World Online is the landmark case
Undoubtedly the most important ruling with regard to prospectus liability is the ruling of the Dutch Supreme Court (Hoge Raad) in the case of World Online (WOL) of 27 November 2009 (JOR 2010, 43 with annotation by Karel Frielink).
World Online was a European Internet Service Provider and its Initial Public Offering (IPO) in 2000 proved a disaster. According to the Dutch newspaper NRC Handelsblad of 22 July 2000: “World Online had all the ingredients to become a conflagration with prices going through the roof, as they say in stock exchange folklore.”
After the IPO it appeared that top woman Nina Brink had sold her shares (by means of a legal entity controlled by her – Kalexer) (this involved 15 million shares) several weeks before the IPO for 6 euro (the introduction price was 43 euro). The average investor was not aware of this. As a matter of fact the sale was stated cryptically in the prospectus and then even without mentioning the sales price. Just before the IPO Nina Brink announced in the media: “I didn’t sell any shares at this time“.
In quashing the judgment of the Appeal Court on that point, the Supreme Court declared it to be law in the WOL case
- that by not stating in the prospectus for what amount the Kalexer shares were sold at the end of December 1999, World Online, ABN AMRO and Goldman Sachs acted wrongfully towards the investors in World Online shares who subscribed to the IPO or bought World Online shares after the IPO, at the latest on 3 April 2000, and
- that by bringing about a misleading opening price ABN AMRO acted wrongfully towards the investors who bought World Online shares on 17 March 2000 or did not sell their shares in the period from 17 March up to and including 3 April 2000 on the basis of the misleading opening price of 17 March 2000.
The prospectus liability is about a failure in the obligation to provide information which gives a truthful picture. In the WOL case the Supreme Court confirmed once again that in answering the question of whether a prospectus is misleading (within the sense of Section 6:194 Dutch Civil Code), the starting point should be “the presumed expectation of an averagely informed, cautious and observant ordinary investor at whom the statement is aimed or which is received by the latter“.
The Supreme Court continued (in ground for decision 4.10.3): “It can be expected that this ‘reference investor’ is prepared to go deeply into the information offered but not that he has specialist or special knowledge and experience (except in cases where the advertising is exclusively aimed at persons with such knowledge and experience).”
Not every inaccuracy in a prospectus is misleading (wrongful). In answering the question of whether this is the case, the reference investor must be taken as a starting point (sometimes also indicated as bonus pater familias).
The Supreme Court held (in ground for decision 4.10.4): “The court will therefore only be able to qualify an inaccurate or incomplete statement as misleading if it is reasonably plausible that the statement, read in the context in which it was placed, is of the essence for the investment decision of the ‘reference investor’. After all, in that case it is plausible that the inaccuracy or incompleteness can reasonably affect the economic behavior of the ‘reference investor’.
According to the Supreme Court it is not required that the investor actually read the prospectus or was influenced by it in his investment decision. The question is whether the inaccuracy or incompleteness of the statement is sufficiently essential in order to be able to mislead the ‘reference investor‘ (maatman-belegger). So it concerns an objectified misleading. For that matter it is a question to be answered by the court. So the court must try to put itself in the position of the reference investor.
If the court establishes that the reference investor has been misled and that the issuing company has acted wrongfully, this does not mean to say that the issuing company is obliged to pay compensation to the investors. After all it still has to be ascertained whether there is a causal link between the faulty information provision and the actual investment decision of the investor. In that connection the question comes up of whether the investor in taking his investment decision has actually been influenced by the misleading statement and has suffered losses as a result of this.
In the WOL case the Supreme Court also gave its opinion on the causal link between the misleading statements on the one hand (in the prospectus and beyond) and the investment decision by the investor on the other hand (also indicated as the condicio sine qua non link, or csqn link). Whether there is a csqn link cannot – theoretically – be ascertained with absolute certainty. In the end it is up to the conviction of the judges deciding the case: whether they consider it (highly) probable that the link exists.
The Supreme Court established that the application of the normal rules with regard to the obligation to furnish facts and the burden of proof can be problematical. The Supreme Court held (in ground for decision 4.11.1): “However, that evidence is problematic because an investor, with regard to his investment decision, will generally allow himself to be guided by a multitude of factors, while in addition it is often impossible to demonstrate that he actually took note of the misleading statement, let alone that he was actually influenced by that misleading statement. That influence could also have taken place indirectly by the investor trusting in the advice or going by current opinions in the market, which in their turn were created by the misleading statement.”
In the majority of the cases the prospectus has not been read, let alone understood. Investment decisions by average people are (exclusively) taken on the basis of market sentiments and the advice of account managers or investment analysts. The question of the extent to which the content of the prospectus affects such sentiments and advice is difficult to answer. When the internet became a hype almost everybody wanted to invest in the ‘new economy’; expectations were running high everywhere. There is no cure for the idea that trees grow to the sky, probably not for a prospectus not being misleading either.
But it has been laid down in the (European) Prospectus Directive that the national law must provide effective legal protection. Somebody must be able to be effectively held liable (thus without too many hurdles) for a misleading prospectus. That is why the Supreme Court held (in ground for decision 4.11.2): “With a view to that effective legal protection and considering the protection of (potential) investors against misleading statements in the prospectus intended by the prospectus regulations, the starting point should be allowed that the condicio sine qua non connection between the misleading and the investment decision is present.”
The Supreme Court talks of a starting point: in actual fact it is a refutable presumption, or the reversal of the burden of proof. There is also something to say about this choice. The prospectus including the misleading information in it (and/or provided afterwards), influences the market sentiment. A certain climate arises with associated expectations of investors affecting their decision to acquire securities. The issuing company is primarily responsible for providing information which is relevant to the respective market sentiment.
The question of whether the market does or does not operate efficiently, and therefore whether the price (development) of the respective securities is a correct reflection of the information about those securities available at that moment in the market, appears to me to be rather within the risk sphere of the issuing company than in that of the investors, certainly if the prospectus appears to be misleading on essential points. The idea that the Supreme Court appears to follow: that investors go by the sentiment in the market rather than by the prospectus, appears to me correct.
The presence of a csqn connection will not have to be assumed if, for instance, the investment decision had already been taken before the misleading statement (the prospectus) was made publicly known. This might be applicable to (some of) the people who received candies from World Online in 2000. WOL shares were reserved for business relations of WOL, friendly relations of top woman Nina Brink and family members for which they had priority of purchase.
In connection with the question of whether the court will take as the starting point that the csqn connection is present, the knowledge and experience of the respective investor also plays a role. If an investor is involved who has relevant knowledge and experience in this connection, and therefore can be recognized as a professional investor, there might be reason to take the ordinary rules of the law on evidence as a starting point. This will also depend on the assessment made by the court about the question of whether such an investor was influenced in his investment decision by the (misleading) prospectus. When an ordinary investor has been assisted by a relevant professional advisor, this can also play a role.
For the average person a prospectus is an unreadable document. With respect to the World Online case I venture the assertion that of the 12,000 investors whose interests were represented by the Dutch Investors’ Association (Vereniging van Effectenbezitters: ‘VEB’) only a handful had actually read the prospectus and that none of the investors based their decision to subscribe to this issue on the contents of the prospectus. And I also dare to venture that less than 0.001% of all investors (and that would have been several hundred thousand) can state the faults on the basis of which the Supreme Court held in the end that World Online and the banks involved in the IPO acted wrongfully towards the investors. And it also appears to me defensible that the average investor, if the prospectus would not have been misleading, would probably also have subscribed to the issue.
Attorney (Lawyer) / Partner
18 March 2014