Investors in European stock corporations increasingly seek to recover damages they have suffered due to misleading information. The corporation that publishes misleading information or withholds relevant information that creates a misleading impression acts unlawfully. If the deception involves the publication of a misleading prospectus in the context of an IPO and/or issuance, the doctrine of prospectus liability comes into play. Misleading statements in the prospectus can lead to an artificially high stock price. Therefore, investors who purchase shares during the relevant period can suffer stock price damage. This damage becomes definitive when the deception is revealed and the stock price inflation deflates. However, investors are only eligible for compensation to the extent of the loss they suffered when it is sufficiently causally linked to the misleading information in the prospectus. Arnoud Pijls, Associate Professor of Corporate Law and Capital Markets Law at Erasmus School of Law, analyses the causation requirement in prospectus liability in his article "Prospectus Liability and Causation", published in the Journal of European Tort Law (JETL) and in a shortened form as a blog post on the Oxford Business Law Blog.
Constructing the causal link in prospectus liability is not straightforward, writes Pijls on the Oxford Business Law Blog: "To establish causation, the recurring question is whether it must be required that the claiming investor relied (directly or indirectly) on the misleading prospectus when purchasing the share. Regardless of whether a stringent or flexible approach is chosen for causation, in my opinion, every discussion on causation and damage should start with the factual circumstances that form the basis of the investor's claim for compensation in the specific case."
Two factual bases can be distinguished for the investor who claims to have been misled in the context of an IPO and/or issuance. Firstly, the claiming investor may base his claim for compensation on the argument that they would have purchased the share even in the absence of the deception but at a lower price. Secondly, the investor may base their claim on the argument that their investment decision was influenced by the misleading prospectus, and that they would not have purchased the share at all with correct and complete information.
Overpaid for the share as a result of the misleading prospectus
According to Pijls, the analysis is relatively straightforward for the investor who chooses the first factual basis: "For this investor, in my opinion, it is generally not relevant for causation whether they have (directly or indirectly) been aware of the misleading prospectus and whether their investment decision has been influenced (directly or indirectly) by the prospectus. This investor argues that they suffered damage because they paid too much for their share due to the deception. In other words, this investor maintains that, when purchasing the share, they relied on the integrity of the stock price and subsequently feels betrayed in this trust. If it can be established for this investor that the misleading prospectus actually resulted in a higher stock price, then the causal link between the misleading prospectus and the price they paid is established."
Purchased the share as a result of the misleading prospectus
For the investor who chooses the second factual basis, according to Pijls, it is generally relevant whether they (directly or indirectly) relied on the misleading prospectus. However, it is important to carefully examine how the investor frames their argument that their decision to purchase the share is causally linked to the misleading prospectus. According to Pijls, this can be done in three ways: "Firstly, the investor can argue that they directly relied on the misleading prospectus and based their purchase decision on the prospectus. (...) Secondly, the investor can argue that they made his purchase decision after consulting an expert advisor. In that case, they must be able to demonstrate that the advisor relied on the misleading prospectus and they based their purchase decision on the advisor's advice. Thirdly, the investor can argue that they based their purchase decision on a positive market sentiment generated by the misleading prospectus. In this case, it is sufficient for the investor to demonstrate that the misleading prospectus led to a misleading, positive market sentiment, and they were influenced by this sentiment in his purchase decision."
The defence that the investor "would have suffered stock losses anyway."
Even if it is established in court that the investor would not have purchased the share at all with correct and complete information in the prospectus, the corporation's liability is not automatically established. It must also be determined that the stock price damage claimed by the investor is causally linked to his decision to purchase the share (and thus to the misleading prospectus). Pijls explains, "A common defence that the defendant corporation can raise in this context is that the investor would have suffered stock losses even in the absence of the deception. For example, they would have suffered such losses if they had invested their money in an alternative investment that, like the share, had decreased in value over the period of the deception."
Furthermore, Pijls extensively discusses the well-known World Online judgment of the Supreme Court, particularly focusing on the Supreme Court's considerations regarding causation in his article "Prospectus Liability and Causation."