Author: Stockholm Marketing

In June 2022, Sweden had its first court decision regarding a board’s responsibility under the Companies Act for breach of the Prospectus Regulation[1]. Following a share issue and a listing of a company on Nasdaq First North Growth Market, two investors sued the company’s board and sought compensation arguing that the prospectus prepared by the board was in breach of the Prospectus Regulation. The District Court’s judgment, which to a large extent agrees with the investors, has been appealed. [1] Regulation (EU) 2017/1129 of 14 June 2017 on the prospectus to be published when securities are offered to the public or admitted to trading on a regulated market and Commission Delegated Regulation (EU) 2019/979 of 14 March 2019 supplementing Regulation (EU) 2017/1129 (Commission Delegated Regulation)

Takeaways to avoid prospectus liability

• Monitor financial forecasts and do not rely on general risk sections and disclaimers for protection against liability.
• Make sure that the marketing of an offer is in accordance with the prospectus.
• Do not use alternative performance measures (APMs) in marketing unless the APMs are included in the prospectus.
• Be vigilant when preparing the working capital statement in the prospectus.

Background

A company (the Company) had made an offering to subscribe for shares in connection with the Company’s listing on Nasdaq First North Growth Market in February 2020. Two investors, among other, had subscribed for shares in accordance with a previously made commitment.

At the center of the dispute, apart from the prospectus, was an analysis prepared in October 2019 (the Analysis), which among other things included a forecast regarding the Company’s future net turnover in 2019 (negative, neutral, and positive) as well as a presentation that was used when the Company was introduced to investors in November 2019 (the Presentation). Among other things, the Presentation included a forecast regarding the group’s net turnover for 2019.

In January 2020, a prospectus was published and posted on the Company’s website together with the Analysis and the Presentation under the headline “IPO.” No forecast was included in the prospectus (at least no information was presented as a forecast). As usual, the prospectus also included a section with risk factors (such as risks associated with financing) and a disclaimer regarding forward looking statements.

At the end of March 2020, the Company published its annual statement where it was evident that the actual net turnover was significantly lower as compared to the forecasts. By the end of June 2020, the Company announced that its wholly owned subsidiary had filed for bankruptcy.

In their suit, the two investors argued that the board had breached the Prospectus Regulation and caused the investors damage as they would not have subscribed for shares if the information had been in accordance with the Prospectus Regulation requirements. The Court agreed with the investors to a large extent. Its decision referred to the Companies Act pursuant to which a board member may be held liable for damages caused by negligence or intent as a result of incorrect or incomplete information in a prospectus (29 Chapter 1 Section Companies Act).

Were the forecasts marketing and, if so, were they inaccurate or misleading?

The Court stated that even though the Analysis and the Presentation had not been presented as “advertisements” (which is a requirement under the Regulation), they were indeed advertisements (marketing) of the offer because, among other things, they had been posted on the website under the headline “IPO” together with the prospectus.

The Court noted that in the beginning of February 2020, at the latest, the board should have realized that the actual outcome deviated significantly from the forecast. The Court was not persuaded by the board’s argument that the board could not have known the outcome until the annual statement was presented at the end of March 2020.

Given that the period to which the forecasts referred had come to an end, it did not matter that the Analysis included a disclaimer regarding forward looking information.

Consequently, the Court state that the Analysis and the Presentation were misleading and in breach of the Prospectus Regulation.

Were the forecasts alternative performance measures?

Information to the public regarding an offer (whether written or verbal and whether or not the information is intended to promote the offer) must not include so-called alternative performance measures (APMs) unless these are also included in the prospectus. According to the Court, the forecasts included APMs. Because they were not included in the prospectus, the board was in breach of the Prospectus Regulation (Commission Delegated Regulation) also in this respect.

Did the prospectus include all material information?

A prospectus must contain the necessary information material to an investor for making an informed assessment of the assets and liabilities, profits and losses, financial position, and prospects of the issuer. In this case, the board had stated that in the board’s view, there would be sufficient working capital for the next twelve months provided that the share issue was executed according to plan. According to the Court, the working capital statement was misleading as it did not clearly state that it was made on the presumption that the business plan would be realized, among other things.

Had the board been negligent?

The Court stated that the board was not liable per se for the actual outcome as compared to the forecasts. However, because the forecasts were regulated by the Prospectus Regulation’s rules on advertisements (marketing), the board had an obligation to continuously monitor the accuracy of the forecasts and inform the market as soon as it was clear that they substantially deviated from the actual outcome. Given that the board had not done so, the board had been negligent.

