant changes and thus dates back to the relatively early days of European capital markets regulation. As a result, there is a notable divergence in Member States’ approaches to prospectus liability, as documented in the ESMA’s 2013 report [5] and more recently in CONSOB’s report on the PR [6].


2. Benefits of Further Harmonisation.

In considering the importance of civil liability for primary markets, it is essential to bear in mind that primary markets and prospectus regulation play a crucial role in ensuring allocative efficiency and hence real economic efficiency. By channelling capital to those issuers who can make the best use of it, limited economic resources are put to the best possible use. Strengthening civil liability for disclosure breaches and developing a consistent enforcement approach across European capital markets is therefore a worthwhile regulatory objective [7].


2.1. Reducing Transactions Costs for Issuers.

Harmonisation can help reduce transaction costs for issuers seeking to raise capital by eliminating the need to deal with different liability regimes. The European legislator has refrained from creating a specific conflict-of-law rule for prospectus liability. This has led to considerable legal uncertainty as to the applicable jurisdiction (Article 7(2) of the Brussels I-bis Regulation) [8] and the applicable substantive law (Article 4(1) of the Rome II Regulation). As the European conflict-of-law rules leave room for interpretation in the case of securities offerings, they do not always lead to predictable results [9]. Moreover, issuers face different liability regimes for inaccurate information in a prospectus, depending on the individual case. This concerns not only public offers in several Member States through passporting but might also be the case where the offer is made in only one Member State. As the liability regimes of Member States differ considerably, in particular as regards the standard of care, damages, proof of causation and liability, this may affect the willingness of issuers to attract foreign investors in the financial instruments concerned.


2.2. Reducing Information Costs for Investors.

European prospectus liability, if provided for as directly applicable law in the PR, would contribute to the goal of a truly integrated European capital market by improving the incentives for cross-border investment. At present, European capital markets remain fragmented and a ‘home bias’ towards holding domestic financial assets remains an important phenomenon [10]. If investors can be confident that they will be protected by the same effective liability mechanism wherever they invest in the EU, this should increase investor confidence in European markets, reduce their information costs and thereby reduce the ‘home bias’ of European investors [11]. This will not only benefit EU issuers (who will have easier access to a wider range of investors) but could also have a ‘signalling effect’ on international investors [12] as European law catches up with the international standards. Both US [13] and UK [14] law provide for prospectus liability and, under the US Securities Act of 1933, such liability is uniform across all US states.


2.3. Improving Legal Certainty.

Harmonisation of prospectus liability improves legal certainty. Legal certainty is a crucial component of the legal system and has a direct impact on compliance costs [15]. In the past, courts in prospectus liability cases have not limited themselves to awarding damages for breaches of the PD, but have also awarded damages where the relevant disclosure was not required by European statutory law. This tendency of the courts to require more far-reaching prospectus content has led to issuers publishing overly long prospectuses. As the PR does not address this issue, there is a risk that different national liability regimes will develop, leading to further fragmentation and reducing the effectiveness of the PR as the only relevant standard for securities prospectuses [16]. In this way, the current legal situation also jeopardises the functioning of the concept of a European passport for an approved prospectus [17].


2.4. Increasing Investor Confidence.

Civil liability is a key element in building investor confidence. While public enforcement by NCAs certainly helps to deter misconduct, only civil liability compensates investors. While compensation plays a minor role in the case of secondary market disclosure breaches due to the possibility of portfolio diversification, primary market investors are unable to diversify the risk of misinformation. They are also usually on the losing side, which gives them strong incentives to increase information costs in order to minimise the risk of buying overpriced shares or to abstain from trading in primary markets [18]. In addition, as those responsible for the prospectus typically benefit from an inflated share price, there is a strong incentive not to comply with disclosure requirements. Effective private enforcement of prospectus obligations is therefore particularly important.


2.5. Developing a Coordinated and Efficient Approach to Enforcement.

Finally, private and public enforcement should not be seen as alternative means of enforcement, but rather as complementary instruments [19]. This is because both enforcement instruments have unique characteristics that cannot be replicated by simply developing the existing public enforcement regime (e.g., the compensatory function of prospectus liability mentioned above) [20]. Further harmonisation of prospectus liability provides the European legislator with the perfect opportunity to better coordinate public and private enforcement (e.g., in terms of the overall magnitude of sanctions). Exploiting synergies between public and private enforcement could improve incentives for private enforcement and reduce overall administrative costs (including private enforcement costs). However, coordinating public and private enforcement of disclosure obligations under the PR is best done by the European legislator to ensure consistency in the enforcement of European capital markets law.


3. Harmonisation as the Preferable Regulatory Strategy.

A recurring question when considering European legislation is whether harmonisation is necessary (subsidiarity principle, Article 5(3) T.E.U.). Both harmonisation and decentralisation have their merits, making the question of the optimal regulatory strategy a challenging one. Broadly speaking, harmonisation can help to reduce information and transaction costs, address externalities and achieve economies of scale, while a multi-level regulatory system can better adapt to local preferences and policy objectives, thereby allowing for beneficial regulatory competition and innovation [21]. Restricting the question of harmonisation to enforcement, there are compelling arguments for harmonising prospectus liability: First, the policy objective of prospectus regulation (ensuring allocative efficiency) is commonly shared and normatively established by the PR. There are no national preferences or differences to be taken into account. Second, there are only a handful of recurring policy issues in the design of prospectus liability that are not related to specific features of Member States’ capital markets. Therefore, the need for regulatory competition and innovation in the design of civil liability rules plays no relevant role. At the same time, the adoption of a European prospectus liability regime is likely to significantly reduce information and transaction costs. An integrated market needs uniform market rules, at least in the long term [22]. While it is true, that a European prospectus liability regime will still depend on civil procedure under national law (e.g., mechanisms of collective redress), the European legislator can give instructions to Member States without harmonising these areas as well. Third, assuming that the PR provides for a socially optimal level of disclosure, the European legislator should be more concerned about Member States’ enforcement regimes undermining the effectiveness of European law. Fourth, the prospectus regime is already largely harmonised. Both the form and content of a prospectus, the disclosure obligation, and public enforcement are largely governed by European law, leaving little room for regulatory competition in enforcement. Fifth, it is not unlikely that allowing regulatory competition in enforcement will not lead to innovation and an optimal enforcement solution, but rather create the risk of a ‘race to the bottom’, as some Member States may be interested in lowering investor [...]


4. Competence of the European Legislator.

The legal basis for a further harmonisation of European prospectus liability through the PR can be found in Article 114 T.F.E.U., which confers to the European institutions the competence to lay down appropriate provisions having as their objective the establishment and functioning of the internal market. Thus, harmonisation of private enforcement is feasible as long as it contributes to the establishment of the internal market and is in line with the principles of subsidiarity and proportionality (Article 5 T.E.U.). As argued above, a harmonised private enforcement regime will contribute to the completion of the internal market. Therefore, the European legislator does have the competence to introduce a prospectus liability regime into European capital markets law.


5. Conclusions.

In European antitrust law, civil liability is harmonised by a directive. The Antitrust Damages Directive sets out requirements for damages claims (Article 3), contains procedural rules (Article 5) and addresses the relationship between private and public enforcement in cartel cases (Articles 6(6) and 9(2)). Especially in the aftermath of the financial crisis, the European legislator has increasingly relied on civil liability as an enforcement instrument of financial markets law [24]. Civil liability has arrived on the agenda of the European legislator! The recently adopted MiCAR is the preliminary culmination of this development [25]. Against this background, Article 11 PR appears to be a relic from the early days of European capital market legislation in the 1980s.


NOTE