Solving Investors’ Problems with Access to Evidence in Damages Litigation: Suggestions for a Future Issuer Liability Regime

Abstract

Private enforcement’s role in the European secondary securities market is narrow. Issuer companies’ civil liability for violations of the inside information disclosure obligation is no exception. While trying to avoid the shadow of the US class action institution, European scholarship has long explored ways to increase the role of private enforcement in the securities market. Harmonising issuer liability is one of the suggestions to create a more prominent role for private enforcement. Even though harmonising issuer liability would be a welcome option for legal certainty and investor protection, it seems unlikely to happen in the near future. As an initial step towards potential harmonisation, this article analyses credit rating agencies’ (CRAs) liability and liability for competition law violations from the viewpoint of information asymmetry in litigation. It evaluates whether the legislative solutions in the CRA III Regulation and the Competition Damages Directive regarding plaintiffs’ access to evidence could be used as models for a potential issuer liability regime. The article finds that the choices made in the Competition Damages Directive could serve as viable models for issuer liability. The provisions in that Directive solve the information asymmetry between the plaintiff and the defendant by granting the plaintiff access to evidence in litigation through a court order.

1 Introduction

The state of private enforcement in the EU secondary securities market is unsatisfactory. Apparent under-enforcement in the European securities market has led to arguments that stronger private enforcement is needed to complement public enforcement, which is insufficient alone.¹ Public enforcement, like administrative sanctions and measures,² and criminal sanctions³ also dominate the enforcement of the EU Market Abuse Regulation (MAR).⁴ Due to the EU’s centralised law enactment and decentralised enforcement,⁵ Member States are responsible for the enforcement of MAR’s provisions.⁶ Any private enforcement of non-compliance with MAR is also at the discretion of Member States.⁷ In line with tradition, similar violations of the same provision in an EU regulation may lead to different civil law consequences depending on the applicable law.⁸

Article 17(1) MAR obliges issuers to inform the public as soon as possible of inside information that directly concerns the issuer.⁹ The exemptions from the disclosure obligation in Article 17(4)-(5) MAR are outside the scope of this article.¹⁰ Inside information has price effect.¹¹ If an issuer misstates inside information by, inter alia, failing to disclose inside information, omitting or misrepresenting facts, the issuer’s share price will not correspond to the price with correctly disclosed inside information.¹² Investors who purchase or sell the issuer’s shares while the misstated inside information affects the share price may suffer financial damage by selling too low or buying at too high prices, depending on the case.¹³ In some jurisdictions, a private right of action exists for investors to claim damages from the issuer based on inside information disclosure violations, while in others, aggrieved investors may not be able to hold the issuer liable for pure economic loss or succeeding in damages litigation is difficult due to procedural obstacles. The situation is not ideal for EU-wide investor protection.

A few examples: in Sweden, shareholders cannot claim damages for pure economic loss from an issuer company for inside information disclosure violations. This is due to a well-established liability limitation doctrine for pure economic loss and the lack of a statutory issuer liability provision for inside information disclosure violations.¹⁴ The situation is similar in Norway (not an EU Member State) where damage payments to shareholders are considered to contradict capital maintenance rules.¹⁵ In Denmark, shareholders are able to claim damages for disclosure obligation violations from an issuer based on general tort law principles on negligence.¹⁶ In Finland, the Finnish Securities Markets Act, Chapter 16, Section 1, contains a liability provision for harm caused due to various violations of legislative acts in the securities market. Based on this provision, individual investors can claim damages from an issuer for violations of Article 17(1) MAR.¹⁷ Although no longer an EU Member State, the UK remains an important jurisdiction for securities markets in Europe. In the UK, a strict reliance requirement in Section 90A and Schedule 10A of the Financial Services and Markets Act 2000 makes damage claims difficult in the secondary market.¹⁸ In Germany, a specific liability regime exists for inside information disclosure violations (Sections 97 and 98 of the German Securities Trading Act).¹⁹ In addition, investors’ claims can be bundled and a model case for investors’ claims can be litigated following the KapMuG (Kapitalanleger-Musterverfahrensgesetz) procedure.²⁰ In the Netherlands, investors can invoke Article 6:162 of the Dutch Civil Code to claim damages from an issuer violating the inside information disclosure obligation. In addition, the Netherlands has an established tradition of securities litigation, class actions, and settlement procedures.²¹

