7.6.1 Causation between misinformation in prospectus and investment decision

The first requirement regarding causation in all jurisdictions is that the false or misleading information in the prospectus was the (exclusive) cause of, or at least contributed to, the decision to invest in the securities on offer. In German law, this concept is known as liability constituting causation; in English law, factual causation. In some jurisdictions, investors are not required to have read the prospectus themselves in order to have a successful claim for damages, they may, to some extent, indirectly rely on the proper securities price formation as a result of professional investors' reading and analysing the prospectus information.

With respect to causation, the Dutch Supreme Court in the World Online judgment ruled that in principle the Dutch civil procedure rules with respect to the duty to claim and the burden of proof apply to the question of causation. The investor has to claim and, upon challenge, prove that there is a condicio sine qua non-connection between the misleading statement in the prospectus and the losses incurred by him The Dutch Supreme Court recognised that it may be problematic to give evidence, because the investor will in general take into account many factors when making his investment decision. Furthermore, it is in many cases impossible to demonstrate that the investor took actually notice of the misleading statement. It is even more difficult for the investor to prove that he was actually influenced by the misleading statement. The Dutch Supreme Court accepted that the influence of the misleading information on the transactional decision by the investor can also occur indirectly if the investor relied on advice or on the leading opinions circulating in the market which in turn were created by the misleading statement.1

Furthermore, the Dutch Supreme Court in World Online reduced the investor's burden of proof by ruling, that in order to ensure effective legal protection as required by the Prospectus Directive 2003 and taking into account the purpose of the prospectus rules to protect (potential) investors from misleading information in the prospectus, the condicio sine qua non-connection shall, in principle, be deemed to exist. This means that there is a presumption that in case there would have been no misleading information, the investor would not — or in case of a secondary market purchase: not on the same terras have purchased the securities. .2

French courts adopted a strict approach to the requirement of causation. In cases that the investor claims that he would not have acquired the securities if correct information had been published in the prospectus. In these cases, the claimants must give evidence that they actually based his investment decision on the information provided in the prospectus. Only in very specific circumstances, like in the Eurodirect Marketing case, the investor will be able to provide this evidence. If the courts deems that there is sufficient evidence to support this claim, the investor will receive the difference between the purchase price and the sales price corrected for the general fall in the securities market prices. However, French courts in recent case law seem to be lenient in accepting causation when the investor claims that he acquired the securities at an incorrect, inflated price as a result of the misleading information in the prospectus and thereby lost the opportunity to make an informed decision with respect to their investment in the defendant company's securities.

Regarding causation, the German Federal Court of Justice ruled that liability constituting causation, i.e. the misleading statement in the prospectus contributed to the decision to invest in the securities, is established even though the non-professional investor did not read the prospectus himself but instead relied on the `investment market sentiment'. The individual investor may rely on the fact that investments are made by professional investors who did in fact read the prospectus and were influenced in their investment decisions by the misleading statements. Investors claiming, on the basis of section 44 of the Stock Exchange Act, restitution of the purchase price of the securities within six months after the publication of the prospectus do not even have to give evidence of the existence of such an investment market sentiment; there is a legal presumption that such a sentiment exists in the aforementioned time span. The defendant bears the burden of proof that there was no `investment market sentiment' when the claimant made his investment.

For compensation claims based on section 90 of the Financial Services and Markets Act 2000, investors do not benefit from any presumption of law; they are required to provide evidence that the misleading statements in the prospectus caused the financial market participants to induce an inflated market price by their increase in subscriptions for those securities.