6.9 Concluding remarks

Concluding, the Financial Services and Market Act 2000 require issuers who seek listing on a U.K. regulated market or offer securities to the public in the U.K. to publish a prospectus. This prospectus has to contain information that enables the investor to make a well-informed investment decision. Besides this generally formulated duty to provide information in the prospectus, the FSMA also prescribes more detailed information requirements by reference to the Prospectus Regulation 2004.

Investors who sustained losses as a result of the misinformation in the prospectus have two possibilities: they can claim damages on the basis of special prospectus liability provision in section 90 FSMA 2000, or they can claim damages on the basis of the common law tort of deceit or negligence respectively. Since there is no reversal on the burden of proof, the claimant who bases his claim on section 90 FSMA 2000 has to give evidence of the following elements: the prospectus contains untrue or misleading information and/or omits required information; the claimant must have acquired the securities to which the prospectus applies; the defendant is a person responsible; the claimant suffered a loss as a result of the untrue, misleading or omitted information. Regarding the first two elements, the rules are clear. Unfortunately, the rules which persons are responsible for the contents of the prospectus are not very clear. Therefore, it is not sure that, despite their extensive involvement in the preparation of the prospectus, the lead manager and/or other sponsoring banks and underwriter can be held liable for the prospectus pursuant to section 90 FSMA 2000. Regarding the requirement of causation, the claimant does not necessarily have to prove that he actually read the prospectus before he took his investment decision. If the claimant can prove that the information in the prospectus caused an artificially inflated securities price, he can hold the issuer and/or its directors liable for the losses incurred. In the only case until now with respect to statutory remedies in the FSMA, the Court of Appeal adopted a transactional approach to causation: the investor must prove that he has acted differently as a result of the contravention of FSMA obligations. The measure of damages is the same as applied to claims in tort for negligence, because it is not very likely that the SAAMCO cap does not apply for claims based on section 90 FSMA 2000. Therefore, the recoverable losses are limited to foreseeable losses and losses that fall within the scope of duty owed to the claimant. Section 90 does not seek to restore the claimant to the position which he would have had but for the misrepresentation (restitutio in integrum),1itholds the person responsible liable to compensate for losses incurred as a result of the misinformation.

The claimant can also claim on the basis of the common law tort of negligence. On the basis of the House of Lords ruling in Hedley Byrne, the following elements have to be established: the defendant acts negligently or makes a negligent statement; there exists a special relationship between the claimant and the defendant from which the defendant's duty of care arises; the defendant breached his duty of care towards the claimant; a causal relationship between the breach of duty and the losses incurred by the claimant. In the common law actions for tort of negligence, the crucial element to be proven by the claimant is the duty of care owed by the defendant to him In the Caparo case, the House of Lords developed the following a three-stage test that must be met in order to impose a duty of care on the defendant: the losses incurred by the claimant must have been foreseeable; sufficient proximity: a special relationship (closeness and directness of the relationship) between the defendant and the claimant from which the duty of care arises; imposition of a duty of care must be für, just and reasonable. Furthermore, the scope of the duty of care is determined by this special relationship: did the defendant have a legal duty to take into account the reliance on his statement by this particular (class of) claimant(s). The requirement of sufficient proximity is of utmost importance to establish liability for negligent misstatements. Whether proximity exists depends on three crucial factors: the purpose for which the statement was made; the defendant's knowledge that his statement is communicated to the claimant; the reliance by the claimant on the statement.

On the basis of these criteria, it is reasonable to assume that the issuer as well as its directors can be held liable for tort of negligence with respect to misrepresentations in the prospectus. The duty of care follows from the special relationship between the issuer and its directors and the general investor community. Therefore, the issuer and its directors have, or should have, the reasonable general investor in mind when they draw up the prospectus.

Regarding the measure of damages, there is an important distinction between cases of deceit, i.e. the defendant deliberately provided misinformation in the prospectus, and cases of negligent misrepresentation. Damages awarded in deceit cases are difference between the price at which the securities were purchased and the actual value of the securities at the time of purchase. Unlike in case of negligent misrepresentation, the losses incurred as a result of deceit need not be foreseeable. Furthermore, in prospectus liability claims based on negligent misrepresentation, the SAAMCO-cap will apply. Therefore, the losses incurred due to a fall in the general securities market price after the day of purchase cannot be recovered by the investor, because they are not foreseeable for the defendant.

Investors who want to collectively claim for damages from the issuer and/or the lead manager and/or the other sponsoring banks have two possibilities: a representative action based on the opt-out model where a representative investor or investors association claims damages from the defendant(s) and the court's judgment is binding on the other investors, unless they opt out, even though they were unknowingly represented; or the group litigation order where a court that is confronted with a great number of claims with common questions/issues to be dealt with may suspend the other proceedings and continue with a test claim. The representative action is not used very frequently because of it high requirements regarding commonality of claims. The problem of the laffer procedure is that it is not so much a collective action available to investors than a court management tool to deal with a great number of similar cases. It is entirely up to the court to decide whether it deals with the commonalities collectively. The proposal from the Civil Justice Council to adopt a generic collective action leaves the actual decision whether a collective procedure is based on opt-in or opt-out to the courts.