Qualified investors can sue issuer over flawed IPO prospectus, EU court rules

On the 06/04/21 at 7:31AM


Adrien Paredes-Vanheule

The Court of Justice of the European Union, on Thursday, ruled that qualified investors can bring a liability action against a company on the ground of inaccurate information in its initial public offering prospectus even if the document is only issued for retail investors.

Ten years on, the turbulent listing of Spanish financial group Bankia on local stock exchange BME was at the centre of the case the Court of Justice of the European Union (CJEU) ruled on this Thursday. The European court delivered a preliminary ruling requested by the Spanish supreme court in December 2019.

In the court’s view and in accordance with the EU law, in the event of an offer of shares to the public for subscription, addressed to both retail investors and qualified investors, an action for damages on the grounds of the information given in the prospectus “may be brought not only by retail investors but also by qualified investors.”

Second, if a qualified investor lodges such complaint, the local courts can “take account of the fact the investor was, or ought to have been, aware of the economic situation of the share offering issuer” by other means than the prospectus, if their national laws allow or require it. However, the court specified such provisions of national law shall “not make it impossible or excessively difficult to bring that action.”

The case opposed the Spanish institutional investor Unión Mutua Asistencial de Seguros (Umas) and Spanish financial group Bankia. In 2011, the former had subscribed to the latter's IPO with the purchase of 160,000 shares at €3.75 per share (€600,000 spent in total by Umas). Bankia hence raised €3.1bn from qualified and retail investors during its IPO.

However, the information over the financial situation of Bankia contained in its IPO prospectus prove misleading. Consequently, Bankia’s shares lost almost all of their value in the secondary market following a reassessment of the bank's annual accounts in 2010 and 2011 as well as in the suspension of its quote.

Previous rulings from the Spanish Supreme Court over the inaccurate information contained in Bankia's IPO prospectus were favourable to retail investors having subscribed to the IPO and claiming nullity before the court. Therefore, Umas, on 22 May 2015, filed a nullity proceeding based on the lack of consent for the purchase of its 160,000 Bankia shares and asked local courts to declare Bankia liable for the inaccurate information presented in the IPO prospectus. Following a long judicial journey with a few turns of events, the case eventually ended at the CJEU.

In its ruling, the EU court noted that all investors, regardless of their status, have the IPO prospectus at their disposal and that the document is supposed “to contain full and reliable information on which they may legitimately rely.” It added that the exemptions from the obligation to publish a prospectus for qualified investors “do not prohibit voluntary publication of such a document for all investors.

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