Civil Liability of Securities Underwriters

Olia Skripova is currently working as a legal counsel/compliance offi cer with Applus RTD Group. She was previously a practicing attorney. She has conducted research on corporate governance and securities law and has co-drafted several studies for the European Commission. She gained her PhD from Erasmus University Rotterdam in 2012 as part of the European Doctorate in Law and Economics programme and an LLM from Erasmus University Rotterdam and the University of Bologna as part of the European Masters in Law and Economics programme (2007). She holds a Masters degree in Law from the University of Vilnius (2005).

CONTENTS Table of Cases List of Tables List of Abbreviations Introduction 1. Why It Matters? 2. Research Question 3. Relevance 4. Methodology 5. Scope of Research and Limitations 6. Structure of the Book PART I. FROM PRACTICE TO THEORY Chapter 1. What Do Underwriters Do? 1. Where Do Underwriters Operate? 2. Underwriter Role in Securities Offerings 2.1. Pre-Contractual Phase 2.2. Syndication 2.3. Prospectus and Due Diligence 2.4. Pricing 2.5. Allocation 2.6. Underwriting 2.7. Listing on the Trading Platform 2.8. Underwriting Fee 3. Underwriter Role in Post-Offering Activities 3.1. Market Making 3.2. Price Discovery 3.3. Stabilisation 3.4. Brokerage 3.5. Profitability of Underwriter Aftermarket Activities 3.6. Research Coverage 3.7. Other Post-Offering Services Chapter 2. Underwriter Gatekeeping Function and its Enforcement Mechanisms 1. Underwriter Gatekeeping Function 1.1. Asymmetric Information 1.1.1. Effects on Primary Markets 1.1.2. Effects on Secondary Markets 1.1.3. Commitment Problems 1.2. The Primary Solution to the Failures of Securities Markets and its Limitations 1.3. The Underwriter as a Gatekeeper 2. Enforcement of the Underwriter Gatekeeping Function 2.1. Goals of Enforcement Mechanisms 2.2. Optimal Monitoring Effort 2.3. Types and Ranking of Enforcement Mechanisms 3. Market Enforcement Mechanisms 3.1. Reputational Sanctions 3.1.1. Reputational Sanctions in Theory 3.1.2. Reputational Sanctions in Practice 3.1.3. Summing Up 3.2. Economic Risk-Taking 3.3. Contractual Solutions 4. Legal Enforcement Mechanisms 4.1. Ex Post vs Ex Ante Legal Intervention in the Gatekeeping Market 4.1.1. Types of Legal Intervention 4.1.2. Criteria for Making a Choice 4.1.3. Some Caveats 4.1.4. Summing Up 4.2. Private vs Public Ex Post Legal Intervention in the Gatekeeping Market 4.2.1. Types of Ex Post Legal Intervention 4.2.2. Incentives to Monitor 4.2.3. Other Impact 4.2.4. Enforcement by the Stock Exchange 4.2.5. Summing Up 4.3. Potential Costs of Gatekeeping and its Enforcement 4.3.1. General Costs of Gatekeeping 4.3.2. Specific Costs of Private Enforcement 4.3.3. Summing Up Chapter 3. Imposition of Civil Liability for Gatekeeping: Impact on Other Functions of the Underwriter 1. Underwriter's Advisory Role 1.1. Underlying Problem 1.2. Impact of the Imposition of Liability 2. Sale Intermediation by Underwriters 2.1. Underlying Problem 2.2. Impact of the Imposition of Liability 3. Price Discovery (Bookbuilding) by Underwriters 3.1. Underlying Problem 3.2. Impact of the Imposition of Liability 4. Underwriting Function of Underwriters 4.1. Underlying Problem 4.2. Impact of Imposition of Liability PART II. THE LAW ON CIVIL LIABILITY Chapter 4. The Most Important Elements of a Liability Regime 1. Parties to a Dispute 1.1. Potential Defendants 1.2. Potential Plaintiffs 2. Liability Standard 3. Measure of Damages 4. Procedural Rules 4.1. Cost-Sharing Rules 4.2. Types of Collective Proceedings 4.2.1. Main Features of Joinder Proceedings 4.2.2. Main Features of Representative Proceedings 4.2.3. Other Types of Collective Proceedings 4.2.4. Comparison of Collective Proceedings 4.3. Choice of Initiator of the Claim 4.3.1. Initiation by Any Member of the Class 4.3.2. Initiation by a Representative Organisation 4.4. Opt-In and Opt-Out 4.5. Burdens of Proof 5. Nature of the Liability Regime Chapter 5. Underwriters' Civil Liability in the USA 1. General Remarks 2. Registered Prospectus Liability: Section 11 