Supreme Court sets disclosure standards for bond offerings

The Supreme Court has just published the grounds for the judgment in a high-profile case of a bondholder who demands that members of the Management Board of the issuer pay compensation for defects in bond issue documentation [i].

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Obviously, the issuer did not redeem the bonds, so the money had to be sought elsewhere. It fell to the Management Board[ii]. After being dismissed by courts of two instances, the case went to the Supreme Court, which issued – in my opinion – a very sound and well-founded ruling. Moreover, this judgment is very important as it sets the standard for the application of the provisions governing the information and data to be provided in offerings of securities without a prospectus. In this sense, the ruling goes beyond the scope of the case.

The judgment was made based on the provisions of the previous Act on Bonds, but it is fully up-to-date and it may be directly applied to the current regulations. This will be even easier due to the provisions of the current Act that are directly quoted in the grounds for the judgment[iii].

So far, and not only in this case, the courts have been interpreting the statutory requirements regarding the information to be provided when offering bonds in a very specific way. The problem was obviously not with offerings based on a prospectus or information memorandum. This is because the content of these offering documents and the scope of the information contained therein are defined in detail by the applicable regulations. The problem was and still is with offerings that do not require preparation of a document with its contents precisely defined by the provisions. It is clear and obvious that whenever lawyers do not have a detailed instruction manual, the poor souls get lost. If the provisions contain a list of the necessary elements, they can make a list and tick off the completed points one by one. Sometimes, however, there is no such list, and the scope of information to be provided is specified only in general terms, together with (the scariest part) a reference to the purpose. And then the uphill struggle of the helpless lawyers begins. This is how it was and still is with bond offerings without a prospectus. We have the following provisions:

  • the current Art. 35 of the Act on Bonds:

The purchase proposal shall include the terms and conditions of the issue and information that makes it possible to assess the financial situation of the issuer. The issuer is obliged to provide, in particular, information concerning: … [an enumeration follows – W.C.]”

  • the previously applicable Art. 10 of the 2015 Act on Bonds:

The purchase proposal (…) shall include data which, according to the type of issuer and bond, make it possible to assess the financial situation of the issuer. The issuer is obliged to provide, in particular, information concerning: … [an enumeration follows – W.C.]”

The principle thus remains unchanged. The issuer is to provide the investor with information that makes it possible to assess the issuer’s financial situation. However, the issuing practice and the courts’ interpretation of the provisions were different, because they allowed for a narrow understanding of these disclosure obligations and for only providing the data indicated in the enumeration.

In the analysed judgment, the Supreme Court presented a convincing interpretation of the provisions, identifying the following issues:

  1. The scope of necessary information to be made available to investors is defined by a general clause, obliging the issuer to include data in the bond purchase proposal which, according to the type of issuer and bond, make it possible to assess the financial situation of the issuer. The enumeration contained in the provision is merely indicative (“… in particular…”).
  2. It is incumbent on the issuer to assess on a case-by-case basis what scope of information is necessary for an exhaustive assessment of their financial situation from the point of view of the group of investors to whom the bond purchase proposal is addressed. The contents of the issue documentation should be adjusted accordingly. It must also take into account the nature of the issuer’s business and the type of bonds. Such a presentation should not omit the financial data and indicators expected by investors, as well as risk factors. The Supreme Court expressly recommends the use of the provisions on the prospectus and the investment memorandum to aid in determining the scope of information.
  3. The scope of information provided in the offering must be assessed in terms of the function of the issuer’s disclosure obligation. The purpose of these regulations is to protect the investor (acting under conditions of information asymmetry) and to protect the credibility of the capital market.
  4. The information provided in an offering without a prospectus must be up-to-date, true, accurate, complete, and presented using language understandable for investors, in a way that allows them to assess the issuer’s financial situation and to make rational investment decisions based on that information (again, the Supreme Court refers to prospectus provisions![iv]). Lack of prospectus-related formal requirements related to the formalised manner of presenting information, approval of the document by the Polish Financial Supervision Authority (PFSA) and its disclosure cannot justify lowering the quality of information provided to investors. A different approach would unreasonably differentiate the situation of investors depending on how securities were offered to them.

When analysing the case, the court also identified interesting issues concerning the pursuit of claims related to the improper performance of disclosure obligations in securities offerings:

  1. The burden of proof that the information provided by the issuer in connection with the offering did not meet the statutory requirements rests on the claimant. Therefore, it is the investor who has to prove what went wrong and why.
  2. The decisive factor in assessing infringements of the law in an offering is whether the relevant information and data were included in the issue documentation, and not whether a specific investor had knowledge of the matter obtained in another way. It is the issue documentation that should be examined – based on objective criteria – and not the investor’s knowledge or emotional state. Whether an investor could have obtained a specific piece of information is irrelevant, only whether this information should have been included in the issue documentation. If it was not, the issuer has a problem.
  3. The same issuer may provide different scopes of information as part of different offerings (listing the issues of different securities, conducting offerings at different times). However, such differences must be justified.
  4. Even the investor’s failure to read the issue documentation does not preclude the possibility of pursuing claims for defective performance of disclosure obligations by the issuer. However, such a situation requires a detailed analysis. “… this assessment always requires taking into account the circumstances under which the investment decision was made. The fact that the investor failed to read the documents provided by the issuer or failed to read them in full does not mean, therefore, that the issuer’s failure to comply with its disclosure obligations by omitting certain information or providing untrue information does not have an adequate causal relationship with any potential damage connected with the investment decision. (…) it is important (…) to determine whether, had the information provided to them been accurate and complete, they would have withdrawn from the transaction, or whether the issuer’s failure to comply with its disclosure obligations is merely a pretext for evading the consequences of an ill-advised investment decision, the making of which was not adequately connected with that failure“. Therefore, nothing is automatic, but there is an indication of the need for careful analysis.

It has been a long time since I read such good grounds for a court ruling in a capital market-related case. I hope that this judgment will set a good standard for operating on the market for offerings without a prospectus.

[i] judgment of the Supreme Court of 23 June 2020, V CSK 506/18

[ii] Once again, we have confirmation of the legal grounds for claiming such damages directly from members of the Management Board under Art. 484 of the Code of Commercial Companies (liability for information related to issues of securities), both for intentional and unintentional acts.

[iii] Art. 10 of the Act on Bonds of 2015 compared to Art. 35 of the Act on Bonds

[iv] the Supreme Court referred to the now obsolete in this respect Art. 22 of the Act on Offering, which can be supplemented by reference to Art. 6 of the Prospectus Regulation

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