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Prospectus Liability and the Role of Gatekeepers as Informational Intermediaries: An Empirical Analysis of the Impact of the Statutory Provisions on Italian IPOs

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Abstract

This article analyzes market reaction to the introduction into Italian legislation of a statutory system of (IPO) prospectus civil liability enacted in April 2007 on the basis of Directive 2003/71/EC. In particular, we study the effects of the new regulation on gatekeepers, such as underwriters and auditors who are commonly qualified as information intermediaries. We analyse the effects on average underpricing, fees charged by the underwriters, syndicate composition and reputation, and auditor participation. Although we find only weak statistical evidence that the level of underpricing has increased after April 2007, there is a statistically significant tendency to have one of the Big Four auditors in post-April 2007 IPOs, with lower participation of international banks in syndication and sharing of prospectus liability. Moreover, after April 2007 we observe an increase in the reputation of the underwriters acting as responsabile del collocamento with lower underwriters’ fees charged.

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Data source: authors’ calculations

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Notes

  1. [2003] OJ L345/64–89. The Prospectus Directive has been replaced by the Prospectus Regulation, Regulation (EU) 2017/1129 [2017] OJ L/12–82. We do not further refer to this new regulatory regime as it is irrelevant for the purposes of this article.

  2. On the Prospectus Directive see Schammo (2011). On the different Member States, see, comparatively, Hopt and Voigt (2005); more recently, ESMA, Report. Comparison of liability regimes in Member States in relation to the Prospectus Directive, 30 May 2013, 2013/619, https://www.esma.europa.eu/sites/default/files/library/2015/11/2013-619_report_liability_regimes_under_the_prospectus_directive_published_on_website.pdf (accessed 10 December 2018).

  3. Indeed, from an operational perspective the IPO is the event where a company seeks to sell its shares to investors while at the same time representing the moment of admission to trading on a (regulated) market.

  4. See also Wundenberg (2015), p 139. On the different levels of harmonization by way of directives in the securities regulation field, see Gerner-Beuerle (2012).

  5. For the discussion of a case decided by the Dutch Supreme Court within the framework of the new Prospectus Directive, with respect to the legal problem of causation, see the comparative analysis of de Jong (2011).

  6. See the seminal articles by La Porta et al. (1997); La Porta et al. (1998); La Porta et al. (2008); La Porta et al. (2006). For a more recent discussion of the ‘leximetric’ approach, see Katelouzou and Siems (2015). See also Spindler and Gerdemann (2016); Hamann (2014), p 40. Two contributions that analyze the impact of a change in legislation for jurisdictions outside the US are, for instance, Ramsay and Sidhu (1995) and Armour et al. (2008).

  7. See La Porta et al. (2006), p 2, for literature on the point. As such, the Italian statutory regime can be considered as an attempt to clearly define the responsibilities for those involved in the prospectus elaboration, as pointed out by these authors for the case of the Netherlands (at p 4). We point out that enforcement of law is essential in securities regulation and that an ex ante better designed system of liability helps ex post in enforcing law. On enforcement in securities regulation see Coffee Jr. (2007).

  8. Bruno (2008). According to this ‘statutory law neutrality argument’, the reconstruction of the issue of prospectus liability and its possible solutions by legal doctrine on the basis of general principles and general clauses of the Italian legal system had already provided a (consistent) system of implicit regulation that has not been altered in a substantial way by the introduction of statutory law.

  9. We intentionally exclude from the analysis of this article the criminal dimension of prospectus liability, considering this dimension as constant. La Porta et al. (2006), p 9, develop and index criminal sanctions for the distributor and the accountant. According to their results, Italy gets a value of 0.50 (for comparison: France 0.33, UK 0.42, Germany 0.50, Spain 0.50 and USA 0.50). In Italy the crime of falso in prospetto has been a constant in recent decades and the relevant provision is now contained in Art. 173-bis TUF, on which see Lunghini (2012).

  10. La Porta et al. (2006), pp 15, 16, assign Italy 0.22 with respect to the liability standard (for comparison: France 0.22, UK 0.66, Germany 0.00, Spain 0.66 and USA 1.00).

