Investor compensation in case of false information: Understanding Europe’s different approaches

Investors’ protection is at the heart of the development of financial markets. Without protection, especially of retail investors, there can be no thriving capital markets. To this end, the EU legislator has established extensive rules governing the information that must be disclosed to investors. For example, through prospectuses for the offer to the public of financial instruments, financial reports, and press releases on important matters.
However, such communications may contain false or misleading information. Think for instance of a listed company claiming that it has achieved a certain high turnover, which then turns out to be false. In these cases, what are the legal consequences once the misrepresentation is discovered, and the price of the stock has fallen, sometimes significantly? For instance, how much money can investors recover from the company? These are among the questions the report addresses.

Civil liability for misrepresentation is not governed in detail by EU legislation, but is essentially left to Member States. Is it appropriate in a single financial market to have such a legislative patchwork? As the EU is trying to build a Savings and Investment Union (SIU), the issue is particularly timely.
The national regimes in our reference jurisdictions differ substantially, and are not very well known outside of each country. Convinced of the importance of such rules for financial markets development, the HCJP wished to have a thorough discussion on the different available approaches and asked me to establish a working group on this topic with the help of Enrico Sartori.

The French approach, which dates back to 2003, appears isolated in Europe. It implies that investors are only compensated for the loss of chance to make another (better) investment. As a result, in France compensation remains largely theoretical and arbitrary, unlike in other jurisdictions, where investors are compensated for their actual losses.

Views are sharply divided on whether civil liability should be harmonised at the European level, and thus whether Member States’ laws should be uniformed. By expanding knowledge of the different domestic systems, the report helps advance the debate and can support developments in Member States. The findings of the report are also of interest for Luxembourg, given its role as a major financial center.
The study may also inform the Commission’s current inquiry on civil liability for defective prospectuses. The Commission is in fact presently examining whether further EU-level harmonisation in this area is advisable.

Each of the jurisdictions plays a significant role for Europe’s capital markets. Germany, Italy, Spain, and the Netherlands are the major jurisdictions in Western Europe. The United Kingdom, while no longer in the EU, hosts the continent’s most vibrant capital market. Together, they offer a very representative spectrum embracing “Napoleonic”, Germanic, and common-law legal traditions.
Still, in all these jurisdictions the relevant liability rules were at least partially shaped by EU-wide legislation such as the Prospectus Regulation. The comparison can thus typically start from a shared – even if sometimes narrow – common basis.

A key difference concerns fault. Plainly, listed companies are liable if they act intentionally. But what if they do so negligently? Some countries (Italy, Spain, the Netherlands) tend to hold issuers liable even in case of simple negligence. Instead, Germany and the UK sometimes require gross negligence, or even limit compensation to cases where investors prove intent. Clearly not the easiest element to demonstrate.
Similarities emerge however in the calculation of compensation. Typically, an investor who can prove to have purchased shares only because of the misrepresentation is fortunate. In that case, compensation equals the full purchase price: the investor is restored to its pre-acquisition economic position. Otherwise, the investor may only recover the difference between the inflated price and the “fair” price he or she would have paid in a correctly informed market.
Finally, procedural rules make a significant difference. Countries with regimes more favourable to collective claims (such as the Netherlands) enable damaged investors to exercise their right to compensation more effectively.

So far, EU legislation has harmonised only very limited aspects of civil liability rules in capital markets. For example, the Prospectus Regulation just requires that damaged investors can sue listed companies if the latter included defective information in a prospectus. As long as some civil liability regime is in place, its details are left to the discretion of each EU Member State. They can thus design (or leave in place) national specificities.
The Court of Justice of the European Union has a gently steering role. For instance, in the 2021 Bankia v. UMAS judgment, the CJEU ruled that Member States can allow also professional investors to sue on the basis of a defective prospectus. Before, the point was debated, because EU legislation presents the prospectus as a document directed to non-professional investors. The CJEU thus favoured a protective stance towards all types of investors.