2.1 Introduction

In 2003, the European Parliament and the Council adopted the Prospectus Directive ("PD 2003"). This Directive is part of EU-legislation that aims to achieve an interaal market in financial services as set out in the following Communications of the Commission: the Risk Capital Action Plan ("RCAP") and the Financial Services Action Plan ("FSAP").1 These plans outline a road map for the Commission and the Council to achieve a single financial market in Europe. In this single financial market, the `users and suppliers of financial services should be able to exploit freely the commercial opportunities offered by a single financial market, while benefiting from a high level of consumer protection'.2 This dual objective of investor protection and free movement of financial services is reflected in the Prospectus Directive 2003.3

In order to efficiently prepare for the necessary legislation, the Council of Economic Affairs and Finance Ministers ("ECOFIN") established a Committee of Wise Men onder the chairmanship of Alexandre baron de Lamfalussy 'to assess the current conditions for implementation of the regulation of the securities markets in the European Union'.4 In its final report ("Lamfalussy Report"),5 the Committee recommends adopting a multi-level legislative approach. At the first level, the basic political choices are laid down in broad but sufficiently precise framework norms, while at the second level the more detailed technical measures are formulated in order to achieve the full implementation of the objectives pursued by the legislation.6 In the third paragraph of this chapter, I discuss the legislative framework created by this multi-level approach and its implications for the Prospectus Directive.

The Commission recognised the impediments to cross-border securities offers in the FSAP: the production of multiple sets of official documentation for the supervisors in the respective Member States and the mandatory application of national requirements in addition to the harmonised set of prospectus rules laid down in various EU directives.7 Even though the Public Offer Prospectus Directive 1989 ("POPD 1989") required mutual recognition of prospectus approved by the competent authority of another Member State,8 this Directive explicitly allowed the Member States to `require that the prospectus includes information specific to the market of the country in which the public offer is made concerning in particular the income tax system, the financial organisations retained to act as paying agents for the issuer in that country, and the way in which notices to investors are published'.9

The Prospectus Directive 2003 is based on the passport system. This Directive designates the competent authority of the home Member State as the single authority competent to approve the prospectus, unless the offer of securities belongs to one of the categories which are exempted from approval prior to publication of the prospectus (home state principle).10 Member States are required to recognise the approval of the prospectus by the home Member State's authority (mutual recognition principle).11 Additional national requirements regarding the prospectus contents cannot be imposed as a condition for recognition of a prospectus duly approved by the competent authority of the home Member State. On the basis of the approved prospectus, the issuer has access to financial markets in the entire European Union, hence the term passport.

The home Member State is defined in article 2(1)(m)(i) as, 'for all Community issuers of securities which are not mentioned onder subparagraph (ii),12 the Member State where the issuer has its registered office'.13 Article 17 and 18 of the Directive are crucial with respect to the home state principle: once the prospectus is approved by the home Member State's competent authority, the issuer is provided with a single European passport. Article 17(1) prescribes that `where an offer to the public of admission to trading on a regulated market is provided for in one or more Member States, or in a Member State other than the home Member State, the prospectus approved by the home Member State and any supplements thereto shall be valid for the public offer or the admission to trading in any number of host Member States, provided that the competent authority of each host Member State is notified in accordance with article 18'. Article 18 requires the competent authority of the home Member State to provide the competent authority of the host Member State with a certificate of approval attesting that the prospectus has been drawn up in accordance with the Prospectus Directive and with a copy of the approved prospectus. The last sentence of this paragraph lays down the home state principle: Ic]ompetent authorities of host Member States shall not undertake any approval or administrative procedures relating to prospectuses.' The European passport allows issuers of securities to obtain admission to trading on a regulated market, and make offers to the public in all Member States on the basis of a notified prospectus approved by the competent authority of the home Member State. The Market in Financial Instruments Directive ("MiFID") introduced into the EU financial law corpus a distinction between a regulated market14 which is an authorised, duly regulated and regularly functioning stock exchange, and a Multilateral Trading Facility ("MTF")15 which operates without authorisation by the Member and is subject to less strict mies. In this thesis, I refer to regulated market in the meaning of a regulated and regularly functioning stock exchange.

In connection with the home Member State's exclusive competence to approve the prospectus, the European passport renders forum shopping possible. Forum shopping in this context means that issuers seek approval in the Member State that either has a very accommodating competent authority and/or a lenient private law regime with respect to prospectus liability. Forum shopping could lead to a `race-to-the-bottom' if the different competent authorities do not ensure an equally strict application of the information standards laid down in the Directive and Prospectus Regulation 2004 ("PR 2004"). In that case, forum shopping compromises one of the purposes of the Prospectus Directive: equal investor protection across the European Union.16

Furthermore, two different mechanisms are applied to enforce the publication of reliable information in the prospectus as required by the Prospectus Directive 2003.17 The public enforcement mechanism is the mandatory approval of the prospectus by the competent authorities of the different Member States.18 The second enforcement mechanism consists of the damage claims for the losses incurred by investors who relied on the information in the prospectus when making decisions about their investment. Private law liability is regarded as an important tool to effectuate market duties by the issuers and their directors. It is reasonable to expect that effective (special) private law remedies in securities laws reduce the incentive for issuers and their directors to provide inaccurate information in the prospectus and as a consequence investor confidence in the quality of information provided in the prospectus is boosted.19

In this chapter, I analyse to what extent the prevention of forum shopping played a role in the adoption process of the Prospectus Directive 2003.

I perform this analysis by describing the goals and instruments envisaged by the European Commission in its FSAP in order to achieve the single financial market in Europe. The third paragraph briefly describes the legislative approach proposed in the Lamfalussy-report. The implications of application with respect to the Prospectus Directive will be discussed as well. Section 2.4 describes the basic structure and provisions of Prospectus Directive 2003. In subsection 5, I will analyse which instruments are available to the European Securities and Markets Authority, as supranational actor in the future European System of Financial Supervision, in order to ensure the correct application by the national competent authorities of the provisions laid down in the Prospectus Directive and Prospectus Regulation.