Liability Arising from Prospectus
Introduction
In line with the financing needs of companies and their desire for institutionalization, the number of public offerings shows an upward trend across Turkey. Looking at the data published by the Capital Markets Board on its website regarding initial public offerings, it is seen that, it is seen that 35 public offerings were made in 2022 and 39 in 2023 as of September.[1] This number is expected to increase further by the end of December 2023.
During this period of high increase in public offerings, the Capital Markets Board imposed administrative fines on three companies due to inaccurate, misleading, and incomplete information in their prospectuses. The administrative fines imposed by the Capital Markets Board emphasize the liability arising from the prospectus and the consequences of violating the obligations regarding the preparation of the prospectus in the capital markets legislation. In this Newsletter article, the obligation to prepare a prospectus will be discussed first, followed by the liability arising from the prospectus and the administrative fines that may be imposed by the Capital Markets Board.
Obligation to Prepare Prospectus
A prospectus is one of the public disclosure instruments in capital markets law. The word prospectus is derived from the Latin words “prospicio”, which means “to foresee”, and “to see far off”.[2]
The prospectus is defined in Article 3/j of the Capital Markets Law numbered 6362 (“CML”) as “a public disclosure document containing all information that will enable investors to make a conscious assessment regarding the financial status and performance of the issuer and the guarantor, if any, and its expectations for the future, its activities, the characteristics of the capital market instruments to be issued or traded on the stock exchange, and the rights and risks associated therewith”. For capital market instruments to be offered to the public or traded on the stock exchange, a prospectus must be prepared and this prospectus must be approved by the Capital Markets Board.
To regulate the principles regarding the preparation, approval and public announcement of the prospectus and issuance document as well as announcements and advertisements, the Communiqué on Prospectus and Issuance Document numbered II-5.1 is issued by the Capital Markets Board.
The prospectus contains various information that will enable the investor to realistically understand the current situation of the issuer. The information required to be included in the prospectus is regulated in the capital markets legislation, especially in the Communiqué on Prospectus and Issuance Document, in the prospectus format and the prospectus preparation guidelines published by the Capital Markets Board. In this context, data such as the company’s current capital, shareholding structure, the group to which the issuer belongs, its executives, sectors/markets in which the company operates, significant investments and geographical distribution of these investments, the degree of completion and type of financing, financial statements, real estates owned by the issuer, significant legal processes in which the issuer participates are included in the prospectus. Furthermore, the income and costs to be incurred by the issuer due to the public offering and the intended use of the public offering proceeds must also be included in the prospectus.
Under Article 7 of the Communiqué on Prospectus and Issuance Document, the prospectus and the information to be included in the prospectus must be prepared in detail to clearly disclose information about the issuer, must be complete and up-to-date, and must be easily analyzable, understandable and evaluable by investors.
The prospectus shall be signed by the issuer, the public offeror, and the authorized institution, if any, and in case a consortium is formed, by the consortium leader and co-leaders, if any.
Provisions Regarding Liability Arising from the Prospectus
While the liability arising from public disclosure documents is generally regulated under Article 32 of the CML, the liability arising from the prospectus is specifically regulated under Article 10 of the CML and Article 25 of the Communiqué on Prospectus and Issuance Document. Under Article 10 of the CML,
“Persons liable for the prospectus
ARTICLE 10 - (1) Issuers shall be liable for the losses arising out of inaccurate, misleading and incomplete information contained in the prospectus. In case the damages cannot be or it is evident that they cannot be recovered from such persons, the offerers, the leading intermediary institution acting as intermediary for the issuance, the guarantor, if any, and the members of the board of directors of the issuer shall be liable to the extent that the damages can be attributed to them according to their faults and the circumstances.
(2) Persons and institutions preparing the reports to be included in the prospectus, such as independent audit, rating and valuation institutions, are also liable for the inaccurate, misleading, and incomplete information contained in the reports they prepare, within the framework of the provisions of this Law.”
Legal Nature of Liability
While the nature of the legal liability arising from the prospectus is considered as tort liability by some legal scholars, others state that this liability is a liability arising from the law (ex lege). The view that opposes the assessment of the liability arising from the prospectus as tort liability argues that the two-tier system (explained below under the title Persons Liable for Prospectus) prevents the liability arising from the prospectus from being considered as tort liability, therefore, there is a liability arising from the law, and the tort provisions can be applied by analogy.