The discrepancy between the private enforcement regimes in different Member States and the overarching objectives of the Capital Markets Union (CMU)²² reveals a further flaw. The CMU aims to create a single capital market with unhindered capital flows across Member State borders.²³ Its objective is to increase market efficiency and make investing easier.²⁴ National provisions that may lead to fundamentally different results in investors’ damages actions are not in line with these objectives.²⁵ The Commission has also recognised that national laws and differing enforcement regimes in Member States hinder capital flows. According to the Commission, ‘[o]bstacles due to national differences in laws and law enforcement, taxation and supervision should be reduced and not impede the free flow of capital’.²⁶

There has been a growing discussion among scholars around the claim that the role of private enforcement in the securities market must increase in the EU.²⁷ However, private enforcement in the securities market also receives criticism.²⁸ The criticism is typically based on the fear of a US-style class action mechanism that differs from the procedural traditions in Europe.²⁹ The reliance on different enforcement mechanisms on either side of the Atlantic derives partly from different substantive law provisions and regulatory choices.³⁰ A direct import of a US-style private enforcement regime in the EU securities market would therefore not be feasible, and the fears of a US-style private enforcement regime seem partly unfounded.³¹ The EU currently lacks an opt-out class action instrument to enforce issuer liability and a specialised plaintiffs’ bar to litigate issuers’ inside information disclosure violations. In addition, a discovery procedure and a contingency fee structure, both essential parts of a securities class action, are not that common and extensive in the EU.

The harmonisation of private enforcement of issuer liability has gained ground among scholars.³² The caveat is that harmonisation is a colossal task, and the need for it should be carefully analysed.³³ Importantly, it does not suffice to determine the substantive elements of civil liability—procedural obstacles to enforcement must be considered as well. If procedural elements hamper the enforcement of civil liability, the benefits of a harmonised regime may well be lost.³⁴ Procedural obstacles to enforcing market abuse laws are many and include investors’ rational reluctance to file suits without a group litigation or class action instrument, lack of litigation funding, and plaintiffs’ problems with access to information.³⁵

Issuer-specific information is necessary to initiate proceedings and to succeed in litigation.³⁶ The situation is certainly not particular to securities litigation only.³⁷ As in any civil liability suit, plaintiffs require sufficient information to file a suit and to meet the required standard of the burden of proof. In the EU, where the US-style discovery procedure is not recognised, this may cause serious obstacles for plaintiffs. Typically, the complementary role of public enforcement has been suggested to answer investors’ problems with access to evidence.³⁸ According to this approach, private enforcement could benefit from the findings of public enforcement as the same information would not need to be collected twice.³⁹ The success of private enforcement would be partly dependent on the coordination between public and private enforcement.⁴⁰

This article approaches the harmonised liability regimes of credit rating agencies (CRAs) and the competition liability regime to explore ways in which the problem of plaintiffs’ access to evidence in private litigation has been solved. Specifically, it analyses whether the choices made in the CRA III Regulation⁴¹ and the Competition Damages Directive⁴² could serve as viable models for a potential issuer liability regime. The article finds that the choices made in the Damages Directive could serve as viable options for issuer liability. The provisions in that Directive solve the information asymmetry problem between the plaintiff and the defendant by granting the plaintiff access to evidence in damages litigation through a court order.

This contribution does not aim at designing fully functional substantive or procedural elements of a harmonised issuer liability regime. It examines how plaintiffs’ problems with access to information in litigation have been solved in the CRA III Regulation and the Damages Directive. The objective of this contribution is to examine whether the choices made in the CRA III Regulation and the Damages Directive could be used as models for a potential future issuer liability regime. Discussion on issuer liability is limited to cases where an issuer listed on a regulated market⁴³ has violated its inside information disclosure obligation. The securities discussed are shares of common stock of such issuer companies.

The article proceeds as follows. Section 2 discusses how plaintiffs’ access to evidence in litigation is approached in the CRA III Regulation. Section 3 conducts the same assessment for the Damages Directive. Section 4 discusses how a potential issuer liability regime could be modelled on the example of the Damages Directive and presents a modest draft for articles on access to evidence in a hypothetical issuer liability damages directive. Section 5 concludes.

