CJEU in Effectenbezitters v. BP: Jurisdiction for Collective Actions Based on Incorrect Investor Information
On 12 May 2021, the Court of Justice rendered its long-awaited judgment in the case Vereniging van Effectenbezitters v. BP. The case concerned the international jurisdiction for a collective action based on issuer liability for inaccurate, incomplete and misleading information in capital markets.
The Court ruled that under Article 7(2) Brussels I bis Regulation such actions may be brought at the place where the issuer is subject to statutory reporting obligations, which is usually the place where the financial instruments are traded on a stock exchange. In contrast, they could not be brought at the location of the investment account in which the financial instrument are held.
The ruling is important from a capital markets perspective, yet it also adds another piece to the puzzle of where to localise purely financial or economic loss.
Facts
The facts of this case go back to the accident at the Deep Water Horizon oil platform in 2010, which was one of the biggest environmental disasters of all time and laid the Southern coast of the U.S. to waste.
The Dutch action underlying the reference alleges that BP, who operated the platform, failed to properly inform its shareholders about its security and maintenance programme prior to the accident. What is particular about this case is that the claim was brought by an association under Dutch law as a collective action on behalf of all persons who bought, held or sold BP shares in the three years preceding the accident. It is also important that the shares of BP are dually listed in London and Frankfurt, but not in the Netherlands.
The Rechtbank Amsterdam and the Gerechtshof (Court of Appeal) Amsterdam denied international jurisdiction of the Dutch courts on the grounds that no damage was suffered in the Netherlands.
Legal Questions
The Dutch Hoge Raad, to which the dispute was presented at last instance, decided to submit a reference for a preliminary ruling to the CJEU. It wanted to know whether Dutch courts have jurisdiction to decide over (1) the collective action, and (2) any individual claim that may be brought subsequently by BP investors. In addition, the Dutch highest court asked two questions on whether Article 7(2) of the Brussels I bis Regulation determines, besides international jurisdiction, internal territorial jurisdiction as well.
Ruling
The CJEU held that the Dutch courts have no jurisdiction over the action brought. Importantly, the court also stated that this jurisdiction is independent of the collective nature of the action. It refused to answer the questions regarding international and internal territorial jurisdiction as they would be merely hypothetical at this stage.
Rationale
The reasoning of the CJEU centres around the well-known question of how purely financial damage is to be localised. This problem has already kept the CJEU busy in many other cases, e.g. Kronhofer, Marinari, Dumez, Kolassa, Universal Music and Löber, to name but a few.
Of these, the most relevant for the current case were Kolassa and Löber, given that both were as well concerned with allegations of incorrect investor information. However, the present case differs from these precedents in that it does not relate to deficiencies of informing the primary market – the market on which financial instruments are issued by the issuer to the investors – through a prospectus. Instead, it concerns deficient information of the secondary market – on which financial instruments are traded amongst investors – through insufficient ad hoc disclosure.
This difference is crucial. In Kolassa and Löber, the CJEU located the loss of investors on the primary market at the place of the investor’s domicile provided that it coincides with the place of establishment of the bank with which the investor held his account. The account meant here was most probably a payment account, because the investor had paid the financial instruments from this account and thus arguably suffered damage there.
The same reasoning could not be applied in the case of Effectenbezitters because many of the investors had already bought (and paid) the financial instruments on the secondary market when the deficient disclosure occurred. The most likely place of the damage they suffered was thus not the place of their payment account, but that of their investment account, i.e. the account in which they hold the BP shares. The difference is important because the payment and the investment account are not necessarily administered by the same institution, and thus do not need to be located at the same place.
Yet in the end, the CJEU did not localise the damage at the place of the investment account. Its main argument was that this would not ensure foreseeability of the competent court in the same way as in the Kolassa and Löber cases (para. 34). Indeed, investors in the secondary market potentially hold their investment accounts anywhere in the world. The issuer could thus not know in which country it may be sued for insufficient investor information.