As it is understood from the wording of the law, to be held liable for the prospectus, the information contained in the prospectus must be inaccurate, misleading or incomplete; damage must occur; and there must be a causal link between the damage and the false, misleading, or incomplete information. Under Article 32/4 of the CML, it is presumed that for the claims to be asserted due to the prospectus containing inaccurate, misleading, or incomplete information; the causal link is established during the validity period of the prospectus.
In terms of fault, it is necessary to distinguish between the issuer and other persons who are responsible. Namely, the legislator regulates the liability of the issuer as a case of strict liability, and the liability of other persons who are held liable as fault liability. As for the burden of proof regarding fault, since Article 32/3 of the CML should also be applied to prospectuses, those who claim that they are not at fault for the prospectus being inaccurate, misleading, or incomplete must prove this. In order to be relieved from liability, these persons must prove that they did not have knowledge that the prospectus was inaccurate, misleading, or incomplete and that this lack of knowledge did not arise from their intention or gross negligence.
Persons Liable for the Prospectus
Article 10/1 of the CML, which regulates the liability arising from the prospectus, provides for a two-tier liability regime. According to this two-tier system, issuers are primarily responsible for the inaccurate, misleading and incomplete information in the prospectus. The person who claims to have suffered damage shall apply to the issuer for the compensation, but if he/she cannot get compensation from the issuer, or if it is clearly evident that the issuer cannot compensate, he/she may claim from other responsible parties. Article 10 of the CML lists the second-degree liable parties as (i) offerors, (ii) intermediary institutions, (iii) guarantors, and (iv) members of the board of directors of the issuer.
Not only the issuers but also the intermediary institutions and independent audit companies that are active in the preparation of the prospectus are held responsible for the accuracy of the information provided in the prospectus. Thus, it is aimed that the participants in the preparation of the prospectus act more diligently during the prospectus preparation process.
Neither the CML nor the relevant legislation contains a provision on how to determine the situation in which it is clear that the loss cannot or will not be recovered from the issuer. According to legal scholars, it is possible to apply to intermediary institutions, in cases where the proceedings against the issuer are unsuccessful (when an insolvency certificate is obtained) or the issuer company is terminated.[3]
Penalties that may be imposed by the Capital Markets Board
There is no provision in the CML and other relevant legislation regarding administrative fines that may be imposed due to inaccurate, misleading or incomplete prospectuses. However, under the general provision under Article 103 of the CML, the Capital Markets Board may impose administrative fines.
Indeed, with its decision dated 02.11.2023 and numbered 2023/67[4] (“Decision”), the Capital Markets Board decided to impose administrative fines on three different companies for breach of Article 25 of the Communiqué on Prospectus and Issuance Document.
In the Decision, it was determined that, shortly after the Capital Markets Board approved of the prospectuses of three publicly offered companies, the proceeds of the public offering were allocated to the subsidiaries of these companies, even though this fund utilization was not stated in the fund utilization reports included in the prospectuses. The Capital Markets Board imposed administrative fines on the publicly offered companies due to the inaccurate, misleading and incomplete information contained in the prospectus. In addition, even though the public offering proceeds were utilized by the subsidiary of the publicly offered company, an administrative fine was imposed because the relevant information was not included in the report prepared by the audit committee regarding the purposes for which the funds to be obtained from the capital increase will be used in the public offering of the shares of non-publicly traded companies through a capital increase, under Article 33 of the Communiqué on Shares No. VII-128.1.
Conclusion
Considering the capital markets legislation and the recent decisions of the Capital Markets Board, the prospectuses of companies that are planned to be offered to the public must be prepared with great care and diligence. Otherwise, other persons involved in the preparation of the prospectus may be held liable as well as the company whose shares are offered to the public.
- Issuance and Public Offering Data, https://spk.gov.tr/sirketler/duyurular-ve-veriler/ihrac-ve-halka-arz-verileri
- Latin-dictionary.net/definition/32046/prospicio-prospicere-prospexi-prospectus
- Ayoğlu, Tolga: “İzahnameden Doğan Sorumluluk”, İsviçre Borçlar Hukukunun İktibasının 80.yılında Borçlar Hukukunun Türk Ticaret Hukukuna Etkileri, İstanbul, Vedat Kitapçılık, 2009, p. 642.
- Capital Markets Board, Bulletin dated 02.11.2023 and numbered 2023/67, https://spk.gov.tr/data/6543ee488f95db0a88f7b61a/67-2023.pdf
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