Liability for the prospectus

Any sale of shares in the UK must have a prospectus containing information about those shares in terms of FSMA. This, in summary, must include the information necessary to enable investors to make an informed assessment of the rights attached to the shares and the prospects of the company issuing the shares. Misstatements in, and omissions from the necessary information in the prospectuses, can give rise to both civil and criminal liabilities for the 'persons responsible for the prospectus'. This is a specific category of people set out in the Prospectus Rules which are made by the Financial Services Authority and govern the publication and content of prospectuses in the UK. To avoid such liabilities, it is standard practice to adopt a lengthy verification of the information found in the prospectus to ensure that such information is wholly accurate and does not have any material omissions.

The obligation to include the necessary information is supported by the Prospectus Rules read with FSMA which include provisions establishing civil liability for the contents of the prospectus. This extends only to information which is within the knowledge of those responsible for the prospectus/listing particulars or which it would be reasonable for them to obtain by making enquiries. The persons responsible for the prospectus/listing particulars are:

• The company itself
• The directors at the time when the prospectus is submitted to the stock exchange. However, a director is not responsible if the prospectus is published without their knowledge or consent and, on becoming aware of its publication, the director immediately gives reasonable public notice that it was published without their knowledge or consent;
• Each person who has authorised themself to be named, and is named, in the prospectus as a director. This covers the situation when A plc. makes a takeover offer for B plc. and some or all of the directors of B plc. agree to join the board of A plc. In the prospectus of A plc., the directors of B plc. who have agreed to join the board of A plc. are 'persons responsible' for the prospectus
• Each person who accepts, and is stated in the prospectus as accepting, responsibility for the prospectus/listing particulars or part thereof
• Any other person who has authorised the contents, or any part of, the prospectus

At least four possible claims aside from those under FSMA can be brought against those responsible for the prospectus/listing particulars. These are actions for negligent misstatement, claims under the Misrepresentation Act 1967, actions for damages in deceit and claims under contract.

If someone relies on a misstatement made by another person who owes a duty of care to them, they will be able to claim for any damage they have suffered as a result. For a duty of care to arise, a special relationship must exist between the person giving the information and the one relying on it. Generally, this special relationship does exist between a company which has published a prospectus and any subsequent purchaser of the shares described in the prospectus.

A person may be able to rescind the contract for acquisition of shares and/or claim damages under the MRA if they acted on an incorrect or misleading statement in the prospectus/listing particulars or an omission from it. Rescission means the setting aside of the contract and restoring of the parties to their original positions. Under the MRA, a claim for damages can only be made against the other party to a contract. Accordingly, the original investor would have a claim against the issuing company but not against its directors. This is in contrast to the claim under FSMA which does allow claims against the directors and other persons responsible.

An investor can claim damages for deceit against the company's directors or other persons responsible if the misstatement was fraudulently made, i.e. if it was made in any of the following circumstances:

• With knowledge that the statement was false
• Without belief in its truth
• Recklessly, without caring whether it is true or false

If an investor applies for and receives the securities, they would have entered into a contract and the prospectus/listing particulars will form part of the contract. Exactly who the other contracting party is depends on the circumstances of the case. If the prospectus is wrong or misleading, the investor may rescind the contract and/or sue the other contracting party for damages.