2 The Credit Rating Agencies’ Liability Provision Sets High Barriers for Damage Claims

Even though the enforcement of securities market legislation in the EU relies heavily on public enforcement, harmonising civil liability is not completely alien to the EU legislator. An example of a harmonised civil liability regime is CRAs’ liability.⁴⁴ CRAs have a particularly important role in the functioning of the financial market which justifies them being subject to a considerable amount of regulation, a civil liability regime included.⁴⁵ The CRA III Regulation was the first EU regulation to introduce a harmonised civil liability regime in the financial market.⁴⁶ Article 35a(1) of the CRA III Regulation stipulates the following:

Where a credit rating agency has committed, intentionally or with gross negligence, any of the infringements listed in Annex III having an impact on a credit rating, an investor or issuer may claim damages from that credit rating agency for damage caused to it due to that infringement.

An investor may claim damages under this Article where it establishes that it has reasonably relied, in accordance with Article 5a(1) or otherwise with due care, on a credit rating for a decision to invest into, hold onto or divest from a financial instrument covered by that credit rating.

An issuer may claim damages under this Article where it establishes that it or its financial instruments are covered by that credit rating and the infringement was not caused by misleading and inaccurate information provided by the issuer to the credit rating agency, directly or through information publicly available.⁴⁷

Both issuers and investors can claim damages from a CRA that has conducted an infringement intentionally or with gross negligence. The infringement must be one that has affected the credit rating and is listed in the Regulation’s Annex III. The Regulation requires from issuer plaintiffs that the issuer or its financial instruments are covered by the infringing credit rating and that the infringement was not due to the issuer’s own conduct. Liability is independent of the existence of a contractual relationship between the plaintiff investor or issuer and the defendant credit rating agency. In the case of issuers, the liability thus applies to both solicited and unsolicited ratings. The liability provision only protects investor plaintiffs in case of ratings that concern a financial instrument, not the creditworthiness of the issuer itself.

The CRA liability regime has received criticism because the different elements of a damage claim are difficult for plaintiffs to meet.⁴⁸ The burden of proof regarding the CRA’s intention or gross negligence is on the plaintiff. Proving intention or gross negligence requires the plaintiff to have some access to documentation evidencing the CRA’s fault. Further, Article 35a(2), subparagraph 1, obliges the plaintiff ‘to present accurate and detailed information indicating that the credit rating agency has committed an infringement of this Regulation, and that that infringement had an impact on the credit rating issued’.⁴⁹ The plaintiff has the burden of proof regarding both the infringement and the causal connection between the infringement and its impact on the rating. Interestingly, the Commission’s Proposal contained a reversed burden of proof on the point of the CRA’s infringement. If the plaintiff could show facts from which the infringement could be inferred, the CRA would have the burden of proof on showing that no infringement had occurred.⁵⁰

To prove the causal connection the plaintiff must show that the rating would have been different but for the infringement.⁵¹ The requirement to present ‘accurate and detailed information’ on the infringement and the infringement’s impact is burdensome on the plaintiff. To prove the infringement and the causal connection at an accurate and detailed level is hardly possible without specific information on the CRA’s rating models, the CRA’s decision-making process, or access to the CRA’s internal documents.⁵² Naturally, the plaintiff has no access to such information,⁵³ which makes proving both the infringement and the causal connection between the infringement and the rating extremely difficult.⁵⁴

In addition to the CRA’s intention or gross negligence, the existence of an infringement, and the causal connection between the infringement and the rating, an investor plaintiff must also prove reasonable reliance on the rating.⁵⁵ Proving reasonable reliance is almost impossible for investors.⁵⁶ The requirement is especially harsh towards institutional investors whom the Regulation obliges to conduct their own assessments of the rated instruments or issuers in question.⁵⁷

The CRA III Regulation tries to take the information asymmetry between the plaintiff and the defendant into account, at least to an extent. According to Article 35a(2), subparagraph 2, ‘[w]hat constitutes accurate and detailed information shall be assessed by the competent national court, taking into consideration that the investor or issuer may not have access to information which is purely within the sphere of the credit rating agency’.⁵⁸ In view of plaintiffs’ lack of information, national courts’ role in making such an assessment is paramount for alleviating plaintiffs’ burden of proof and for the success of a damage claim.⁵⁹ The CRAs’ regulatory disclosure obligations are insufficient to cover the information that is needed to establish an infringement and causal connection.⁶⁰ The same problems with access to information arise when it comes to proving reasonable reliance, infringement, causal connection, and the CRA’s intention or gross negligence. All are required for liability to attach. It is doubtful that an assessment of what constitutes accurate and detailed information—an assessment left to the Member States’ courts—is enough to help aggrieved plaintiffs.⁶¹ Given the rigorous requirements of the Regulation, it remains uncertain how the access to information obstacle could be overcome in practice.⁶²

