Revision of law on prospectus liability proposed

Author: | Published: 1 Dec 2005
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Waselius & Wist

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A working group appointed by the Finnish Ministry of Finance recently published a report suggesting changes to Finnish law on prospectus liability. The report characterizes the existing legal situation as unclear and unsatisfactory, and calls for legislative reform to be undertaken on the basis of the general conclusions set out in the report.

The report rejects strict liability as a basis for prospectus liability. The report recommends that the liability of issuers and underwriters be negligence based, and that issuers and underwriters could avoid liability for a prospectus by establishing lack of negligence under a form of so-called business judgement rule, with reversed burden of proof. The individual liability of the management of Finnish issuers and underwriters vis-à-vis shareholders and investors would be negligence based. Issuers and underwriters would generally be entitled to rely on opinions and reports issued by auditors and other experts, unless specific circumstances cast doubt on their accuracy. The report further suggests that statutory prospectus liability could not be limited through disclaimers.

Prospectus liability would extend also to tender offer documents prepared in takeover bids as well as to prospectuses prepared solely for the purposes of listing securities in Finland. In case of a prospectus prepared for a secondary sale of securities, the issuer would be liable to the extent the prospectus concerns information on the issuer and the issuer has participated in its drafting. The liability of an issuer for a prospectus would extend to any purchases of securities based on the prospectus but also to any other on- or off-exchange transactions in the issuer's securities undertaken on the basis of information contained in the prospectus before the error or omission is corrected. Claims based on prospectus liability would, unless caused by a criminal offence, be subject to the general period of limitation of three years from the time when the injured party became aware of the loss and of the identity of the liable party. Furthermore, the report recommends that the injured party should give notice to the liable party within a reasonable time.

According to the report, the quantum of loss would, as a general principle, be calculated as the sum by which the price paid for the securities deviates from the price that would have been paid, had the prospectus not contained an error or omission. However, the report also stresses that, in accordance with the principle of full compensation, compensation in excess of the above cannot be excluded. The report recommends that the liability of issuers of shares to compensate losses incurred by subscribers of shares should not be restricted by applicable capital requirement and maintenance rules in the Companies Act. On the other hand, rescission of the subscriptions would not be available as a legal remedy for the subscribers of shares.

Legislative reform on the basis of the report is expected in 2007.

Tarja Wist and Samuel Isaksson