i Sources of law
In Switzerland, there is no single body of law setting out the law of securities. The substantive law regulating securities is codified in the Swiss Code of Obligations (CO).2 Three sections of the CO are of special relevance when dealing with securities: the provisions on companies limited by shares in Article 620 et seq. CO, dealing with equity securities; the provisions regarding negotiable securities (which may include both equity and debt) in Article 965 et seq. CO; and the provisions regarding debt securities issued as bonds in Article 1156 et seq. CO. The procedure for civil litigation is set out in the Swiss Civil Procedure Code (CPC).3 In cases involving foreign parties, international private law comes into play, especially the Lugano Convention (LC)4 (applicable in cases involving parties from most European countries) and the Federal Statute on Private International Law (PIL)5 (applicable in cases involving parties from non-European countries).
Public securities law and public enforcement are governed by the Stock Exchange and Securities Trading Act (SESTA)6 and – for securities that are traded on the main Swiss stock exchange, SIX Swiss Exchange Ltd – the Listing Rules and implementing provisions of the SIX Swiss Exchange.7 The Financial Market Supervision Act (FINMASA)8 establishes the organisation and sets out the supervisory instruments of the Swiss Financial Market Supervisory Authority (FINMA), which is the Swiss authority for the supervision of the financial markets. Concerning criminal liability in general, the Swiss Criminal Code (SCC)9 and the Swiss Criminal Procedural Code (SCP)10 are of relevance.
ii Regulatory authorities
There is no regulatory authority entrusted with the general supervision of securities transactions in Switzerland. Indeed, in the absence of any criminal act, offerings of securities, whether public offerings or private placements, are still not subject to any regulatory oversight.
FINMA has certain limited power in connection with the enforcement of the requirements under the SESTA, in particular relating to disclosure of major shareholdings, insider trading and market abuse. SIX Exchange Regulation, an independent body of the main Swiss stock exchange, assumes a certain supervisory and enforcement role as a private organisation against its members. In the securities context, SIX Exchange Regulation may act in case of certain failures to disclose price-sensitive information or of making false and misleading statements to the capital market (the ad hoc rule).
The Federal Department of Finance has the primary responsibility for the prosecution of failures to notify qualified shareholdings. Prosecution authorities are responsible for criminal proceedings under SESTA and the SCC (see Section III, infra).
iii Common security claims
Very few actions for breaches of securities laws are ever brought to court in Switzerland. Lawsuits brought by investors against issuers or banks for prospectus liability are also infrequent but are probably still the most common securities claim in Switzerland. Only a few precedents are available, though. The reasons are not entirely clear but are likely a combination of the following: (1) Swiss investors tend to be relatively unlitigious; (2) there is no class action or similar instrument and therefore there is a risk of high litigation costs; and (3) many investors have entrusted banks or other financial intermediaries with investment decisions and will therefore sue or claim damages first from their agents before invoking prospectus liability claims against issuers or banks involved in securities offerings.
Due to the absence of a regulator with broad power to police securities offerings, the public enforcement of securities claims is limited to certain aspects of SESTA mainly relating to disclosure of shareholdings, insider trading and market abuse.
II PRIVATE ENFORCEMENT
i Forms of action
The pivotal provision of Swiss substantive law concerning securities litigation is Article 752 CO. This provision governs the liability for the issue prospectus and similar documents and reads as follows:
Where information that is inaccurate, misleading or in breach of statutory requirements is given in issue prospectuses or similar statements disseminated when the company is established or on the issue of shares, bonds or other securities, any person involved whether wilfully or through negligence is liable to the acquirers of such securities for the resultant losses.