Another flaw in the CRA liability regime is that the CRA III Regulation does not even attempt to fully harmonise CRA liability.⁶³ Article 35a(4) of the CRA III Regulation expressly states that ‘[t]erms such as “damage”, “intention”, “gross negligence”, “reasonably relied”, “due care”, “impact”, “reasonable” and “proportionate” ’ are determined according to the applicable national law.⁶⁴ The exact content of such terms may vary between Member States. The Regulation does not address the discrepancies that exist at national level and fails to create a uniform liability regime.⁶⁵ In addition, Article 35a(4) further states that ‘[m]atters concerning the civil liability of a credit rating agency which are not covered by this Regulation shall be governed by the applicable national law’. This is likely to create enforcement results that differ between jurisdictions.⁶⁶ The EU legislator’s choice seems to undermine the purpose for which EU regulations are enacted.⁶⁷ Indeed, it may well be asked to what extent the enforcement of CRA liability is compatible with, or can even meet, the requirement of uniform application of EU regulations.⁶⁸

The civil liability regime of the CRA III Regulation has received considerable scholarly criticism.⁶⁹ Due to the flaws of the liability regime, it cannot function as a complement to public enforcement.⁷⁰ CRA liability, in the way it now appears in the Regulation, therefore seems an unlikely candidate to be considered as a model for issuer liability. Transposing the requirement of plaintiffs’ reasonable reliance into an issuer liability regime for violations of Article 17(1) MAR would be especially problematic. Investors in the secondary securities market may suffer damage without reliance on an issuer’s disclosure. In fact, investors may suffer damage without any knowledge of issuers’ disclosures. Investors’ potential unawareness has led to the use of various presumptions of reliance in different jurisdictions, for example, the rebuttable presumption of reliance developed in US case law. Several authors, particularly in the US, have therefore argued that investors’ reliance on issuers’ misstatements should not be a requirement of issuer liability in secondary market fraud cases at all.⁷¹

The existence of a CRA liability regime, particularly in the form of a regulation, provides ample food for thought. A credit rating is addressed to an indeterminately large audience.⁷² Further, CRA liability applies to both contractual and non-contractual relations.⁷³ Theoretically, this exposes CRAs to a flood of claims.⁷⁴ The above-mentioned strict burden of proof regarding reliance and causation, however, stems the flood. Interestingly, one of the most prominent arguments against issuer liability in the secondary securities market is the floodgate argument. The potential amount of investors in the market is indeterminately large, creating an indeterminately large amount of potential damages, so that, the argument goes, issuers become exposed to an unpredictably large liability. The same arguments used against an issuer liability regime could also be used against the CRA liability regime. Yet, a harmonised CRA liability regime exists (as a regulation) but the EU still lacks a harmonised issuer liability regime.⁷⁵ This raises the question of whether harmonising private enforcement of civil liability also looms in the future, particularly in cases of violations of Article 17(1) MAR.

Overall, plaintiffs’ access to information in the CRA liability regime does not appear to be a suitable model to address similar issues in a potential issuer liability regime regarding violations of the inside information disclosure obligation. The CRA III Regulation does not ease an aggrieved investor’s position in accessing evidence or proving an infringement. However, the formulation of Article 35a(2), subparagraph 2, of the CRA III Regulation is a step in the right direction. National courts’ discretion to take the plaintiff’s lack of access to information into consideration would likely prove justified in a harmonised issuer liability regime as well. A national court adjudicating on investors’ claims could acknowledge in its assessment that an investor plaintiff cannot have access to the issuer’s internal decision-making documentation. Nevertheless, such leeway given to courts may be insufficient.

