6.4.1 Contractual prospectus liability

An individual investor can bring a contractual claim on the basis of the false or misleading prospectus if he qualifies as contractual counterparty to the securities sales contract. The structure in which the offer of securities takes place determines whether the issuer and/or lead manager and/or other members of the syndicate of sponsoring banks are the investor's contractual counterparty. In case of a guichet issue, the issuer is the counterparty and the sponsoring banks only act as an intermediary for the issuer.

These banks have the option to guarantee the issuer that in case of undersubscription the syndicate will buy the securities at a predetermined price. If the sponsoring banks, however, buy the securities from the issuer at a fixed price and then resell these securities to their clients, these banks are the counterparty of their clients with respect to the securities sales contract. In that case, the investors can only bring a contractual claim against the sponsoring banks.1

In practice, only professional institutional investors subscribe in their own name and at their own expense. The non-professional investors, however, are not party to the sales contract; their securities brokers act in their own name (and at the investor's expense) and therefore the brokers are the contractual party. The securities broker is the only person who can bring a claim against the issuer and/or the baraks. This section does not elaborate upon the claims available to the securities broker against the issuer, because in this section focuses on the claims available to (groups of) non-professional investors.

The equitable remedy of rescission is available to the investor, if his contractual counterparty made a fraudulent misrepresentation, i.e. the defendant had the intention that the misrepresentation should be acted upon by the person to whom it was made.2 The right of rescission is also available if a negligent/ innocent misrepresentation has become a term of the sales contract.3 In principle, the information provided in the prospectus is a term of the contract of purchase.4 However, the right of rescission is also available to the investor if the innocent misrepresentation induced him to enter into the contract of purchase.5

If the investor claims for rescission, he must establish that the misrepresentation was:

An omission of information in the prospectus, which does not falsify the statements therein, does not give a right of rescission even though the omission is in breach of a statutory provision to disclose.7 The courts uphold that in such a case legislation has to provide a statutory remedy.8

The claim for rescission has to be addressed to the contractual counterparty in a short time span9 after the discovery of the false or misleading statement in the prospectus. Otherwise the claim will be barred.10 The right to claim rescission is denied when the investor, even in the absence of knowledge of the false or misleading statements, was in a position that he had reasonable grounds to doubt the truth of the statements, and did not make an inquiry with respect to the statements in the prospectus.11 The right to claim rescission is also barred as soon as the investor ratifies the sales contract by for example acceptance of dividends;12 participation in a shareholders meeting;13 voting or transfer of right to vote;14 and attempted resale15 or transfer of the securities16 If rescission is awarded by the court, the claimant will be restored to the position which he would have had but for the misrepresentation (restitutio in integrum). He will recover the price paid for the securities plus interest.

If the investor claims rescission on the basis of innocent misrepresentation, the court may deciare the contract subsisting and award damages in lieu of rescission, if it is of the opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the defendant.17 In any case, the investor may claim damages on the basis of negligent misrepresentation18 or innocent misrepresentation.19 These causes of action for damages are only available against the contractual counterparty.20 The contractual counterparty has a statutory defence, if he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.21

For his claim based on innocent misrepresentation, the investor has to prove that he relied on the negligent statement in the prospectus and thereby was induced to enter into the securities sales contract. Unlike a claim for tort of negligence,22 the investor does not have to prove the defendant owed him a duty of care. Furthermore, he has to prove the he suffered a loss as a result of this misrepresentation. The investor will be awarded the same damages as English law would award, if the misrepresentation was made fraudulently. Therefore, the defendant is also liable for unforeseeable losses. Note that the claimant is only entitled to damages which will compensate for the failure to perform the contract as represented. Damages for all the losses including opportunity costs will not be compensated.23 In the most likely circumstances, the prospectus does not contain `promises' that investors can rely upon. As a consequence, investors are not expected to get much compensation for claims based on innocent misrepresentations. Furthermore, it was already mentioned that misleading omissions in the prospectus do not give rise to a right of compensation. Therefore, the right to damages in lieu of rescission is not a very helpful instrument for investors. The matters of causation and damages will be discussed in subsection 7.