6.1 Introduction

A prospectus is a document in which regulated information about the securities and its issuer is made available to the investment community. This representations made in the prospectus will be relied upon by investors when they make their investment decision.1 Therefore, the legislator regulates the minimum information requirements for the prospectus. In UK law, these requirements are laid down in the Financial Services and Markets Act 2000 (FSMA 2000) and the FSA Prospectus Rules.

Investors can claim for damages against the persons responsible for the prospectus on the basis of statutory law or on the basis of common law actions. The statutory provisions that will be analysed in this chapter are applicable to the whole territory of the United Kingdom. Common law actions are restricted to England and Wales. For that reason, the common law case law to be discussed is only applicable to prospectuses issued in these parts of the United Kingdom.

Section 90 of the FSMA 2000 provides the investor with the right to claim compensation from the persons responsible for the losses incurred by him as a result of false or misleading information in the prospectus. Alternatively, investors can claim damages on the basis of the common law tort of negligence. The issuers and its directors qualify as persons responsible for the prospectus on the basis of the FSA Rules. Apart from the issuer and its directors, the lead manager and/or the other sponsoring banks, and the auditors can be held liable for negligent misrepresentations in the prospectus, if they violated their duty to make due and careful enquiries into the information provided in the prospectus. In general, a claim based on section 90 is likely to be more successful than a claim based on the common law action for negligence because the conditions to be proven for a successful claim based on section 90 are lower.

If the investors are able to prove that they either directly relied on the information in the prospectus or indirectly via its effect on the stock market price of the securities when they made their investment decision, they can obtain damages. The damages awarded will be restricted to foreseeable losses; the general fall in stock market prices after the publication of the prospectus cannot be recovered.

Section 6.2 discusses the legal obligation to publish a prospectus under U.K. law. In subsection 3, the administrative proceedings in regard to the prospectus will be analysed. Section 6.4 provides an overview of the legal bases available to investors for their damage claim for a misleading prospectus. Paragraph 1 discusses the basis of contractual prospectus liability. In paragraph 2 a brief overview of the statutory damage claim is provided for. Paragraph 3 enumerates the common law action for deceit and the common law action for negligent misrepresentation. Subsection 5 analyses the persons responsible for the prospectus both under the FSMA and the various common law actions. As an example, the fictional issuing company X plc and the lead manager Y plc are introduced. Section 6.6 explains when the information qualifies as misleading or false. In section 6.7, the requirement of causation and the proper measure of damages are discussed. The measure of damages depends on the basis of the prospectus liability claim. In section 6.8 the applicable rules in regard to the burden of proof is discussed. Finally, in section 6.10 some concluding remarks are provided for.