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Dragsted Schlüter Aros Law FirmCopenhagen

On September 2 1999 the Maritime and Commercial Court of Copenhagen passed its judgment in the so-called Hafnia case. The judgment had been awaited as it is one of very few Danish decisions on prospectus liability in connection with public share issues. A decision on appeal to the Supreme Court has yet to be taken, however the judgment has been satisfied with a reservation for appeal.


Hafnia Holding was a major insurance company in Denmark in the late eighties but the management of the company and the debt financed strategic shareholdings lead to major financial difficulties in 1992.

To rescue Hafnia from its financial difficulties in the spring of 1992, the shareholders decided to replace the board of executive and non-executive directors of the company as well as to increase the company's share capital by DKK 1.5 billion ($220 million) - subsequently raised to DKK 2 billion. The capital increase was carried out by way of a public rights issue of which a part was underwritten by a group of underwriters. A number of Danish and foreign institutional investors (sub-underwriters) had made binding undertakings to the underwriters.

A prospectus dated June 16 1992 was prepared under great time pressure and was issued and signed by the new board of managers and board of directors of Hafnia, the auditors of the group as well as The issuing group (consisting of three of the four underwriters), each making individual responsibility statements. In addition, a verification of the prospectuses was carried out.

Suspension of payments followed less than one month after the expiry of the subscription period

The subscription period ended in July 1992, but already on August 19 1992 the company suspended its payments followed by insolvency proceedings. A number of investors, including both private investors and some of the sub-underwriters, instituted individual legal actions claiming indemnification of their losses incurred in connection with the rights issue.

The recent judgment concerns the claims of two private investors against:

  • the insolvent estate of Hafnia;
  • the new Chairman of the board of directors and the new managing director;
  • the auditors of the group; and
  • Den Danske Bank which acted as lead manager of the issuing group.

One of the two investors had subscribed for shares during the subscription period while the other investor bought shares in the company three days after the expiry of the subscription period.

Prospectus not true and fair

The Maritime and Commercial Court (with one dissenting judge out of five) stated as the grounds for the judgment that the prospectus had not given a true and fair view of the company's situation in many respects. The Court found that:

  • the auditors of the group;
  • the bank which acted as lead manager, lender and furthermore had participated in the preparation of part of the prospectus; and - with respect to one of the two investors
  • the insolvent estate were all liable in damages.

The chairman of the board of directors of Hafnia and the managing director were not found liable on the grounds that they had joined the boards only shortly before the rights issue and consequently did not have a detailed knowledge of the financial position of the Hafnia group.

The Court held that a prospectus is to provide a sufficient basis for the decision to acquire shares in a company and it is to contain all information on the company which may be of importance to the investor. The information is to be complete and easily accessible and understandable to enable investors to assess the importance of the given piece of information. The Court therefore held that the press coverage of and supplementary information given by the media on the financial position of the company before and during the subscription period was not to prejudice the plaintiffs.

As regards the investor who acquired the shares after the expiry of the subscription period, the Court held that the prospectus may be seen as equal to a stock exchange announcement and that, consequently, the investor could claim indemnification of his losses as the prospectus was not true and fair and no correcting stock exchange announcements were made subsequent to its publication; however, liability of the issuing group for correcting stock exchange announcements was limited to the expiry of the subscription period.

Causal link: The share issue would not have been effected

The Court found that the loss suffered by the two private investors was attributable to the prospectus not giving a true and fair view of the financial position of the company in an intentional way. The Court did not consider the impact of the specific information on the investor or reasons for Hafnia's subsequent insolvency, but held only that the investors would almost certainly not have subscribed to shares in Hafnia or that the rights issue would never have been effected had the prospectus given a true and fair view of the financial position of the company. In other words, had the information been given, the rights issue would - and should - have been called off.

Emphasis of well-known standards

The judgment by the Maritime and Commercial Court establishes that irrespective of the high risk of an investment, the prospectus which forms the basis for the investment is to give a true and fair view of the financial position of the company and is to disclose and illuminate any risks - even if the rights issue is deemed a rescue operation. Those responsible for the prospectus may not rely on the supplementary press coverage of the media, but are obliged to ensure the disclosure of all necessary information on the company, and that any information which is not true and fair is corrected or completed.

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