Prospectus liability under Dutch Law

Introduction

Dutch prospectus liability, which is mainly based on tort law, offers investors a combination of broad substantive protection and useful procedural tools. In a book on prospectus liability rules in Europe (and beyond) recently published by Oxford University Press (edited by Danny Busch and Matthias Lehmann), I wrote the chapter on prospectus liability under Dutch law. This blog post highlights the main features of the Dutch regime, focusing on the legal basis and core concepts, the scope of liable parties, fault and the due diligence defence, and the role of disclaimers.

Dual-track legal basis

Rather than through securities regulation, Dutch law approaches prospectus liability through special tort-based regimes implementing the Unfair Commercial Practices Directive (‘UCPD’) and the Misleading Advertising Directive. Retail investors (‘consumers’ under the UCPD) must base their claims on Articles 6:193a et seq. of the Dutch Civil Code (‘DCC’), which embody the implementation of the UCPD, whilst all other investors must resort to Articles 6:194 et seq. DCC, which embody the implementation of the Misleading Advertising Directive. Accordingly, the doctrine of prospectus liability in the Netherlands is governed by, respectively, European consumer law and European market regulation law. This dual-track system sits on top of the general tort provision of Article 6:162 DCC, which remains a residual basis both retail and non-retail investors can base their claim on, but which does not grant the procedural advantages linked to unfair commercial practices and misleading advertising. 

Misleading information, burden of proof, and causation

In its landmark World Online judgment, the Dutch Supreme Court anchored the misleadingness test in the presumed expectations of the ‘average investor’, who is reasonably well-informed, observant and circumspect, and for whom only statements that are materially relevant to the investment decision qualify as misleading. Dutch case law does however allow the standard to shift upwards when a prospectus is exclusively targeted at a group of sophisticated investors whose higher level of knowledge and experience may justify a stricter assessment of misleadingness (stricter from the investor’s perspective).

The Dutch system offers investors a double reversal of the burden of proof. Firstly, the defendant must prove the accuracy and completeness of the information on which the alleged misleading nature of the prospectus is based (Articles 6:193j(1) and 6:195(1) DCC). Secondly, once wrongfulness is established, the defendant must prove that the wrongful act is not attributable to it (Articles 6:193j(2) and 6:195(2) DCC). In its World Onlinejudgment, the Supreme Court further strengthened investor protection by adopting a presumption of causation, holding that it must be presumed that, but for the misrepresentation, the investor would not—and in the case of a secondary market purchase, not or not on the same terms—have purchased the securities.

Against whom can claims be brought—and on what terms?

The issuer stands at the centre of Dutch prospectus liability and can be sued by both retail and non-retail investors under the special regimes, facing the double reversal of the burden of proof. This is grounded in the view that all information in the prospectus originates from or is attributable to the issuer, which also makes the responsibility statement under Article 11(1) Prospectus Regulation and therefore cannot exclude its liability.

Beyond the issuer, Dutch law distributes liability amongst several other actors, partly on differentiated legal bases and standards:

• Lead manager: can be sued under Articles 6:194 et seq. DCC (non-retail) and Articles 6:193a et seq. DCC (retail), typically faces the double reversal of the burden of proof, but enjoys a central ‘due diligence defence’ towards attributability.
• Co-managers and listing agent: may fall under the special regimes depending on their involvement in drafting and distributing the prospectus and the due diligence process, with their exposure and burden of proof calibrated to the intensity of that involvement.
• Selling shareholder(s): may also incur prospectus liability under the special regimes depending on his (their) involvement in drafting the prospectus and providing information to the lead manager as part of the due diligence process.
• Directors, external auditors and external lawyers: cannot be sued under the special regimes because they neither ‘make public’ the prospectus nor engage in a qualifying commercial practice towards investors. Their liability must be based on general tort law. Furthermore, the standard of so-called ‘gross personal culpability’ applies to directors’ liability.

Fault and the due diligence defence

Prospectus liability under Dutch law is a form of fault-based liability, where ‘fault’ is understood in terms of culpability: the key question is whether the responsible persons knew or should have known of the misleading nature of the prospectus. Under the general tort regime, the investor bears the burden of establishing attributability, but under the special regimes this is reversed. The defendant must thus show that the wrongful act cannot be attributed to it.

For issuers, this non-attribution hurdle is usually insurmountable: because the issuer holds, or is deemed to hold, all information relevant to the prospectus, any material misstatement or omission normally reflects insufficient internal investigation and leads to what has been called ‘quasi-strict’ liability. By contrast, the lead manager can invoke a due diligence defence, which entails that the lead manager cannot be blamed for misleading information in the prospectus because of its due diligence efforts in the process of drafting the prospectus. In the context of this defence, one of the questions that must be considered is what responsibility the lead manager has in relation to information provided by third parties, in respect of which it can be argued that primary responsibility rests with the person who provides that information and consents to its inclusion in the prospectus. 

The Dutch Supreme Court gave an important judgment on the aforementioned question in ABN AMRO v Coopag. This case involved financial statements approved by Coopag's external auditors and that were included in the prospectus. The Supreme Court held that it cannot be accepted as a general rule that a bank acting as a manager in the preparation of the prospectus may without further qualification rely on financial statements of the issuer if these have already been audited and approved by one or more auditors. The answer to whether the bank was entitled to rely on the accuracy and completeness of the financial statements depends on the circumstances of the case.

Disclaimers and limitations of liability

Dutch doctrine is averse to contractual techniques aimed at excluding or limiting prospectus liability, especially when used by the issuer. The prevailing view is that exclusion or limitation of liability clauses inserted by the issuer in the prospectus are null and void because they conflict with (i) the issuer’s responsibility for the information in the prospectus and the issuer’s responsibility statement under Article 11(1) Prospectus Regulation, (ii) the requirement of Article 11(2) Prospectus Regulation that investors can hold responsible persons liable, and (iii) for retail investors, the mandatory and consumer-protective nature of Articles 6:193a et seq. DCC and the effectiveness principle under EU law.

The Supreme Court has, however, recognised a narrow space for disclaimers benefiting the lead manager in respect of specific third-party statements. In ABN AMRO v Coopag, it accepted that the prospectus may state clearly that certain expert statements are not the bank’s own and that it cannot vouch for their accuracy. Yet, legal scholars (see for example Franx, ‘The Netherlands’, in Busch, Ferrarini & Franx (eds.), Prospectus Regulation and Prospectus Liability, Oxford: OUP 2020, para 24.38) question whether the much broader ‘no representation or warranty’ disclaimers occasionally used in international practice would be upheld in Dutch courts for underwriters that have been actively involved in drafting the prospectus and conducting due diligence.

Conclusion

In sum, the Dutch approach to prospectus liability illustrates how a formally ‘ordinary’ tort regime can, through a combination of substantive standards, burden-of-proof reversals, and a restrictive stance on disclaimers, evolve into a protective regime for investor redress. As collective actions initiated by (allegedly) aggrieved investors proliferate, future developments will tell us whether prospectus liability under Dutch law not only services as a mechanism to compensate investors ex post, but also as an instrument to (further) discipline disclosure practices ex ante.​

The full article can be accessed here.

Arnoud Pijls is a Professor of European and Comparative Financial Law at Radboud University Nijmegen.