Did the investors suffer damage and if so, how much?

According to the Court, there was no reason to question that the investors would not have subscribed for shares if the Company’s actual financial situation had been presented to them. Consequently, the investors had suffered damage as a result of subscribing for shares in accordance with their commitments. The precise reasons for the decrease in the share price was not relevant.

Were all board members liable?

Because none of the board members had objected to the information that was presented to the investors, the Court stated that all the board members had caused the damage jointly and were jointly liable for the damage (District Court of Attunda 2022-06-07 case No T 10146-20).

A board member in a listed company made a late notification following a sale of the listed company’s shares. The transaction amounted to approx. SEK 48 million and the Financial Supervisory Authority (FSA) determined the penalty fee to approx. SEK 8,2 million based on its standardized penalty-fee guidelines for delayed reports. The Supreme Administrative Court, however, questioned the strict use of the penalty-fee guidelines and reduced the fee to SEK 2 million.

Takeaways

• The penalty fees for incorrect or late transaction reports by insiders are still extremely high. This is true also in situations where the report would hardly provide any new information to the market. The penalty fees may still amount to millions – even in situations where the delay may seem like a minor administrative offence.
• Management and others who must report their transactions still have an almost strict liability for making a correct report within the prescribed time in accordance with MAR.
• The Financial Supervisory Authority’s standardized penalty-fee guidelines, which specify fees on the basis of the size of the transaction and the length of the delay, may still apply in general but cannot be copy-pasted without thought, at least not when there is a longer delay in reporting a larger transaction and the model results in disproportionate amounts.

The case in short

According to the market abuse regulation (MAR), board members and other persons in the management of a listed company must report transactions in the company (these persons are often referred to as ‘insiders’). The report must be made to the FSA without delay and not later than three business days after the transaction. The same applies to individuals closely associated to management as well as their companies.

The reporting requirement aims to prevent market abuse, particularly insider dealings, and to increase market trust.

An insider (or a closely associated person) who fails to make a correct report in due time, risks having to pay a penalty fee. MAR and the supplementary Swedish legislation state the maximum amount of the fee that can be imposed in case of a breach. Somewhat simplified, the maximum fee is EUR 500,000 for individuals and EUR 1,000,000 for legal persons (or, if higher, an amount corresponding to three percent of the turnover). However, the law does not state the standard amount for a “typical” breach of the reporting requirement. In practice, though, the FSA has applied a method which in principle determines the size of the fee based on the size (value) of the transaction and the length of the delay, a method that may lead to very high amounts in larger transactions.

In this case, a board member in a listed company and the board member’s own company (the holding company) had sold the listed company’s shares worth approx. SEK 48 million. The sale, which took place in November 2017, was made public via a press release on the same day, and a so-called flagging notification was made on the following day. About a week after the sale (i.e., too late), the board member reported the whole sale to the FSA. In February 2018, he corrected the report by stating that, in fact, he had only sold half of the shares while the other half had been sold by his holding company. The holding company reported its sale on the same day as the filing of the corrected report by the board member. Based on the FSA’s own guidance and standard amounts for determining the penalty fee, the FSA imposed a penalty fee of SEK 2,837,000 and SEK 5,400,000 respectively, given that the reports were not made in time.

The board member and holding company argued that the fee was disproportionate as, among other things, the market already had information about the sale and there had been no intent to hide the fact that the sale had taken place. Furthermore, no profit had been made as result of the delay. But in the FSA’s view, none of this mattered.

The Administrative Court of Appeal agreed with the FSA to a large extent. However, even though the Supreme Administrative Court determined that the breach was not minor or excusable (ignorance about a reporting duty is not an excuse), the Court significantly reduced the amount of the penalty.

When determining the size of the fee, the Court stated that it must strike a balance between imperatives that the fees act as a deterrent (i.e., be high) and the fees be proportionate in relation to the sanctions that apply to criminal market abuse. Further, while the intention is not for the FSA to make any in-depth analysis of subjective circumstances, it must consider whether the particular breach is more or less reprehensible. Also, while it must be possible to impose a penalty fee in case of long delays, where there is hardly any value in the information in the report, there may be reasons not to take into account the full length of the delay. In addition, the size of the transaction must be considered. However, the Court stated that the FSA’s use of standardized penalty-fee guidelines raised concerns as the guidelines result in considerable amounts in situations where there is a longer delay in reporting larger transactions and since the use of the guidelines means that other circumstances are not taken into consideration. In this case, the breaches were serious given the size of the transaction and the length of the delay. And though there was no risk of any actual damage, there was indeed a risk for reduced market trust, according to the Court. But, given that there was no intent to hide the transaction and that no profit resulted from the delay, the Court determined that the FSA’s penalty fees were disproportionate (they corresponded to almost half of the maximum amounts). Thus, the Court significantly reduced the amounts of the penalty fees to SEK 500,000 and SEK 1,500,000 respectively (Supreme Administrative Court 6143-20).

