Business & Law 2006, pp. 36 f.

The New Prospectus Law - "European Passport" for Securities

In the scope of the capital investment law, the prospectus liability plays an important part. Peter Mattil from the lawyers’ office Mattil & Kollegen points in this context to the fact that courts require from capital investors to read and to understand contents and advices of risks in the prospectuses. Due to the new "European Passport" for securities, the preconditions for that become complicated.

Since July 1st, 2005, the so called "European Passport" for securities is valid in the European Economic Area (EEA = EU + Norway + Iceland + Liechtenstein). An issuing establishment can use a securities prospectus, that has been approved in a Member State, in other Member States, too. There is no obligation of procuring an approval from the competent authority of that place (single passport). By the approval of the prospectus in the home Member State of the issuing establishment, problems in the sphere of consumer protection can raise because the prospectus must not be drawn up in German language, and furthermore, the issuing establishments will make use of it in order to submit lawsuits under the law of the home Member State. The new Prospectus Act is valid only for securities, namely shares, share certificates, debentures, and similar transferable securities which can be traded on the capital market. Non-securities are above all the so-called asset funds, such as shares in civil law associations, general, limited and silent partnerships, and shares in private limited companies. From July 1st, 2005, the Securities Prospectus Act is valid in Germany. It has been enacted by realization of the Directive 2003/71 EG (Prospectuses Directive). This Directive and the act regulate the drawing up, the approval, and the publication of securities prospectuses which should be offered to the public or admitted to trading on regulated markets. The regulation No. 809/2004 EG of the commission from April 29th, 2004 is supplementary valid. The regulation controls the given information in prospectuses, the format, the taking up of information by means of reference, the publication of such prospectuses, and the dissemination of advertising. Detailed minimum information about the prospectus content, that distinguish the type of securities, are stipulated in the regulation. The prospectus can be drawn up as one single document or separate documents. In this case, the postulated information must be divided into a registration document, a securities description, and a summary. Prospectus obligation does not exist in certain exceptional cases, for example in the case of small issuing establishments, or if the prospectus is addressed only to qualified investors. In certain cases, the issuing establishment can draw up voluntarily a prospectus for approval in order to make use of the "European Passport".

The "European Passport" is valid since July 1st, 2005. If securities shall be (also or exceptionally) offered to the public, in one or various Member States, or shall be admitted to trading on regulated markets, an approved prospectus will be effective for public offers or for admission to trading, in any number of Member States. Additional approval proceedings are not necessary. It is required that the competent authority of the home Member State sends a certificate of approval attesting that the prospectus has been drawn up in accordance with this Directive to the competent authority of the host Member State (notification proceeding). If securities, for which the home Member State of the issuing establishment is not Germany, are offered in the home country, the prospectus can be drawn up in a language that is either accepted by the German Financial Authority (Bafin) or that is customary in the sphere of international finance. Neither in the Directive nor in the regulation, a precise definition of the international common language is noted. The Bafin tends to the opinion that it concerns only English whereas the European commission understands the abstract concept beyond it. In the opinion of the commission, it all depends on where the prospectus will be distributed. German can also be an official financial language in Central Europe. The Prospectuses Directive and the Securities Prospect Act require only a summary of the prospectus in the language in which the securities shall be distributed.

At the moment, a new certificate is offered on the German market that uses the "European Passport" for its purposes. The issuing establishment, being situated in Paris, addresses German small investors. The prospectus is drawn up in English and French, partly only in French, and in the case of lawsuits, it designates the use of French law as well as the place of jurisdiction in France. In the case of loss, the investor is confronted with almost insuperable problems: First of all, he has to organize the translation of the prospectus, containing circa 200 pages, in order to find out whether the prospectus is incorrect or incomplete. In the case of a legal action in a German court, it must be accordingly submitted and the prospectus has to be presented in the translated form. The translation costs are to be expected in the five-digit Euro-range. Additionally, the correctness and completeness of the prospectus has to be verified under French law so that the aggrieved certificate holder must retain an attorney for verification – since they come to an agreement. Finally, the prospectus provides for a place of jurisdiction in Paris, so that it should be litigated there. A German small investor will be totally overstrained by these obstacles and will not be able to start seriously the prosecution of an action. Here the question raises whether the foreign issuing establishment has drafted its prospectus in this way by purpose. Even an agent in Germany will be confronted with insuperable challenges. He must be able to understand the whole prospectus and to explain it to the investor. He can not refer to the fact that he can not judge the correctness of the prospectus. Otherwise the agent incurs inevitably a liability.

In future, it is expected that more issuers are willing to let approve their prospectuses in another Member States, in order to distribute the securities in Germany. The courts demand from the investors that they read a prospectus and take note of the there-mentioned details and advices for risks. Otherwise they can lose claims fully or partly. Many securities – such as certificates – are speculative in any case, so that an offer prospectus is drawn up in the language of the state where it will be used. During the drawing up of the Prospectuses Directive, the directive legislator did not think out the problem of consumer protection. They solved the disadvantages of the free internal market – especially regarding language regulations and the applicable law – at the expenses of the consumer. The regulations could have been also drawn up in the way that the issuing establishment is affected by the translation costs and the law of the home country is applicable.