3 The Damages Directive Alleviates Plaintiffs’ Access to Evidence

In stark contrast to civil liability claims in the financial market, private litigation for damages in competition law has a long history in the EU. The extensive court practice of the European Court of Justice (ECJ) in the field of damages actions and claims regarding competition law violations, as well as the central role of competition law in the development of the EU internal market, led to the enactment of the Damages Directive. Long before that Directive, the ECJ had already developed the liability for competition law infringements and individuals’ right to damages for such infringements.⁷⁶ Importantly, the ECJ held that Articles 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) confer a right to compensation on any individual for damage that they have suffered due to a competition law infringement.⁷⁷ The Damages Directive codifies the ECJ’s case law and obliges Member States to ensure compensation in case of damage caused due to violations of Articles 101 and 102 TFEU.⁷⁸

The Damages Directive addresses the right to compensation for harm resulting from an infringement of Article 101 or 102 TFEU.⁷⁹ The purpose of the Damages Directive is to enhance private individuals’ possibilities to gain compensation. Its objective is also to protect the leniency statements and settlement submissions of parties engaged in anti-competitive behaviour. This is because leniency applications are still an important source of information for both the Commission and Member States’ competition law authorities.⁸⁰ However, the Directive lacks clarity on what the most important objective in access to evidence is—the Directive’s dual goals of protecting the interests of plaintiffs suffering damage and of protecting the interests of leniency applicants and participants as well as parties to settlement submissions pull in opposite directions.⁸¹

According to Article 3(1) of the Damages Directive, ‘Member States shall ensure that any natural or legal person who has suffered harm caused by an infringement of competition law is able to claim and to obtain full compensation for that harm’.⁸² Anyone can claim damages for the harm they have suffered due to competition law violations.⁸³ Further, the compensation for harm suffered must be full. Full compensation covers compensation for actual loss, loss of profit, and payment of interest.⁸⁴

One of the objectives of the Damages Directive is to make it easier for plaintiffs to gain access to relevant information.⁸⁵ Plaintiffs’ access to information in competition law damages cases is crucial,⁸⁶ and the Damages Directive recognises this.⁸⁷ A good example is Recital (14), which emphasises the difficulty of access to information:

Actions for damages for infringements of Union or national competition law typically require a complex factual and economic analysis. The evidence necessary to prove a claim for damages is often held exclusively by the opposing party or by third parties, and is not sufficiently known by, or accessible to, the claimant. In such circumstances, strict legal requirements for claimants to assert in detail all the facts of their case at the beginning of an action and to proffer precisely specified items of supporting evidence can unduly impede the effective exercise of the right to compensation guaranteed by the TFEU.⁸⁸

The plaintiff has the burden of proof regarding the defendant’s anti-competitive behaviour, the amount of damage, and the causal relationship between the damage and the defendant’s anti-competitive behaviour.⁸⁹ The burden of proof is heavy, but the Directive eases it in different ways.

Article 9 of the Damages Directive eases the plaintiffs’ burden of proof on the defendant’s anti-competitive behaviour. According to Article 9 of the Damages Directive, where a damages claim is brought before a national court under Article 101 or 102 TFEU, or national law, an infringement of competition law must be held as established if the infringement is found in the final decision of a national competition authority or a review court.⁹⁰ Such previous finding of a violation is irrefutable in a damages action.⁹¹ If the finding of an infringement is contained in the final decision of another Member State’s national competition authority or review court, the finding of the infringement must be accepted at least as prima facie evidence of an infringement.⁹² Further, the rebuttable presumption that cartels cause harm⁹³ makes plaintiffs’ role in establishing damage in cartel damages claims easier. In addition, Article 17(1) of the Damages Directive allows national courts to quantify the plaintiff’s damage where this would be practically impossible or excessively difficult for the plaintiff based on available evidence.⁹⁴ The Directive does not address how a causal relationship between an infringement and damage is established but leaves the matter to Member State legislation.⁹⁵

Articles 5 to 8 of the Damages Directive introduce rules for disclosure of evidence in court.⁹⁶ Specifically, Article 5 eases the plaintiffs’ burden of proof regarding the amount of damage and the causal relationship between the plaintiff’s damage and the defendant’s anti-competitive behaviour by introducing provisions on access to evidence. Article 5(1) of the Damages Directive stipulates the following:

[U]pon request of a claimant who has presented a reasoned justification containing reasonably available facts and evidence sufficient to support the plausibility of its claim for damages, national courts are able to order the defendant or a third party to disclose relevant evidence which lies in their control, subject to the conditions set out in this Chapter. Member States shall ensure that national courts are able, upon request of the defendant, to order the claimant or a third party to disclose relevant evidence.⁹⁷