  11. See Ferrarini and Giudici (2005).

  12. We acknowledge that the results of a recent paper have questioned the role of underwriters as reputational intermediaries (certification role) for Italian IPOs (in comparison to the US case), see Scribano (2015a).

  13. We translate this into English, in short, as party responsible for the prospectus, and better and properly define the notion in Sect. 3.2.

  14. This article covers also the period of the economic and financial crisis that started in 2008. We are aware of the possible effects of the crisis on IPOs and the variables we have decided to study but stress that the kind of analysis we conduct is not able to catch these possible effects. A more appropriate way to reach conclusions on this issue would be to comparatively study these variables for all 28 Member States and to check how the crisis impacted the IPOs internationally. This would require detailed data from 28 Member States, which is beyond the scope of this article.

  15. For a very recent treatment of the legal and economic framework for the rationale justifying the system of disclosure in case of IPOs and related forms of liability, see Fox (2016).

  16. On the role of underwriters, see Gilson and Kraakman (1984), p 613.

  17. See Kraakman (1986).

  18. Gilson and Kraakman (1984), p 620: ‘In essence, the investment banker rents the issuer its reputation’. Apparently, the first article in financial economics to formalize the certification role of underwriters was by Booth and Smith (1986). On the several levels of reputation of underwriters, see Ferres et al. (1992).

  19. See Kraakman (1986); Fox (2016), p 690.

  20. The first level is a rule of strict liability for the issuing company. Others (underwriters and other parties) may be subject either to a due diligence defence (second level) or to a reliance defence if somebody else certified the provided information (third level). See Gerner-Beuerle (2009a), p 334; Giudici (2008), p 218. We do not consider here section 12(a) SA and section 10(b) and Rule 10(b)-5 SEA, see Gerner-Beuerle (2009b); on section 11 see also Cox et al. (2013), p 485; Ventoruzzo (2003), p 115.

  21. For an exhaustive overview of this debate over the last three decades, see Sher (2006a), p 405; see also Sher (2006b), p 456, focusing on the problem of moral hazard.

  22. See e.g. Fox (1984), p 1025.

  23. See Choi (1998).

  24. Partony (2001).

  25. We do not further discuss the issue. A comparative empirical analysis is provided by La Porta et al. (2006) with respect to the liability standard specified at p 7.

  26. Testo Unico della Finanza, legislative decree no. 58 of 24 February 1998.

  27. Legislative decree no. 51 of 28 March 2007 GU no. 94 on 23 April 2007. This prospectus liability system includes IPOs, secondary offerings, and takeover bids. Art. 113 TUF provides the link between the listing of equity securities on a regulated market and the prospectus for the offering according to Art. 94 TUF.

  28. See Portale (1982); Ferrarini (1986); Ferrarini (1987); Perrone (2003), p 65; Macchiavello (2009a); Macchiavello (2009b); Giudici (2008), p 221; Facci (2009); Anelli (2010); Giudici (2014a), p 984; Fioruzzi et al. (2012).

  29. This is the case for the solutions proposed after the analyses by Portale (1982) and Ferrarini (1986).

  30. See, e.g. Jaeger (1986).

  31. See, e.g. Tribunale Milano, 11 January 1988, with a note by Ferrarini (1988) and Appello Milano, 2 February 1990, in Giur. Com. (1990), p II/795. For other cases see Anelli (2010), p 421. A judgment of 2008 has considered prospectus liability for underwriters, sponsors and auditors in terms of contractual liability: it was the case of the IPO of Freedomland in 2000, Tribunale di Milano, 25 July 2008, in www.ilcaso.it.

  32. The decision concerned a secondary offering (capital increase) of an Italian bank in 1991, see Cassazione civile, 11 June 2010, no. 14,056, with a note by Chicchinelli (2014); Anelli (2010); Afferni (2011); Rizzuti (2011); Zanardo (2012). The inclusion of prospectus liability in the realm of tort law has been further confirmed in an obiter dictum by Cassazione civile SU, 8 April 2011, no. 8034, with a note by Gardella (2011).

