In Switzerland, prospectus liability aims to protect the
confidence and capital of investors, and the reliability of
information distributed on the capital markets. But a recent
decision of the Swiss Federal Supreme Court highlights once
again the difficulty of making a successful claim for
prospectus liability under Swiss corporate law and the illusory
nature of investor protection.
Under Swiss corporate law, prospectus liability applies to
all persons who contributed to publishing an incorrect or
misleading prospectus or similar document in relation to the
incorporation or the issue of shares or other debt instruments.
Consequently, a wide circle of persons can be made liable for a
prospectus, including not only the founders and the board of
directors but also bank institutions and investment counsel
promoting the subscription.
The establishment of prospectus liability requires not only
damage, a negligent or intentional failure to perform a duty,
but also a natural and adequate causality between the negligent
or wilful behaviour and the incurred damage. The information
published in the prospectus must be the cause of the investor's
intention to acquire and the subsequent damage.
In the decision rendered by the Swiss Federal Supreme Court
(August 28 2006), two shareholders sued the directors of a
software company for prospectus liability, trying to recover
losses incurred due to the drop in share price that occurred
shortly after the company's IPO. The claimants asserted that
the prospectus was misleading and incomplete, in particular
because information regarding a flaw in the software (which was
the company's most important product) and problems with clients
The question of whether the prospectus was misleading was
left unaddressed because the concept of the first instance
primarily focused on the causality and rejected the claim on
the grounds of lack of causality.
Swiss doctrine is divided on the burden of proof for
casualty. Some argue that the claimant is not required to prove
that it has relied on the alleged incorrect prospectus because
it could legitimately assume that the market value reflects all
information available. This argument leads to the fact that the
defendant must prove that causality is lacking. The Swiss
Federal Supreme Court made it clear that a change of the burden
of proof does not apply in the field of prospectus liability
and so it is the investor who must prove cause. However,
considering the difficulty of the proof and the investor's
interest in protection, the Swiss Federal Supreme Court held
that no such strict proof is required, only proof that the
causality is likely (proof of probability).
Consequently, the Swiss Federal Supreme Court rejected the
claimants' argument stating that, regarding application of
prospectus liability, it is generally assumed that potential
misleading and incorrect information in a prospectus always
causes the decision to purchase and the damage resulting from
investment. In contrast, the Swiss Federal Supreme Court came
to the conclusion that claimants had not furnished the required
proof of probability because, according to the findings of
facts of the first instance, the jumping market trends, the
euphoric mood in the new market, the investor's faith in the
future as well as the willingness to take risks were more
relevant to the investment decision than the information
published in the prospectus.
The recent decision acts as yet another disincentive to
potential claimants, so claims for corporate prospectus
liability are likely to remain scarce.