What exactly constitutes ‘a reasoned justification’, ‘reasonably available facts and evidence’, ‘sufficient to support the plausibility’ and ‘relevant evidence’ is outside the scope of this contribution.⁹⁸ For the assessment conducted here it is relevant that the plaintiff’s access to evidence is codified in a directive and that the national courts are indeed able to order the defendant to disclose evidence in damages proceedings. In this manner, Article 5 of the Damages Directive eases plaintiffs’ access to information.⁹⁹ Disclosure of evidence is subject to certain limitations¹⁰⁰ but rules on inadmissibility should be interpreted restrictively.¹⁰¹ Failure to comply with a national court’s disclosure order is subject to penalties.¹⁰²

National courts must be able to order the disclosure ‘as precisely and as narrowly as possible’.¹⁰³ The disclosure of evidence must be limited to what is ‘proportionate’.¹⁰⁴ These elaborations on the requirement to disclose information protect defendants’ interests. The fundamental obstacle lies in trying to ease private plaintiffs’ possibility to gain damages and the need to protect leniency applicants and participants, as well as parties to settlement submissions.¹⁰⁵ This is because a leniency programme and a settlement submission only concern administrative proceedings and fail to protect their participants from private follow-on damages actions.¹⁰⁶ In determining what counts as proportionate, Member States’ courts must consider, among other things, whether the request for evidence is justified, ‘the scope and cost of disclosure’, and the confidentiality of the information and the protection thereof.¹⁰⁷ This calls for a case-by-case overall assessment. However, according to Article 5(8), ‘this Article shall not prevent Member States from maintaining or introducing rules which would lead to wider disclosure of evidence’.¹⁰⁸ Member States are therefore free to adopt a more plaintiff-friendly approach to disclosure as well.

Article 6 contains additional provisions on the disclosure of a competition authority’s evidence.¹⁰⁹ For the competing objectives of the Directive (easing plaintiffs’ position and access to damages and protection of defendants’ possible leniency statement or settlement submission) Article 6(6) is of particular importance. According to this Article, ‘Member States shall ensure that, for the purpose of actions for damages, national courts cannot at any time order a party or a third party to disclose any of the following categories of evidence: (a) leniency statements; and (b) settlement submissions’.¹¹⁰ Business secrets and confidential information must be adequately protected as well.¹¹¹

National courts are in a difficult balancing position in deciding on the disclosure of evidence.¹¹² Finding the right balance between sufficient but not excessive disclosure is not a trivial task. On the one hand, the interests of private plaintiffs must be observed, in particular considering the fundamental EU law principles of effectiveness and equivalence.¹¹³ On the other hand, the potential defendant’s incentives to take part in leniency programmes should not be undermined by the disclosure of evidence at a later stage.¹¹⁴ The success of a pending public enforcement process should not be jeopardised either. Therefore, leniency statements and settlement submissions are outside the scope of plaintiffs’ access to information and are inadmissible in court.¹¹⁵

The Damages Directive has also received criticism, for various reasons.¹¹⁶ Nevertheless, the regime has been considered to be a more viable option than the CRA liability regime as a model for a potential issuer liability regime in the secondary securities market.¹¹⁷ This analysis takes the same position. While not perfect, the Damages Directive balances the interests of the plaintiff’s and defendant’s sides as well as those of third parties.¹¹⁸

The Damages Directive could function as a viable model for a potential issuer liability regime from the viewpoint of access to information. The provisions in that Directive solve, at least to an extent, the information asymmetry problem between the plaintiff and the defendant. This is done explicitly by granting the plaintiff access to evidence, through a court order, in a statutory provision. Especially Articles 5-6, 9 and 17, discussed above, balance the information asymmetry between plaintiffs and defendants and help plaintiffs in obtaining evidence that would otherwise be fully out of their reach. Investor plaintiffs could be allowed to gain access to evidence by making disclosure requests in the court proceedings in the vein of Article 5 of the Damages Directive. Plaintiffs could also be allowed to benefit from the findings of national competent authorities as modelled by Article 6 of the Damages Directive. Naturally, the particulars of such rules would need to be adjusted to the secondary securities market context, but the overall principles could be transferred from the competition law liability regime.