  33. We use the term tort law as synonymous to accident law, meaning the body of law which regulates unintentional harm between parties (injurers and victims); see Shavell (2007), p 1; Cooter and Ulen (2000), p 289.

  34. The taxonomy about the liability standard proposed by La Porta et al. (2006), p 7, for Italy formally refers to the liability system before statutory law was introduced in 2007 and gives Italy 0.22 (at p 16).

  35. Art. 98-ter.3 TUF considers prospectus liability in collective investment undertakings as a form of pre-contractual liability. A recent decision decided the issue in terms of contractual law, so reversing the typical case law on this issue (Cassazione civile, 12 July 2012, no. 14188). The extent to which this last decision can be expanded to the case of prospectus liability for IPOs is doubtful also because a very recent case of the Tribunale di Milano (24 May 2017) referred prospectus liability to the context of tort law with explicit reference to the two decisions of the Cassazione 14056/2010 and Cassazione SU 8034/2011, above n. 32.

  36. We prefer to leave the Italian name in the text and to attempt an English translation in terms of the party responsible for the distribution of the shares and which organizes the consortium of banks (in short the party responsible for the prospectus). This translation puts emphasis on what this party (usually a bank) does.

  37. The core argument is that the prospectus aims at protecting parties that are not determined ex ante, the general principle of neminem laedere being applicable, Cassazione 14056/2010, above n. 32.

  38. The decision of the Cassazione SU 8034/2011 (above n. 32) has recently been used also by the Tribunale di Milano, above n. 35 in order to argue the tort law nature of prospectus liability in Italy.

  39. Although auditors are not mentioned in Art. 94.8 TUF, their liability in the Italian IPO context has been argued by Giudici (2008), p 375. This solution is not fully agreed on in the Italian doctrine, see Anelli (2010), p 417. In general on auditors, see Giudici (2012).

  40. On the point see also Sartori (2011), pp 3 and 7; Anelli (2010), p 416; Facci (2009), p 128; according to Giudici (2008), p 227, business practice is such that the issuer voluntarily takes liability for the entire prospectus as a consequence of the particular liability regime of the responsabile del collocamento. The partial liability case is actually not universally shared in legal doctrine. Indeed, according to Bruno (2008), p I/787, the wording of Art. 94.8 TUF supports an interpretation in favour of joint liability among at least two parties for whatever part of the prospectus.

  41. We do not take into consideration the issue of the liability of the directors of the company as was done by La Porta et al. (2006), p 7, on which see Giudici (2008), p 233 and p 342; Angelici (2010).

  42. In Italian: Il soggetto che organizza e costituisce il consorzio di collocamento, il coordinatore del collocamento o il collocatore unico.

  43. The principle of recovery for victims among injurers in terms of their joint and several liability is a general rule under Italian civil law, see Sartori (2011) p 3, and more extensively Violante (2004).

  44. See Giudici (2008), p 387, also for the notation that the Italian legislator extended liability also to this actor not explicitly included in Art. 6 of the Prospectus Directive. See also Sartori (2011) p 4; Facci (2009), p 142.

  45. The Article provides a due diligence rule where the parties mentioned can demonstrate to have used proper diligence (ogni diligenza) to ensure that information was factually correct and did not omit anything to alter its sense. Ogni diligenza has been interpreted by Italian authors on the basis of the US experience with different results in terms of strict liability (responsabilità oggettiva) and diligence (responsabilità per colpa), see Bruno (2008), p I/791; Giudici (2008), p 231; Facci (2009), p 131; Sartori (2011), pp 1-2.

  46. See Bruno (2008), p I/794; Giudici (2008), p 236; Facci (2009), p 152; Sartori (2011), p 5.

  47. So that after the introduction of the statutory regime, the system appears more favourable (at least in terms of clarity) to investors in relation to burden of proof and causal connection, which can be seen as an improvement of the liability regime. See Art. 2697 Italian Civil Code and Art. 1218 Italian Civil Code.

  48. See Art. 2946 Italian Civil Code for the ordinary prescription of 10 years and Art. 2947 Italian Civil Code for 10 years for torts.

