On 3 June 2021, the European Court of Justice resolved that institutional investors are entitled to claim compensation for the losses they suffered in Bankia’s infamous 2011 public listing. The ruling follows a request for clarification from the Spanish supreme court. The decision addresses the historic position of Spanish courts on the subject and provides legal certainty for institutional investors in the country.
Perhaps more discretely than some of its neighbouring European countries, Spain has had its fair share of corporate scandals and failures: Bankia (2011), Pescanova (2013), and Abengoa (2015), to mention a few. Institutional investors who have resorted to Spanish courts to claim compensation for prospectus liability have run into a wall in the vast majority of cases. Spanish courts have ruled that the profile of the investor is relevant to determining whether or not it is entitled to claim compensation in prospectus liability matters, mostly denying institutional or qualified investors the right to be compensated for the complementary information at their disposal.
The European Court of Justice (“ECJ”) has provided clarity on the subject in the case against Spanish bank Bankia brought by the pension fund Unión Mutua Asistencial de Seguros (“UMAS”). In a binding decision, the ECJ ruled that institutional or qualified investors are also entitled to claim compensation for the inaccuracies contained in the prospectus for Bankia’s initial public offering (“IPO”), thus providing clarity on what was an issue of legal uncertainty.
The Bankia Case
In 2011, in one of the most ill-fated listings in Spanish history, Bankia raised EUR 3.1 billion from retail and institutional investors (60%/40%). Less than a year after the IPO, the bank infamously restated its 2011 profits from EUR 300 million to a EUR 3 billion loss. The restatement was the first in a series of events that led to the insolvency of the bank, which was ultimately rescued and restructured by the Spanish state.
Bankia’s failures led to a wave of shareholder claims filed against the bank. The Spanish supreme court has acknowledged in previous rulings that Bankia’s IPO contained “serious inaccuracies as to the true financial condition of the bank”. To date, Bankia has paid retail investors nearly EUR 1.9 billion in compensation for losses they suffered on the public listing of its shares.
For institutional investors the story has not been as bright. In recent years, Bankia has achieved important legal victories against institutional investors who sued the bank for misrepresentations contained in the prospectus. In February 2016, the Spanish Supreme Court went as far as clarifying that:
“a qualified or institutional investor should be presumed to have other means of knowledge superior to those of a retail investor, without the prospectus being the only means of knowledge at his disposal”.
The Spanish courts’ position has been highly questioned on several occasions from a domestic and European legal perspective. However, to date, it has been the position of reference for institutional investor claims in the country.
The ECJ Decision
In one of the few pending cases between Bankia and institutional investors in Spain (Bankia vs. UMAS[1]), the Spanish supreme court asked the ECJ to clarify if a liability claim on the grounds of the information given in the prospectus (prospectus liability) can be brought not only by retail investors but also by institutional or qualified investors.
In its decision, the ECJ resolved that in the event of a public offering addressed to both retail and qualified investors, an action for damages based on the information provided in the prospectus may be brought not only by retail investors but also by qualified investors. The ECJ ruled that it cannot be inferred from EU law that qualified investors lack the ability to bring an action for damages on the grounds of prospectus misinformation because, in case of a mixed offering (retail/institutional), all investors to whom it is addressed, regardless of their status, have the prospectus at their disposal, and the prospectus is assumed to contain complete and reliable information. The ECJ concluded that:
“where a prospectus has been published, it must be possible to bring an action for damages on the grounds of the information given in it, irrespective of the type of investor”.
The decision also clarified that national courts should consider the different levels of investment expertise between investors as provided by national law but only to the extent that those provisions are not less favourable than those governing similar actions and do not have the practical effect of rendering it “impossible or excessively difficult to bring that action”.
Ramifications
Many institutional investors that suffered losses in Bankia’s public offering were not adequately compensated either because of (i) the distinction made by Spanish courts between the right to claim damages for retail and institutional investors, or (ii) presumably, the decision not to take action due to the legal uncertainty. The ECJ’s decision will immediately impact the result of ongoing institutional lawsuits but unfortunately will not provide a remedy for many other investors in the above-mentioned cases.
Looking ahead, the consequences of the ECJ’s decision will largely be seen outside the Bankia case. The decision is set to become a fundamental precedent for future public listings and institutional investor cases not only in Spain but also in the EU. In terms of minority rights in the country and the EU, the decision should be welcomed as another step towards a fairer and more equitable environment for investors.
[1] Bankia S.A. vs. Unión Mutua Asistencial de Seguros - C-910/19