Instead, the Court opts for the place in which the issuer has to comply with his statutory reporting obligation for the purposes of the listing of its shares on a stock exchange (para. 35). This solution is remarkable. It deviates from the conclusions by AG Sánchez-Bordona, who suggested to disapply Article 7(2) Brussels I bis in such cases for lack of an identifiable place of damage. The Court instead adopts for a ‘market localisation’ of the damage, which has long been defended in the literature.
The collective nature of the action brought is, in the opinion of the Court, “not in itself decisive” for the determination of the place where the harmful event occurred in the sense of Article 7(2) Brussels I bis (para. 36). It thus does not matter for jurisdictional purposes whether the claim is brought on behalf of a number of investors or by an individual investor. In either event, the Dutch courts had no jurisdiction because the BP shares were not listed in the Netherlands.
Provisional Assessment
The ruling of the CJEU is to be welcomed. In particular, the Court must be applauded for rejecting to localise the at the place of the investment account, since such a localisation would have resulted in a dispersal of court competence. This would not only have led to unforeseeable venues from the point of view of the issuer, but also been disadvantageous for investors, as they could have brought a collective action exclusively at the domicile of the issuer (Article 4 in conjunction with Article 63 Brussels I bis).
The solution chosen by the Court to retain the place where shares are listed as the place of damage is certainly ingenious. This criterion leads to predictable results and chimes well with the regulatory duties, which largely depend on the place where the instruments are traded. It also facilitates the bundling of investor claims in collective actions, provided that the law of the country of listing disposes of a mechanism for collective redress. The Court is also right in holding that collective action and individual actions are not treated differently under the current Brussels Ibis regime.
Two points remain open: (1) the place of damage in case of dual listings in the EU, and (2) the place of damage in case of non-listed financial instruments (those that are traded over the counter – OTC). The Court will possibly have the opportunity to clarify these points in later rulings.
While the decision of the CJEU is thus satisfying from a policy point of view, it is hard to reconcile with the option offered in the Bier case between the ‘place where the damage occurred’ and the ‘place of the event which gives rise to and is at the origin of that damage’.
The CJEU allegedly determined the first place in Effectenbezitters, but it needs considerable tongue twisting to say that the ‘damage occurred’ at the place where the issuer failed to fulfil its statutory duties of information. This is rather the place at the origin of the damage than that where the damage occurred. This point is important, as it may create difficulties in the context of Article 4(1) of the Rome II Regulation, which has taken up the first-mentioned prong of the Bier case and refers to the ‘law of the country in which damage occurs’. In reality, the CJEU has created a new, special localisation rule for wrongful investor information cases, which deviates partially from the Bier case. Transposing this case law to the Rome II Regulation may be difficult.
This is merely a first assessment of the case. The European Association of Private International Law will use the occasion of this ruling for an online symposium on the localisation of financial loss. The question is of general importance and has already been addressed several times on this blog (see e.g. the CJEUs Volkswagen judgement or Rechtbank Rotterdam’s judgment in Petrobas). We will discuss it in more depth, with the first contribution coming from Laura van Bochove (Leiden).
Thanks for the comment, Matthias. I am not sure everybody shares this reading of the Court’s decision. In addition for a different assessment based on the variety and scope of the obligations to report of listed companies, see
https://eulawlive.com/op-ed-place-where-the-harmful-event-occurred-and-financial-damage-connected-to-breaches-of-obligations-to-disclose-information-by-an-issuer-of-securities-no-jurisdiction-i/#
Looking forward to the online symposium!
Many thanks, Marta! Disagreement is always valuable. Mr Valline’s underlines that information under the Market Abuse Regulation (Art 17) and other EU texts must be put on the internet, and disseminated throughout the EU. He derives therefrom that investors would suffer damage in any Member State. But since the information must be put on the internet, it will also be available world-wide, so the same argument could be made for jurisdiction of the courts outside the EU. In my mind, however, it seems a little far-fetched to conclude that a company whose shares are listed exclusively, e.g. in Madrid, could be sued in Australia, Thailand and Brazil, just by the fact that investors have investment accounts and access to the internet there. This would be indeed world-wide jurisdiction. The U.S. Supreme Court in Morrison v. National Australian Bank has rejected this approach as “extraterritorial” and instead limited itself to the jurisdiction at the place of listing or offering of the securities. The CJEU has chosen a similar direction.
