Article Investors denied damages in Court of Appeal – despite board’s breach of the Prospectus Regulation

The board of a Swedish limited liability company was ordered to pay damages to investors for breach of the Prospectus Regulation. The Court of Appeal has overruled the judgement (with a dissenting opinion). In line with the district court, the Court of Appeal agrees that there was incorrect and misleading information. However, since the investors had previously made guarantee commitments to the company, the investors had not proven that their decision to subscribe for shares in the company was caused by the incorrect information in the prospectus. The judgement of the Court of Appeal has been appealed.

Background

In connection with the listing of a company (the Company) on Nasdaq First North Growth Market in February 2020, the Company carried out a new share issue where, among others, two investors subscribed for shares in accordance with a guarantee commitment.

In addition to the prospectus, the focus of the dispute was an analysis that had been prepared in October 2019 (the Analysis) and which contained, among other things, a forecast of the Company’s expected net sales in 2019, and a presentation that was used in connection when the Company was presented to investors in November 2019 (the Presentation). The Presentation contained, among other things, a forecast of the group’s net sales for 2019.

In January 2020, a prospectus was published and posted on the Company’s website together with the Analysis and Presentation under the heading ‘IPO’. The prospectus did not contain any forecast (in any case, it did not state that any information would be a forecast). As usual, the prospectus contained a description of risk factors (including financing risks) and a disclaimer aimed at forward-looking information. In February 2020, the Company carried out the new share issue in which, among others, the two investors subscribed for shares in accordance with the guarantee commitment.

At the end of March 2020, the Company published its year-end report, which revealed that the net sales for 2019 were significantly lower than predicted in the forecasts. At the end of June 2020, the Company announced that its wholly owned subsidiary had filed for bankruptcy.

The investors claimed that the Board had violated the Prospectus Regulation. Among other things, because the Board had not made a so-called supplement to the prospectus in accordance with the Prospectus Regulation[1]. If such a supplement had been published, the investors would not have made the guarantee commitment and consequently not subscribed for shares in the Company.

The District Court’s assessment

The District Court largely agreed with the investors and initially stated that if a Swedish limited liability company prepares a prospectus in violation of the Prospectus Regulation, the board members may be liable for damage caused by negligence or intent due to incorrect or incomplete information in the prospectus (Chapter 29 section 1 Swedish Companies Act).

Furthermore, the District Court stated that although the Analysis and the Presentation had not been classified as advertisements (which is a requirement according to the Regulation), they were nonetheless advertisements (marketing) since they had been posted on the website under the heading ‘IPO’ together with the prospectus. According to the Prospectus Regulation, advertisements must not contain false or misleading information.

With regard to whether the forecasts in the Analysis and Presentation were incorrect and misleading, the District Court meant that the relevant time of the assessment was the time when the investors signed the guarantee commitment towards the Company (i.e. at the beginning of February 2020). According to the District Court, the board should, at least at that time, have realized that the Company’s actual outcome differed significantly from the forecasts, given that the board had an obligation to continuously monitor the accuracy of the forecasts. Consequently, the board should have prepared a  supplement to the prospectus by that time to correct the previous information. As the board did not do so, the board was negligent. If the investors had received correct information in accordance with the requirements of the Prospectus Regulation, they would not have entered into the guarantee commitment and thus would not have subscribed for shares under such commitment, the District Court held. The District Court therefore found that the Board was obliged to compensate the investors for their loss.

The Court of Appeal’s assessment

Like the District Court, the Court of Appeal found that the Board had breached the Prospectus Regulation. However, when it came to the causality between the violations and the investors’ loss, the Court of Appeal made a different assessment. The background to the Court of Appeal’s assessment was that, according to the Court of Appeal, the investors had in practice already decided to subscribe for shares in the Company in 2019, i.e. before they entered into the guarantee commitment towards the Company in February 2020. The inaccuracies in the prospectus and advertising had therefore not affected the investment decision. According to the Court of Appeal, the investors would have subscribed for the shares in the Company even if they had received correct information.

The Court of Appeal therefore dismissed the investors’ claim for damages. One judge had a dissenting opinion . He argued that it was more likely that the investors would had decided not to subscribe for the shares if they had been given correct information, despite the guarantee commitment.

Takeaways to avoid prospectus liability

Since the Court of Appeal largely made the same judgement as the District Court regarding the breaches of the Prospectus Regulation, there are still important takeaways for a board preparing a prospectus. A board that is to draw up a prospectus should in particular:

• Monitor financial forecasts, prepare prospectus supplements when necessary, and not rely on general risk sections and disclaimers in the prospectus to protect against liability.
• Ensure that the marketing of an offer is consistent with the prospectus.
• Not use alternative key measures in marketing unless the measures are included in the prospectus and ensure that these measures comply with the applicable accounting framework.
• Pay attention to how the working capital statement is worded in the prospectus.

This information is for general information purposes only and does not constitute legal advice.

[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 of the European Parliament and of the Council (Commission Delegated Regulation)