4 Issuer Liability Could Be Harmonised at a Minimum Level

Harmonising private enforcement of issuer liability has gained votes among scholars.¹¹⁹ Indeed, a harmonised issuer liability regime would be welcome as it would enhance investor protection ex post and level the playing field between investors from different Member States. In addition, it would contribute to ex ante deterrence of violations.¹²⁰ It would also be in line with the larger objectives of the CMU. A harmonised regime would ascertain that investors have at least a right of action, in all jurisdictions, to hold an issuer liable. This would also increase the predictability and legal certainty in liability questions in the secondary securities market. Better predictability and legal certainty concern not only aggrieved investors but also issuers who would be better able to avoid, prepare for, and react to possible damages claims.

Currently, harmonising issuer liability for inside information disclosure violations is confined to academic discussion. Considering the delicacy of the subject matter, it seems unlikely that the regime would be harmonised in the near future. Even if harmonised, an issuer liability regime following the example of the CRA III Regulation should be avoided. This applies particularly to the use of national provisions to interpret terms such as ‘damage’ and ‘reasonable reliance’. This would undermine the idea of harmonising civil liability and would therefore not serve its purpose in clarifying and increasing the institutional role of private enforcement of issuer liability.¹²¹

However, harmonisation may also have unexpected consequences or lead to unwanted results.¹²² Full harmonisation may not be desirable,¹²³ as learning from other jurisdictions is impossible in a fully harmonised regime.¹²⁴ Finding a balance between sufficient but not excessive harmonisation is difficult. Academics have therefore suggested that the instrument to harmonise issuer liability should be a directive.¹²⁵

A regime compensating for damage caused by inside information disclosure violations should provide for full compensation for investors but refrain from overcompensating.¹²⁶ It should aim at a balance between over- and under-enforcement, like the Damages Directive.¹²⁷ The differing interests of the plaintiff and the defendant side, as well as of third parties, should be balanced. In particular, the threshold to order the disclosure of evidence should be set carefully to prevent frivolous fishing expeditions. Actions that could be considered frivolous may include meritless claims based on a drop in the issuer’s share price without there having been an inside information disclosure violation or any other unlawful act on the issuer’s part. For example, allegations that are based on general forward-looking statements that contain no inside information disclosure violation but turn out not to come true in the long run should be excluded. Potential problems with frivolous suits could partly be overcome by requiring proof of the existence of inside information first.

For example, where an investor plaintiff cannot show the exact moment when an inside information disclosure violation occurred, the court adjudicating the case could order the national competent authority to disclose relevant details of a public enforcement action. In this way, the investor plaintiff could benefit from information already gathered by the national competent authority. Such disclosure could only take place after the national competent authority completed its public enforcement action. No information should be revealed of ongoing investigations. Certain pieces of information (such as business secrets) must be protected during litigation so that the future business interests of the defendant are not undermined.¹²⁸ The extensive experience from competition law, including case law, will likely prove helpful in determining what information should remain completely inadmissible or undisclosed in damages proceedings.

The discussion in this contribution has concentrated on the problems with plaintiffs’ access to information prior to and during litigation. Below, a rough draft of a provision on the plaintiff’s access to information is presented. A provision akin to this might help mitigate the problems with plaintiffs’ access to information if issuer liability is harmonised in the future. The suggested provision does not pretend to be perfect or to include all the necessary elements in a fully functional damages regime. It merely serves as the initial stepping stone toward future research. Needless to note that the draft provision would not function in isolation or without a specified framework, including definitions and limitations of scope. As the reader observes, the draft is inspired by Articles 5 and 6 of the Damages Directive.

Subject matter and scope

This Directive sets out rules necessary to ensure that anyone who has suffered damage through purchase or sale of an issuer’s shares in the regulated market, where the damage is caused by an infringement of that issuer’s inside information disclosure obligation of Article 17 of the Market Abuse Regulation (MAR), can effectively exercise the right to claim full compensation for that damage from that issuer.

General principles governing the disclosure of evidence

1. Member States shall ensure that:

(a) national courts are able, upon request of the plaintiff, to order the defendant, a third party, or the national competent authority to disclose relevant evidence which lies in their control;

(b) national courts are able, upon request of the defendant, to order the plaintiff, a third party, or the national competent authority to disclose relevant evidence which lies in their control;

(c) national courts are able to order the disclosure of specified items of evidence or relevant categories of evidence defined as precisely as possible;

(d) national courts request the disclosure from a national competent authority of evidence included in its file only where no party or third party is reasonably able to provide that evidence;

(e) national courts have the power to order the disclosure of evidence containing confidential information where they consider it relevant to the action for damages;

(f) when ordering the disclosure of confidential information, national courts have effective measures at their disposal to protect such information; and

(g) national courts give full effect to applicable legal professional privilege under Union or national law when ordering the disclosure of evidence.