  49. Recent literature has pointed out the importance of private enforcement as an alternative or complementary way to enforce the law, see Ferrarini and Giudici (2005); Coffee Jr. (2007); Giudici (2009); Poelzig (2015); Heil and Lee (2016).

  50. Possibly under Art. 140-bis Codice del Consumo, see Giudici (2008), p 149, and the preceding pages, also for a comparison with the US system. See Giudici (2011), p 191; Afferni (2013), p 1282. For instance, a recent decision of the Corte d’Appello di Firenze has rejected the possibility of using class actions, see the note by Iacumin (2015).

  51. La Porta et al. (2006), p 16, give Italy 0.48, though in general they stress the relatively low importance of this instrument to support financial markets, at p 20.

  52. Shavell (2007), p 7, for the simple model for unilateral accidents; Cooter and Ulen (2000), p 300.

  53. For a complete comparative analysis of the complex issue of the nature of tort law in terms of compensatory scope or deterrence scope, see Giudici (2008).

  54. A unilateral accident is where the victim’s behaviour cannot influence the risk of accident and he/she cannot take precautions to prevent it (i.e., the victim does not cause the accident), Shavell (2007), p 178. See also Fox (2016), p 694, for the application in the context of offering of new securities. A bilateral accident refers to the situation where the victim’s behaviour can influence the risk of accident and he/she can take precautions to prevent it (i.e., the victim causes the accident together with the injurer), Shavell (2007), p 182. One should properly distinguish between unilateral harm and bilateral harm and unilateral precaution and bilateral precaution to reduce the risk of accident, see Cooter and Ulen (2000), p 311. We assume that in the context of IPOs the problem regards solely possible unilateral harm (on the side of the investor) and possible bilateral precaution to reduce the risk of harm (the injurers on one side and the investors on the other). Undoubtedly, possible considerations can be made also in terms of reputational harm for the issuer and gatekeepers who lend reputation.

  55. The question is asked also by Anelli (2010), p 428, in terms of concorso di colpa of the investor. This point was considered by Cassazione civile, 3 March 2001, no. 3132, with a note by Perrone (2002), without an explicit reference to the notion of reasonability.

  56. Art. 94 TUF includes two slightly different versions of the reasonability criterion (ragionevole affidamento, reasonable reliance vs investitore ragionevole, reasonable investor) but both cover misrepresentation (i.e. misstatement or omission), see also Facci (2009), p 147.

  57. Art. 94 TUF differs from section 11 SA which is normally interpreted as not requiring a form of reliance of the investor with the exception of her/his knowledge of the untruth or omission, see Giudici (2008), p 218; Ventoruzzo (2003), p 10. For the reasonability criterion of materiality in the secondary market in the fraud-on-the-market-theory in the US system, see Giudici (2008), p 254; Angelici (2010), p 25; Ventoruzzo (2003), p 81; de Jong (2011), pp 357 and 367; Ferrell and Roper (2015).

  58. Giudici (2008), p 219; Anelli (2010), p 428. For the liability of Consob, see Cassazione civile 3132/2001, above n. 55; Cassazione civile, 25 February 2009, no. 4587, with a note by Poto (2009) and Cassazione civile, 17 November 2016, no. 23418.

  59. The reasonable investor in this liability system could have a direct connection also to the reasonable investor of the insider trading regime (Art. 1.2 Directive 2003/124/EC [2003] OJ L339/70, in Art. 181.4 TUF), in general see Facci (2009), p 147.

  60. See also Giudici (2008), p 219.

  61. On the need for a (mandatory) disclosure system, see Easterbrook and Fischel (1984); Coffee Jr. (1984); Romano (1998); Fox (1999).

  62. Institutional investors (vs retail investors) would probably be able to afford the costs of verification and to profit from this knowledge, see also Perrone (2002), p II/27, who, considering a bilateral accident (concorso di colpa), distinguishes between the two types of investors (but see also Facci (2009), p 149). Alternatively, the system could be qualified either in terms of bilateral accident, where both parties can take precautions and share liability, or in terms of the cheapest cost avoider model. In this latter case, either the injurer or the victim can take precautions: liability is attached to the subject who can prevent the accident with the least cost (see e.g. Shavell (2007), p 189; Ferrarini (1987), p. I/453); this is actually the symmetric argument of the lowest cost provider of information as argued by La Porta et al. (2006), p 5.