The legal nature of prospectus liability is debated in legal doctrine. Some authors qualify Article 752 CO as a contractual liability,11 others argue that it is a lex specialis in relation to Article 41 CO, which governs the liability for torts.12 Still others argue that Article 752 CO is a form of liability for breach of trust.13 The qualification is relevant for, inter alia, the burden of proof for fault on behalf of the respondent and the determination of damages: fault is presumed in contractual liability but not under tort law. The methods for the calculation of damages differ in tort and contract law.14 Nevertheless, the Swiss Supreme Court has qualified the liability for the issue prospectus as a liability in tort.15
Scope of application
Two requirements must be fulfilled for Article 752 CO to apply. First, there must be an issue of shares, bonds or other securities by a company. This requirement thus covers the creation or increase of equity capital (by issue of shares or participation certificates during the establishment or capital increase of a company limited by shares) or the raising of borrowed capital (by the issue of bonds). The provision generally applies to all kinds of securities that are issued in large amounts. This includes shares, bonds, participation certificates, convertible bonds and convertible option bonds.16 The applicability extends to initial public offers, fixed price underwritings and – according to Watter – to the offer documents regarding acquisitions.17 Not covered, however, are 'secondary placements' whereby an investor sells its securities to the public.18
Second, an issue prospectus or similar statement must have been prepared, or there must have been a failure to comply with the duty to publish such prospectus or similar statement. Therefore, Article 752 CO not only applies where a prospectus or similar document was prepared in compliance with a legal obligation to do so, but also where such document was prepared and disseminated voluntarily.19
An issue prospectus is a written document created by the issuer to inform potential investors about the intended issue and to invite them to subscribe to the securities.20 A duty to publish an issue prospectus is established in Article 652a CO and Article 1156 paragraph 1 CO for public offers of new shares and new bonds, respectively. Article 27 paragraph 1 Listing Rules sets out the duty to publish a listing prospectus if the securities are to be listed on the stock exchange. In this case, the prospectus must contain significantly more information than under Article 652a CO.21
The term 'similar statement' encompasses any information given to potential investors that relates to the issue of the securities and that is used as a means to market the securities and to inform the potential purchaser. Article 752 CO might therefore apply to listing prospectuses (if not identical to the issue prospectus), short prospectuses, advertisements, research reports, presentations, press releases, business reports, interim reports or letters to shareholders.22 However, there is little case law specifying which type of statements fall under Article 752 CO and the question provokes controversy in legal doctrine. A general characteristic of a similar statement pursuant to Article 752 CO is that it is impossible or unreasonable for the recipient of the statement to verify the given information.23
Right to sue and capacity to be sued
Pursuant to the wording of Article 752 CO, anyone who acquires securities has standing to sue. This does not just include the first buyer; any later buyer is also eligible to file a claim if the information in the prospectus was causal for the acquisition of the shares.24 Controversies exist regarding the legitimacy of claims if the acquirer already resold the securities or otherwise lost their ownership, and regarding the acquisition of already issued securities of the same kind as the ones being subject of a duty to issue a prospectus.25 The community of creditors according to Article 1164 CO and the company itself cannot act as claimants.26
Liability under Article 752 extends to any person involved in the drafting or the dissemination of the prospectus or similar statement. The involvement needs to be of a certain significance to trigger a liability, that is, the person must have had an influence on the contents of the prospectus.27 These persons can be executives or employees of the issuer or the leading issuing bank, or advisers of the issuer, issuing bank or rating agencies, such as lawyers, tax advisors and environmental advisors. Persons who disseminate the prospectus or similar document can be a consortium bank, financial institutions and other persons who are involved in the distribution of the prospectus.28 Further, it is possible to file a claim against the issuer of the security.29
Heads of claim under Article 752 CO
Violation of duty
A violation of the duties under Article 752 CO occurs if the information in the issue prospectus or similar document is either inaccurate, misleading or in breach of a statutory duty.
Information is inaccurate if the prospectus or the similar document does not objectively state the facts, for example, by stating that a company is stable and high-yielded even though there are doubts about its solvency.30 Forecasts are inaccurate if they are not based on concrete facts and probabilities or if they are mere assumptions.31
Information is deemed misleading if the facts stated in the document are not themselves wrong, but if material facts or circumstances were concealed or suppressed.
Generally, information is deemed misleading if there is no clear and sufficient disclosure of relevant risks. A general warning or disclaimer is of course insufficient; all risks that are not assessable or known to potential investors must be clearly stated in the prospectus.32
Moreover, information is misleading if it lacks transparency or is ambiguous.33
Information is in breach of statutory requirements if there is a duty to prepare an issue prospectus (see Article 652a, 653d-f, 656a, 1156 CO and Article 28 Listing Rules) and this duty is violated by not issuing a prospectus or issuing an incomplete prospectus.34
The relevant point in time is when the prospectus or similar document is published. It is debated in doctrine whether and to what extent there is a duty to update the information given in the prospectus. Several authors advocate that a duty to update the prospectus or similar document exists until the expiry of the subscription period.35
A further requirement for liability pursuant to Article 752 CO is the existence of harm. See subsection iv, infra regarding the calculation of damages.