2.1. Requirement to Disclose Information 2.2. Basis for Liability 2.3. Potential Defendants 2.4. Potential Plaintiffs 2.5. Liability Standard 2.6. Burdens of Proof 2.7. Definition of Damages 3. Beyond Prospectus Liability 3.1. Liability for Other Offering Documents and Oral Statements in Connection to the Distribution: Section 12(a)(2) 3.2. Underwriter Liability in All Other Cases: Rule 10b-5 4. Procedural Rules in the USA 5. Limitation of Liability 5.1. Disclaimers and Limitations 5.2. Indemnification and Contribution 6. Liability Threat Posed by the US System 6.1. Law on the Books 6.1.1. Section 11 6.1.2. Section 12(a)(2) 6.1.3. Rule 10b-5 6.2. Law in Practice Chapter 6. European Legal Framework 1. General Remarks 2. Underwriters' Gatekeeping Duties and Liability within the EU Regime 2.1. Requirement to Disclose Information 2.2. Basis for Liability 2.3. Possible Defendants 2.4. Beyond Prospectus Liability 2.5. Unfair Commercial Practices Directive 3. Procedural Law in Europe Chapter 7. Underwriters' Civil Liability in the Netherlands 1. Prospectus Liability: Sections 6:193 A, 6:194 and 6:195 1.1. Requirement to Disclose Information 1.2. Basis for Liability 1.3. Potential Defendants 1.4. Potential Plaintiffs 1.5. Liability Standard 1.6. Burdens of Proof 1.6.1. Burdens of Proof at the Declaratory Judgment Stage 1.6.2. Burdens of Proof at the Stage of the Award of Damages 1.7. Definition of Damages 2. Beyond Prospectus Liability 3. Procedural Rules in the Netherlands 4. Limitations of Liability 4.1. Disclaimer and Limitations 4.2. Indemnification and Contribution 5. Liability Threat Posed by the Dutch Legal System 5.1. Law on the Books 5.2. Law in Practice Chapter 8. Underwriters' Civil Liability in the UK 1. Prospectus Liability: Section 90 1.1. Requirement to Disclose Information 1.2. Basis for Liability 1.3. Potential Defendants 1.4. Potential Plaintiffs 1.5. Liability Standard 1.6. Burdens of Proof 1.7. Definition of Damages 2. Prospectus Liability: Common Law Causes of Action 2.1. Tort of Fraudulent Misrepresentation 2.2. Tort of Negligent Misrepresentation 2.3. Contractual Liability 3. Beyond Prospectus Liability 4. Procedural Rules in the UK 5. Limitation of Liability 5.1. Disclaimers and Limitations 5.2. Indemnification and Contribution 6. Liability Threat Posed by the British System 6.1. Law on the Books 6.1.1. As Compared to the USA 6.1.2. As Compared to the Netherlands 6.1.3. Predicting the Size of Settlements in the UK 6.1.4. Probability of Enforcement 6.2. Law in Practice PART III. POLICY IMPLICATIONS Chapter 9. Proposal for Improvement of Underwriters' Civil Liability Regimes in the USA and the Netherlands 1. Underwriter Liability as a Tort 2. Negligence vs Strict Liability 2.1. Academic Debate on Negligence vs Strict Liability 2.2. Application of Shavell Framework to Underwriter Liability 2.2.1. Unilateral vs Bilateral Accident 2.2.2. The Effect of Mistakes 2.2.3. Level of Activity and Residual Liability Risks 2.2.4. Problem of Frivolous Litigation 2.3. Liability Regimes and Low Settlement Size 3. Proposal for a Change 3.1. Switch to Strict Liability 3.2. Solving the Problem of the Excessive Residual Liability Risk: The Cap on Damages 3.3. Solving the Problem of Frivolous Litigation: The Shift of the Burden to Prove Loss Causation 4. Application to the US Legal System 5. Application to the Dutch Legal System Chapter 10. The Curious Case of the UK 1. No Private Enforcement 2. Alternative Enforcement Mechanisms 2.1. Overview of Historical Development: LSE and FSA 2.2. Enforcement by the FSA in Practice 2.3. Enforcement by the LSE in Practice 2.4. Summing Up 3. Particularities of the UK Market 4. Means to Increase Liability Threat in the UK 4.1. Is There a Need for Civil Liability in the UK? 4.2. Application of My Proposal to the UK Legal System Conclusions 1. Main Findings 1.1. Underwriters and their Main Functions 1.2. Positioning Civil Liability among other Enforcement Mechanisms 1.3. Civil Liability in Selected Jurisdictions 1.4. The Proposal for a Change 2. Limitations and Suggestions for Further Research Bibliography