National courts’ duties

1. Member States shall ensure that national courts limit the disclosure of evidence to what is proportionate.

2. In determining whether any disclosure requested by a party is proportionate, national courts shall consider the legitimate interests of the parties, third parties, and the national competent authority. National courts shall consider:

(a) the scope and cost of disclosure;

(b) whether the evidence contains confidential information;

(c) whether the request for disclosure is a specific or a non-specific application concerning documents submitted to or in the file of a national competent authority;

(d) whether the request for disclosure is made in connection with an action for damages before a national court; and

(e) the need to safeguard the effectiveness of the public enforcement of market abuse law.

3. The interest of issuers to avoid actions for damages following an infringement of the inside information disclosure obligation of Article 17 MAR shall not constitute an interest that warrants protection.

4. National courts may order the disclosure of the following information only after a national competent authority has closed its proceedings:

(a) information that a legal or a natural person prepared specifically for the proceedings of a national competent authority; and

(b) information that the national competent authority prepared specifically for conducting its proceedings.

Right to be heard

1. Member States shall ensure that those from whom disclosure is sought are provided with an opportunity to be heard before a national court orders disclosure.

2. If a national competent authority is willing to state its views on the proportionality of a disclosure request, it may, acting on its own initiative, submit observations to the national court before which a disclosure order is sought.

5 Conclusions

A well-known information asymmetry exists between issuers and investors in the secondary market of exchange-listed shares. The information asymmetry not only concerns transactions conducted in the securities market but continues in a possible litigation process where issuer liability is enforced through private means. Investor plaintiffs’ lack of access to information affects many aspects of a potential litigation process from the filing stage to pleading. The most prominent problems relate to the elements of a damages claim for which the plaintiff has the burden of proof. These elements depend on the applicable law. Depending on the choice of law, possible elements that the plaintiff must prove may include establishing the defendant’s fault and violation, the amount of damage, and causation between the violation and damage. This article approached the problems of private enforcement in the securities market from the viewpoint of access to evidence in litigation.

Scholars have argued that private enforcement in the secondary securities market needs to gain more ground to ensure investor protection. Investors must be able to claim damages for the loss caused to them due to an issuer’s violation of the inside information disclosure obligation of Article 17(1) MAR. This article compared the choices made in the CRA III Regulation (establishing the CRA liability regime) and in the Damages Directive (establishing liability for competition law violations) and assessed the access to information rules contained in said Regulation and Directive. The purpose of the assessment was to answer the following question: if issuer liability for violations of the inside information disclosure obligation in the secondary securities market were harmonised in the future, would the access to information rules in the Regulation or the Directive serve as viable models? This analysis found that the choices made in harmonising liability for anti-competitive behaviour in the Damages Directive could serve as a model for a harmonised issuer liability regime. The Directive addresses the information asymmetry problem forthright and provides for means for plaintiffs to gain access to evidence in a damages action.

Even though the pathway to harmonisation is not straightforward, the situation is not hopeless. As discussed in this article, a harmonised liability regime has already been adopted for competition law violations and in the context of CRA liability. The EU legislator has also been bold in creating a harmonised market abuse criminal sanctions regime in MAD II, which indicates that more extensive measures could also be resorted to in developing issuer liability.

This article has not attempted to create a detailed harmonised regime. There are several prominent issues in harmonising issuer liability for violations of the inside information disclosure obligation. The most obvious obstacles relate to the lack of a proper collective or class action instrument. A group litigation instrument of some form is necessary to bundle investors’ claims and to solve the rational apathy and litigation funding problems. Considering the delicacy of the matter, it seems unlikely that a harmonised issuer liability regime for inside information disclosure violation will be adopted in the near future. That does not mean that a harmonised regime would not be welcome. It would benefit legal certainty for investors and issuers alike, contribute to ex ante deterrence of violations, and increase ex post investor protection in the EU. To that end, this article has also presented a modest draft provision on plaintiffs’ access to information to help initiate the potential harmonisation process in the future.