Exact but Misleading Information

25 June 2004

Delphine Simon

On 26 September 2003, the Court of Appeal of Paris decided that a listed company can be held liable for publishing misleading information if a material fact capable of affecting share prices is omitted from publication.

In the case referred to above, a listed company published an announcement in a daily newspaper forecasting losses for the coming year. As a consequence of the announcement, some shareholders sold their shares at a share price of 41 €. However, five days after the publication of the announcement, the company announced that it was to be bought out by an Italian group and that the shares would have a guaranteed share price of 78 €. The shareholders who had sold at 41 € issued proceedings against the company for the difference between 78 € and 41 € for every share sold.

Under Article 2 of the Commission des Opérations de Bourse Regulation (the French Stock Exchange Commission, now known as the “Autorité des Marchés Financiers”), listed companies are required to provide complete and accurate information to the public. However, the information contained in the announcement was accurate and the shareholders did not, in fact, allege that the information was inaccurate. The argument put forward by the shareholders was that the failure to include the imminent agreement with the Italian group in the announcement was a breach of Article 2. Therefore the sole issue before the court was whether the omission of the imminent deal, although it had not been finalised, could constitute a violation of Article 2. This issue highlights the difficulties faced by companies in trying to balance the requirements of Article 2 against confidentiality and an obvious reluctance to disclose deals that may be in the pipeline but have not yet been finalised.

The court decided that the information was inaccurate or at least, misleading, conveying as it did a message of excessive pessimism on the prospective share value and failing to make reference to the deal that would have a material effect on share value. The court decided that the damage suffered by the shareholders was the “loss of an opportunity” to sell their shares for the guaranteed price of 78 €. As the opportunity was almost certain, the court awarded the shareholders damages equal to approximately 90% of the difference between 78 € and 41 € for every share sold between announcements.

This judgment raises concerns for listed companies since they can no longer be sure that an accurate representation of the facts will absolve them from liability. It is difficult to imagine how listed companies will be able to discharge their obligations under Article 2 without violating other obligations such as confidentiality. One can only hope that the Article 2 obligation will be more clearly defined by the court in the future.