  63. See Bruno (2008), p I/792; Giudici (2008), p 236; Facci (2009), p 151; Sartori (2011), p 5.

  64. Shave1l (2007), p 181.

  65. Shavell (2007), p 193. With respect to the issuer (and/or the offeror) the IPO is a one-shot game and intermediaries serve as gatekeepers with their reputational capital, see also Ferrarini (1987), p I/462.

  66. See also Ferrarini (1987), p I/462.

  67. Assuming the level of care as sufficient to escape legal liability, Hanley and Hoberg (2010) show that investment in information production in the pre-marketing stages reduces the level of underpricing and the necessity to discover information in the bookbuilding period.

  68. As mentioned, in Italy there have not been many cases of prospectus liability for the IPO context and it is difficult to assess whether Italian courts are able to properly identify the due diligence standard for the issuing company and the different gatekeepers in order to ultimately create a coherent system.

  69. Cooter and Ulen (2000), p 340.

  70. Namely, the problem of judgment-proof injurers, i.e. potential insolvent injurers, Shavell (2007), p 230.

  71. Indeed, the typical Italian IPO is structured in a global offering divided into a public offering for retail investors according to Italian rules and regulations, and a private placement for institutional investors according to Regulation S, Rule 144A Securities Act. The major difference with the US system is that while share allotment to retail investors in the public offering is subject to strict rules to avoid discrimination and ensure the general principle of equal treatment among retail investors, distribution to institutional investors in the private placement is completely free, as in the US system. There are also two consortia with different characteristics, see Boreiko and Lombardo (2011); Giudici and Lombardo (2012); Giudici (2014b).

  72. The sponsor finds its definition in Art. 51 of Regolamento Emittenti Consob and then in the Regulation of Borsa Italiana S.p.a. It is the financial firm that collaborates with the company in the offering procedure. For an analysis of its possible liability, see Nuzzo (2002).

  73. See Giudici (2008), p 389. In the old regime without statutory law the problem of a possible evasion of liability by using a less solid underwriter was already raised by Ferrarini (1987), p I/450.

  74. The problem is that from a legal perspective the notion of responsabile del collocamento seems to refer (only) to the party expressly mentioned as being responsible for the public retail offering and not for the entire global offering, which includes also the private placement for institutional investors.

  75. The economic dimension of the (global) offering is concentrated in the private placement: institutional investors’ demand signals the final offering price by way of the bookbuilding system, and the role of the lead manager and global coordinator for the determination of the offering price is crucial. It follows that splitting the position of the party responsible for determining the offering price from the liability regime can weaken the system of protection, see also Giudici and Lombardo (2012). In general, see Giudici (2008), p 387, concluding for an extensive liability system. See also Macchiavello (2009b), p 816; Anelli (2010), p 417; Cassazione SU 8034/2011, above n. 32.

  76. Reconta Ernst & Young S.p.A., PricewaterhouseCoopers S.p.A., Deloitte & Touche S.p.A., and KPMG S.p.A.

  77. In the past there have been several articles on underpricing and prospectus liability. In favour of this hypothesis, see, e.g. Tiniç (1988), studying in particular the level of underpricing before and after the introduction of the liability regime of the Securities Act of 1933; for a formal model, see Hughes and Thakor (1992).

  78. See Alexander (1993). For more recent (economic) scholarship on this theory, see Hanley and Hoberg (2009); Lin et al. (2013).

  79. Alexander (1993), p 33.

  80. Alexander (1993), p 44.

  81. Alexander (1993), p 46.

  82. We are not aware of any study in Italy analyzing this issue from an empirical perspective. For other countries, see the literature provided by Lin et al. (2013).

