In its judgement on 3 February 2016, case nº 23/2016 (hereinafter, the Judgement), the Plenary of the Civil Chamber of the Supreme Court confirmed the nullity of the purchase of shares offered in 2011 under Bankia’s IPO (Initial Public Offering), which the Appeal Court of Valencia had previously declared null.
Due to its importance, and to lay the foundation of what would be a flood of demands from other shareholders of Bankia, the Judgement has inundated pages of the national press throughout February. Bankia has recently announced its express plan to quickly refund money to small investors that purchased shares when the company went public in 2011, thus avoiding the incurring exorbitant — and surely unnecessary – procedural costs that the courts would bring (thousands of expenses that procedures generated by preference have already caused).
The way the Supreme Court reviewed the Judgement is laudable for its clarity, conciseness, and forcefulness. The reasoning pivots on the error of consent of the buyers of the Bankia shares motivated by the lack of veracity of the explanatory booklet, which was the basis for the IPO:
As it was the IPO of an entity that until now has not traded, its shares do not have a previous “history” of trading on an official secondary market, making the booklet the only informational channel available to small investors. In the process of admission to the trading of shares, an essential requirement is that the detail brochure provide information about the issuer and of its shares(…) such information is the decisive factor that a future small investor (unlike large investors or institutional investors) has at its disposal to assess the assets and liabilities of the issuer, the issuer’s financial situation, gains and losses, the issuer’s prospects, and the inherent rights of such shares. This is especially true in the case of small subscribers that invest according to advice from employees of the issuers, with whom they have a relationship of personal and commercial confidence.
If it turns out that the document contains economic or financial information that shortly after is exposed as seriously inaccurate by reformulating the issuer’s own accounts and for its clear situation of a lack of solvency, it is clear that the Court links the information deficits with the erroneous granting of consent (…). The key issue is that the purchasers of the shares offered by the bank (that comes from the transformation of a savings account where they had their savings), are mistaken as to the solvency of the entity and, consequently, the possible return on investment, and find that they have actually acquired securities of a company on the brink of insolvency, with some multi-million dollar losses undisclosed (on the other hand, they admit the existence of the benefits) and which must resort to the injection of an extremely high quantity of public money for its livelihood. Hence it is an excusable error in the subscription of shares, which vitiates consent.
After such analysis, the Judgement does not overlook a somewhat complex legal issue, but an equally important issue based on company law. The nullity of the sale of Bankia’s shares in its IPO is, de facto, the nullity of the capital increase that was the basis for the operation. This would prevent, as an important doctrinal sector, the practice of contractual nullity action by a defect in consent, resulting in the only way to claim responsibility for damages resulting from the inaccuracy of the booklet.
The Supreme Court, however, ruled out this approach, relying for this purpose on the Judgement of the Court of Justice of the European Union on 19 November 2013, that confirmed the pre-eminence of the rules of the stock market over the standards of the Directive on companies. This opens the door to the possibility of contractual nullity due to a lack of consent when, like in the case that resulted in the Judgment, the error leading to the provision of consent is substantial and inexcusable.
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