5.1 Introduction

In German law, a prospectus liability claim can be based on either the principles of general private law prospectus liability laid down in the German Civil Code (Bürgerliches Gesetzbuch, GCC) or on the special prospectus liability regulation laid down in sections 44 and 45 of the Stock Exchange Act (Börsengesetz). The latter is exclusively applicable to securities listed on a German regulated market. Investors acquiring securities from an issuing company listed on a nonGerman regulated market and not incorporated under German law can also claim on the basis of section 44, if the securities were acquired on the basis of a transaction concluded in Germany or on the basis of an investment service provided wholly or partially in Germany. Investors acquiring securities offered to the public without listing on a German regulated market have to base their damage claim on the principles of general private law prospectus liability.

The general private law prospectus liability is subdivided in prospectus liability in the broad sense and prospectus liability in the narrow sense. Prospectus liability in the broad sense is based on the personal trust and confidence inspired to the investor by the information or advice provided by an investment adviser. The latter is not necessarily one of the sponsoring banks. If the investor is wrongly advised on the risks and conditions of his investment, because his adviser made use of a misleading prospectus, the adviser is liable for breach of his duty to inform, if he failed to make a due and careful inquiry into the prospectus contents. Prospectus liability in the narrow sense is based on the defendant's breach of a standardised trust and confidence owed by the person who had a special influence on the issuer and/or who had a special role in the preparation of the prospectus. The defendant's profession or expertise created trust and confidence such that he implicitly warranted the correctness of the information in the prospectus and thereby induced the investor to acquire the securities, while in fact the information in the prospectus was misleading. If the special liability regime of sections 44 and 45 of the Stock Exchange Act is applicable, claims based on the prospectus liability in the narrow sense are excluded.

Investors claiming damages on the basis of section 44 of the Stock Exchange Act have the advantage of a lower burden of proof, because of the legal rebuttable presumptions enacted in the Stock Exchange Act. With respect to liability constituting causation,1 it is presumed that in the six months after the publication of the prospectus there was an investment market sentiment (Anlagestimmung) such that the investor does not have to prove that he in fact based his investment decision on reading the prospectus. He is entitled to rely on the investment market sentiment created by the professional investors who did in fact base their investment decision on the information provided in the prospectus. The second legal presumption is that the fall in the securities market price after the revelation of the misleading nature of the information was the result of this revelation, i.e. liability completing causation2 is presumed. In order to avoid liability, the defendant has to claim and upon challenge prove that the subsequent fall of the issuer 's share price was not the result of the revelation but due to a general fall in share prices.

The outline of this chapter is as follows: subsection 2 discusses how the legal obligation to publish a prospectus is implemented in German law. In section 5.3, the administrative and criminal proceedings with respect to a misleading prospectus are analysed. Subsection 4 gives an overview of the legal bases for prospectus liability claims. Paragraphs 1 to 4 analyse the general private law prospectus liability regime. Section 5.4.5 discusses the general tort law provisions on which prospectus liability claims can be based. The special prospectus liability regime enacted in the Stock Exchange Act is analysed in section 5.4.6. In section 5.5, it is explained in what circumstances a prospectus is deemed misleading. Subsection 6 enumerates the persons who can be held liable for misinformation in a prospectus on the basis of the general private law prospectus liability and on the basis of the Stock Exchange Act. To this extent, the fictional issuing company X AG and the fictional lead manager Y AG are introduced. Furthermore, section 5.6.3 contains the degree of culpability necessary for qualifying the behaviour of these persons as tortious. Sections 5.7.1 and 5.7.2 analyse the liability constituting and liability completing causation respectively. Paragraphs 3 and 4 discuss what kind of damages can be awarded under the general private law prospectus liability and under the Stock Exchange Act respectively. Section 5.7.5 analyse under what circumstances the losses incurred by the investor cannot be recovered from the persons responsible because of their own fault or contributory negligence. In section 5.8, the tules with respect to the burden of proof in prospectus liability claims are analysed. Section 5.9 provides for concluding remarks.