9.4.4 Kronhofer applied to prospectus liability claims

Given the fact that the majority of securities are issued on the international capital market, it is very likely that the issuer and the investor are domiciled in other jurisdictions.1 For that reason, I will not deal with the situation where the person claimed to be liable and the person sustaining damage both have their habitual residence in the same country at the time when the damage occur as provided for in article 4(2) of the Rome II regulation. In that case, the law of the state where the claimant and the defendant have their common habitual residence applies. In the following artificial case, I will demonstrate the consequences of the application of article 4(1) of the Rome II regulation on the law applicable to prospectus liability claims. An issuing company with a registered office in France wants to be listed on the London Stock Exchange. The issuer seeks and gets approval of its prospectus by the AMF.2 Note that article 13(5) of the Prospectus Directive 2003 allows the competent authority of the home Member State, in this case the AMF, to transfer the authority to approve a prospectus to the competent authority of another Member State subject to agreement with that competent authority. In this case it would be likely for AMF to request the FSA delegation of the prospectus approval. However, this delegation mechanism is not used frequently.3

The question is which law is applicable to a (prospectus) liability claim against the issuer and/or its directors if an investor who is domiciled in Austria and who holds these bonds at an investment account of a German investment bank starts proceedings before the French court (as the country in which the issuer has its registered office).4 In accordance with article 4(1) of the Rome II regulation and Kronhofer, the German prospectus liability regime5 would be applicable to the compensatory damage claim of prospectus issued by a company with registered office in France and listed on London Stock Exchange. A choice of law clause in the prospectus is not binding.6

As a result of the conflict of law rule laid down in article 4(1), the predictability for the issuer of the laws applicable to prospectus liability claims arising from one particular (international) issue of securities is seriously compromised, given the fact that not all investors hold their investment account in the same country.7 Furthermore, this choice of law rule is contrary to the required legal certainty on international capital markets8 and it creates serious disadvantages for issuers who offer their securities internationally.9 The fact that the law applicable to a prospectus liability claim is dependent on the place where the investor holds his investment account creates an unacceptable inequality between the investors.10

Article 4(3) of the Rome II regulation, however, provides the court an `escape' instrument11 to apply the law of another country if from all the circumstances of the case the tort is manifestly more closely connected with that particular country. Dickinson is of the opinion that the intangible nature of financial loss, and the propensity for the connecting factor to be manipulated, are factors to be taken into account in applying this 'escape clause'.12 Furthermore, it is noteworthy that this escape clause is to be used only in exceptional circumstances.13 The deviation from the standard rule is to be applied on an individual basis; different rules for entire categories of claims cannot be based on article 4(3).14 In subsection 5, I will argue which law is manifestly more closely connected to prospectus liability claims.