The causation requirement must be satisfied in two respects: there must be a causal link between the violation of Article 752 CO and the damages, and between the violation of Article 752 CO and the acquisition of the securities in question.36 With regard to the latter, the claimant must prove that he or she relied on false or incorrect information in the issue prospectus, and that he or she would have not purchased the securities – or would have done so at a lesser price – were he or she in possession of the full and correct information.37 Since it is usually not possible to prove causation with absolute certainty, a less strict standard of evidence applies (preponderant probability rather than strict proof ).38
For the requirement of causality to be fulfilled, actual and legal proximate cause need to be given.39 Actual cause is determined with the conditio sine qua non-test (the 'but-for' test). If the basis for liability is an omission – namely, the failure to prepare an issue prospectus or the failure to disclose certain information – one must first determine whether a duty to act exists. An omission is a cause in fact if compliance with this duty would have prevented the damages, respectively if it would have influenced the decision to acquire the securities. According to the standard formula used by the Swiss Federal Supreme Court, legal or proximate cause is defined as a cause that in the ordinary course of things and according to general life experience, is suited to cause the damage in question, such that the cause in question can be regarded as having substantially increased the risk of occurrence of the damage in question.40
Liability under Article 752 CO requires fault on behalf of the liable party. A negligent violation of the duties under Article 752 CO suffices to trigger liability. The term negligence presupposes that a duty of care was breached.41The standard applied is an objective one; negligence is deemed to have occurred if a reasonable person could have foreseen the occurrence of the damage.42
The due diligence defence, which has its roots in US law, gives the underwriting bank a possibility to exclude its liability. Under Swiss law it serves as a proof of exculpation and is therefore, treated under the fault requirement.43 In BGE 129 III 71, E. 2.6 et seq., the Federal Supreme Court held that an underwriting bank must, when preparing an issue prospectus, verify the information it receives from the issuer, as far as is reasonable. In this case, the Court held that the bank had no reason to doubt the information given to it by lawyers and auditors of the issuer.
Statute of limitations
The claim for damages against a person held liable under Article 752 CO becomes time-barred five years after the date on which the injured party learned of the losses and of the person liable for it (relative time limit), but in any event 10 years after the date of the act which caused the losses (absolute time limit). Where the action stems from a criminal act for which criminal law provides for a longer statute of limitations, the latter also applies to the civil claim.44
Burden of proof
Pursuant to the general rule of Article 8 of the Swiss Civil Code (CC), the claimant bears the burden of proof for all of the requirements for liability under Article 752 CO, including fault.45 However, commentators who do not regard Article 752 CO as a liability in tort argue that the claimant – as in contract law46 – should not have to bear the burden of proof for the fault requirement.47
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1. Matthew T Reiter and Thomas U Reutter are partners at Bär & Karrer AG.
2 The Federal Act on the Amendment of the Swiss Civil Code (Part Five: The Code of Obligations) of 30 March 1911 (as of 1 July 2014), www.admin.ch/opc/en/classified-compilation/19110009/201407010000/2 The Federal Act on the Amendment of the Swiss Civil Code (Part Five: The Code of Obligations) of 30 March 1911 (as of 1 July 2014), www.admin.ch/opc/en/ classified-compilation/19110009/201407010000/220.pdf.
3 The Civil Procedure Code of 19 December 2008 (as of 1 May 2013), www.admin.ch/opc/en/classified-compilation/20061121/201407010000/3 The Civil Procedure Code of 19 December 2008 (as of 1 May 2013),www.admin.ch/opc/en/ classified-compilation/20061121/201407010000/272.pdf.
4 The Lugano Convention, which entered into force in Switzerland on 1 January 2011 (as of 1 July 2014), www.admin.ch/opc/de/classified-compilation/20082721/201407010000/0.275 4 The Lugano Convention, which entered into force in Switzerland on 1 January 2011 (as of 1 July 2014), www.admin.ch/opc/de/classified-compilation/20082721/201407010000/0.275.12.pdf (German).
5 The Federal Statute on Private International Law of 18 December 1987 (as of 1 July 2014), www.admin.ch/opc/de/classified-compilation/19870312/201407010000/291.pdf (in German).