Thank you, Matthias for your commentary. And thank you both Marta and Matthias for considering my comment on the judgment. Just a brief remark. My point was limited to the EU and the current EU regulatory context. The obligations to provide information are created by EU law (essentially, the Transparency Directive and the Market Abuse Regulation) for the benefit of all EU investors who, somehow, may be deemed to be operating in the same market. For this reason, it does not seem unreasonable to me to conclude that, when BP informed about the explosion in the Gulf of Mexico in the manner provided by EU law, the company knew that the information was targeting all EU investors (not only those based in the UK and in Germany) and, therefore, the company was assuming that any investor may make investment decisions on the basis of that information in any EU Member State. In any event, I do not think my argument will work outside the EU, because, if I am not mistaken, the information obligations imposed by the Transparency Directive and the Market Abuse Regulation are not meant to reach investors in third States. Thank you again.
Dear Enrique, Many thanks for your remark. Your view assumes that the EU legislator, by obliging issuers to disseminate information in the whole EU, also intended to open the jurisdiction of the courts in all of the Member States in cases of inaccurate information, provided that investors have investment accounts there. This may be a stretch. It must not be forgotten that Art 7(2) Brussels Ibis refers to the place of harm, and no harm is suffered merely by a lack of information. The harm is typically suffered where securities are acquired and sold, and this tends to be the place where they are listed. The CJEU decision is a bit misleading because it refers to the obligation to provide information at this place. The goal in any case is to limit the jurisdiction to the place of the market, and not allow for a forum auctori, which would be unavoidable if one were to open up courts in all Member States.
Dear Matthias, thank you again for your comment.
I never meant to imply that the EU legislator intended to open up jurisdiction with the Transparency Directive or the Market Abuse Regulation. The Directive and the Regulation impose obligations to disclose information for the benefit of all EU investors, who, somehow, are deemed to be acting in a common investment market. And, in my view, it is clear that the EU legislator was not thinking about jurisdiction when the Directive and the Regulation were enacted. It is the CJEU who, in Effectenbezitters, has established a link between jurisdiction and the said information obligations.
In its judgment, the court did not say that the place where the financial harm had occurred was the place of the market where the securities were acquired and sold (Frankfurt or London, in the case at hand). Instead, the court (paras 32-33) insisted on saying that, when financial harm is reflected on a bank account, the place where the bank holding this account is located may qualify as the ‘place where the harmful event occurred’ for the purposes of Article 7 (2), provided that the forum was predictable. It is at this point – the assessment of the predictability of the forum – where the court makes the argument of the obligations to disclose information.
The argument of the court (paras 34-35) is that, even though financial damages have been reflected on accounts held in the Netherlands, the Netherlands was not a predictable forum for BP because the company did not have any obligations to disclose information in the Netherlands – those obligations only applied in the UK and Germany, ie, in the States where BP was listed. In short, the court argues that having no information obligations in a forum equals the lack of predictability of the forum.
My criticism is that this equation (no information obligations = lack of predictability) does not work within the EU and with the current EU regulatory context under the Transparency Directive and the Market Abuse Regulation. When a company is listed in an EU Member State, it assumes information obligations under EU law towards all EU investors and, therefore, it targets all EU investors. Thus, I believe that, to some extent, such a company may foresee that disputes related to the accuracy of information targeting all EU investors may arise before the courts of any Member State. This is why, always within the EU, I do not see the argument linking the lack of information obligations in a particular Member State to a lack of predictability of the jurisdiction of the courts of that Member State.
That said, I should add that I understand your concerns about the need to limit jurisdiction under Article 7 (2) and to avoid an EU-wide jurisdiction to hear cases relating to financial damage at the place where the plaintiff holds her bank account. But I believe that a flawed argument should not be the means to achieve such a goal. Other avenues could be explored instead. Thank you again.