This information does not, and is not intended to, constitute legal advice.

New rules are introduced to make it possible for Swedish limited liability companies to change their domicile to another EU or EES country by way of a cross-border conversion. At the same time, the rules for cross-border mergers and divisions will be updated. The purpose is to facilitate cross-border restructurings.

EU cross-border mergers, divisions and conversions – takeaways

• A Swedish limited companies (private and public) may change its domicile to another EU-country (cross-border conversion). The procedure requires a plan including the terms of the conversion, an shareholders’ approval and permission from the Swedish Companies Registration Office.
• A shareholder who has voted no to a cross-border merger has the right to have its shares redeemed.
• A new form of division is introduced where the consideration is paid to the company itself instead of to its shareholders (separation).
• Companies with an ongoing merger or division may need to watch out as the new rules apply also to ongoing procedures started before January 31, 2023 when the new rules start to apply.

Many of the proposed laws apply also to economic associations and financial companies. The new laws are proposed to enter into force on January 31, 2023 and are based on EU directive 2019/2121 of 27 November 2019 amending Directive (EU) 2017/1132 as regards cross-border conversions, mergers and divisions.

Cross-border conversion

A cross-border conversion entails that a Swedish limited liability company (private or public) is converted into a foreign company or, vice versa, that a foreign company is converted into a Swedish limited liability company. No new company is formed and no company is dissolved. Instead, the same company continues to exist in a converted form in another EES member state. To a large extent, the rules will correspond to those that apply to cross-border mergers and divisions, such a requirement to prepare a plan with the terms of the conversion, shareholder approval and a notice to the creditors of the company and permission to execute the plan.

As with cross-border mergers and divisions, a shareholder who has voted no to the division will be entitled to have its shares redeemed and may also claim additional compensation before a court.

Cross-border merger

Already today, Swedish limited companies may merge with a corresponding legal entity in another EES member state but the proposed legislation includes certain changes, such as for example the following:

• New requirements on the report of the board and the auditor’s statement.
• A shareholder who has voted against a cross-border merger will have the right to have its shares redeemed for a compensation. If the shareholder does not accept the compensation stated in the merger plan, the shareholder may claim additional compensation before court.
• A shareholder who has not requested to have its shares redeemed, but who objects to the share exchange ratio in the merger plan, may also claim additional compensation before a
• The Companies Registration Office may reject an application to execute a merger if the merger is set up for “abusive or fraudulent purposes leading to or aimed at the evasion or circumvention of Union or national law” or for criminal purposes.
• The Companies Registration Office may engage an expert to determine if a cross-border merger may be executed. The company applying for the execution will be liable for the cost.

Cross-border division

A division entails that a limited company is divided into two or more limited companies. While the Companies Act already regulates domestic divisions, new provisions are introduced to enable cross-border divisions.

For both domestic and cross-border divisions, there will be three kinds of divisions:

• Complete division: Corresponds to what is usually known as a ‘demerger’.
• Partial division: Corresponds to a ‘spin-off’, meaning that the company transferring assets and liabilities continues to exist and that the compensation is paid the shareholders of that company.
• Separation: Corresponds to a partial division with the difference that the compensation is paid to the company transferring the assets rather than to its shareholders.

Thus, both a domestic and a cross-border division may be executed by way of a complete division, a partial division or a separation. In a cross-border division, a company’s assets and liabilities will – completely or partially – be transferred to one or more corresponding legal entities within the EES. To a large extent, the procedure will correspond to a cross-border merger. However, the cross-border division plan must, among other things, include a description of the division of assets and liabilities between the companies as well as information on the treatment of assets and liabilities not explicitly allocated in the plan (e.g. unknown debts).

A short note on employment law

The Act on Involvement of Employees in Cross-border Mergers is amended to cover also cross-border mergers and divisions. Among other things, the new legislation will enable the Companies Registration Office to reject an application to execute a cross-border reorganization if the purpose of the reorganization is to circumvent employee participation rights.

This information does not, and is not intended to, constitute legal advice.