6 Stock Exchange and Securities Trading Act of 24 March 1995 (as at 1 January 2015), available online: www.admin.ch/opc/de/classified-compilation/19950081/index.html.
8 Federal Act on the Swiss Financial Market Supervisory Authority of 22 June 2007 (as of 1 January 2015), https://www.admin.ch/opc/en/classified-compilation/20052624/index.html.
9 Swiss Criminal Code of 21 December 1937 (as of 1 January 2015), www.admin.ch/opc/en/classified-compilation/19370083/201501010000/9 Swiss Criminal Code of 21 December 1937 (as of 1 January 2015), www.admin.ch/opc/en/classified-compilation/19370083/201501010000/311.0.pdf .
10 Swiss Criminal Procedure Code of 5 October 2007 (as of 1 January 2015), www.admin.ch/ opc/en/classified-compilation/20052319/201501010000/10 Swiss Criminal Procedure Code of 5 October 2007 (as of 1 January 2015),www.admin.ch/ opc/en/classified-compilation/20052319/201501010000/312.0.pdf.
11 Guhl et al., Das Schweizerische Obligationenrecht (Ninth Edition, Zurich, 2000), Section 72 N6.
12 See e.g., Müller, Lipp and Plüss, Der Verwaltungsrat, Ein Handbuch für Theorie und Praxis (Fourth Edition, Zürich, Basle and Geneva, 2014), p. 355.
13 See Watter, Basler Kommentar: Art. 530–964 OR (Honsell, Vogt and Watter (eds.), Fourth Edition, Basle, 2012), Article 752 N 2; and Reutter 'IPO – Ablauf, Struktur, Haftung und Schadloshaltung' in Vol 144, Kapitalmarkttransaktionen VIII (Reutter and Werlen (eds.), Zürich, Basle and Geneva: Europa Institut Zürich, 2014), p. 40. Reutter qualifies the legal nature of prospectus liability as a liability for breach in trust, arguing against the blind application of contractual standards.
14 Watter, (footnote 13, supra); and Reutter, (footnote 13, supra), p. 38 et seq.
15 BGE 129 III 71 E. 2.4.
16 Watter, (footnote 13, supra), Article 752 N 4.
17 Ibid., Article 752 N 3.
18 Reutter, (footnote 13, supra), p. 41.
19 Watter, (footnote 13, supra), Article 752 N 5; Urs, 'Prospekthaftung/Haftung gegenüber Investoren', Entwicklungen im Gesellschaftsrecht IX (Kunz, Jörg and Arter, Bern, 2014), Sections 97, 104 et seq.; Müller, Lipp and Plüss, (footnote 12, supra), p. 356; and Reutter, (footnote 13, supra) p. 41.
20 Watter, (footnote 13, supra), Article 752 N 5.
21 See Article 28 Listing Rules and Reutter (footnote 13, supra), Section 37 et seq.
22 Watter, (footnote 13, supra), Article 752 N 14.
23 See Watter, (footnote 13, supra), Article 752 N 14, with reference to the decision of the Cantonal Court of St. Gallen II, dated 19 December 1986, in: SJZ 1989, p. 50.
24 BGE 131 III 306, E. 2.1; and Watter, (footnote 13, supra), Article 752 N 6.
25 Watter, (footnote 13, supra), Article 752 N 7 et seq.
26 Ibid., Article 752 N 9, 9a.
27 Reutter, (footnote 13, supra), Section 43 et seq.
28 Watter, (footnote 13, supra), Article 752 N 10.
29 Ibid., Article 752 N 12.
30 Ibid., Article 752 N 16.
31 Ibid., Article 752 N 19.
32 Ibid., Article 752 N 17.
34 See ibid., Article 752 N 18, with further references.
35 Ibid., Article 752 N 20.
36 Ibid., Article 752 N 26.
37 BGE 132 III 718, E. 2.1. and E. 3.2
38 Ibid., E. 3.2.1
39 Ibid., E. 2.1.
40 See e.g., BGE 123 III 112.
41 BGE 129 III 71, E. 2.4.
42 Watter, (footnote 13, supra), Article 752 N 29.
43 Reutter, (footnote 13, supra), p. 57.
44 Article 760 para. 1 and 2 CO.
45 BGE 129 III 71, E. 2.5.
46 See Article 97 CO.
47 Watter, (footnote 13, supra), Article 752 N 33.
Previously published in The Securities Litigation Review
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