  83. We do not cover here the issue of the amount of damages, for which see Bruno (2008), p I/795; Giudici (2008), p 239.

  84. See Gerner-Beuerle (2009b), p 491.

  85. According to Coffee Jr. (2007), p 287, the listing premium paid by foreign issuers not registering on the basis of section 5 SA but just using Rule 144A is less pronounced than that paid by issuers cross-listing by registering also in the US, so becoming subjects to US securities regulation and enforcement.

  86. See Gerner-Beuerle (2009b), pp 489–491.

  87. According to Alexander (1993), p 33, in the US system it is possible to cumulate suits according to the Securities Act of 1933 and the Securities and Exchange Act of 1934.

  88. Alexander (1993), p 37, after discussing a case states, ‘In such a case, there would be no liability for the price decline even if the underwriter knowingly overpriced the stock, as long as the underwriter did not conceal any material information’.

  89. On this point with respect to an Italian case, see Giudici and Lombardo (2012), p 922.

  90. This is the event studied by Tiniç (1988).

  91. The extent to which the Italian market for underwriting is more or less open to competition would also have an impact on the increase in fees.

  92. Active in Italy from May 2009.

  93. Except for the IPO of Credito Artigiano in 1999 offered for retail investors only.

  94. See Chen and Ritter (2000).

  95. It should be stressed that not all IPOs disclose in the prospectus underwriters’ remuneration, so this number might be somewhat higher.

  96. For example, Finmatica with 692%, I.NET with 170% or Gandalf with 131% underpricing, which went public in November 1999–March 2000.

  97. For example, CHL with 139% or Italdesign-Giugiaro with 56%.

  98. One bank can take on more than one role in any single IPO. To keep the Table manageable we drop two infrequent functions of the underwriters—Coordinator of public or institutional offerings where the two are coordinated by different banks (4 and 9 cases in all IPOs).

  99. Enervit, Ferragamo and Brunello Cucinelli do not report any liability for underwriters who are not responsabile del collocamento.

  100. See http://bear.warrington.ufl.edu/ritter/ipodata.htm.

  101. Banca Commerciale Italiana and Mediabanca.

  102. We already used this methodology in Boreiko and Lombardo (2013).

  103. In the case of several global coordinators, we took only the corresponding proportion of the global offering value. Moreover, we proxy the underwriters’ reputation by the total value of the shares sold in the IPOs that were underwritten by the particular underwriter, and not by the market value of the IPOs after listing, arguing that the reputation of an underwriter is correlated with its ability to market the IPO shares rather than with its ability to sell a very small portion of the share capital of large firms to be listed.

  104. We are not aware of (recent) literature on the industry of underwriters in Italy. In any case, see Scribano (2015a).

  105. See Ferrarini and Giudici (2005).

  106. For the role of auditors as important gatekeepers in Italy, see also Scribano (2015b).

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Acknowledgements

We thank Paolo Giudici, Federico M. Mucciarelli and Mathias Siems for helpful suggestions and comments on a previous version of this article. We also thank the anonymous referee. We remain of course solely responsible for the content of this article.

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  1. Assistant Professor of Corporate Finance, Faculty of Economics and Management, Free University of Bozen/Bolzano, Bolzano, Italy

    Dmitri Boreiko

  2. Associate Professor of Economic Law, Faculty of Economics and Management, Free University of Bozen/Bolzano, Bolzano, Italy

    Stefano Lombardo

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  1. Dmitri Boreiko
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Given the different scientific competences of the two authors, for the purpose of academic evaluation it has to be mentioned that Sects. 1, 2 and 3 of this article were written by Stefano Lombardo, Sect. 4 was written jointly by Stefano Lombardo (the legal part) and Dmitri Boreiko (the economic part), Sect. 5 was written by Dmitri Boreiko, while Sects. 6 and 7 were written by Stefano Lombardo.

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Boreiko, D., Lombardo, S. Prospectus Liability and the Role of Gatekeepers as Informational Intermediaries: An Empirical Analysis of the Impact of the Statutory Provisions on Italian IPOs. Eur Bus Org Law Rev 20, 255–284 (2019). https://doi.org/10.1007/s40804-019-00130-6

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