Director liable for price loss investors
The court of Amsterdam recently delivered an interesting ruling about the liability of directors in issuing misleading information about the company results. The shareholders of the bankrupt company Landis jointly instituted proceedings against the former directors. Dutch Corporate lawyer Marco Guit explains the case.
Directors liable for negative balance in bankruptcy
Landis went bankrupt in 2012. Landis had been a listed company since 1998. Shortly before the bankruptcy the Enterprise Court found that there had been mismanagement in the areas of, among others, financing policy, administration and financial accounting. The Enterprise Division held the board of management and the Supervisory Board liable. After the bankruptcy, based on the trustee’s claim, the court sentence these parties to pay the negative balance in the bankruptcy and damages, due to directors’ and officers’ liability.
The VEB (Association of Stockholders) institutes damages action on behalf of aggrieved investors
The aggrieved investors, represented by the VEB, then also sought recovery for their loss. The VEB held the directors liable for the price loss suffered by the shareholders, based on, among others, liability for the balance sheet and misleading public reporting. The court ruling showed that Landis has systematically for years presented a much too rosy a picture of the company’s financial situation. The turnover was (intentionally) presented millions too high in the annual accounts and in other areas the financial reporting was also seriously lacking.
Liability for the balance sheet: misleading presentation annual accounts
Pursuant to article 2:139 of the Civil Code, directors are jointly and severally liable for damage suffered by third parties due to a misleading presentation of the situation of the company in the annual accounts or other interim figures. The court finds, following the previous ruling, that the annual accounts for 1999 and 2000 contained misleading information. The scope and the extent of the corrections showed that there was a pattern of manipulating the figures and covering up the reality of the situation. The shareholders can be considered third parties as defined in article 2:139 of the Civil Code, which means the directors are liable.
Misleading media coverage is wrongful act
The statements by the directors in press releases were also misleading. For example, profit expectations were expressed in 2001 of at least €0.40 per shares, whilst it was known at that time that the loss would be €1.06 per share. The directors knew that the inaccuracy in the financial accounting and the statements in the press would give a misleading impression. In this case, as directors of a listed company they should be aware of the importance of accuracy of, among others, their statements in the press.
Financial accounting for reference investor
These actions are seriously culpable and therefore wrongful towards the investors. The court emphasizes the interest of (accurate) regular financial accounting of a listed company. The accounting also intends to provide the investing public, the reference investor, with the opportunity to form a balanced view of the profitability and the chances for the future of that company. The reference investor shall base his investment decision on this.
Misleading figures: price loss shareholders
The aggrieved parties in this case were unable to properly take this decision because they had been misinformed. They were robbed of the chance to take the right decision about buying, selling or holding their shares. As it cannot be denied that the wrongful information to a certain extent impacted the share price, the possibility that the investors suffered damage seems plausible. There is therefore a causal connection. Follow-up proceedings shall determine the exact amount of the damages.