Securities claims in Denmark

Securities claims are on the rise here. In recent years, Danish and international investors have pursued indemnification before the Danish courts. As large Danish corporations are often listed on stock exchanges outside of the European Union, Danish companies also face securities claims outside Denmark, in the US for example.

In a private securities action under Danish law, investors are seeking indemnification from the issuer of shares (the company), the management or the Board of Directors. Claims are often based on either:

Incorrect or untrue statements in published information from the company (often in the prospectuses), or
Unjustified delay of the publishing of cooperative information.

In general, such claims are covered by D&O insurance policies. For large Danish companies, cover is, in general, provided via the London Market with (terms and conditions) wording drafted by large insurance brokers. Coverage disputes are to be settled within the Danish judicial system (arbitration or court) with Danish law applicable. Consequently, the London Market terms and conditions are subject to Danish legal interpretation methods.

Basis of liability under Danish law

Investors seeking indemnification have to satisfy the requirements of non-contractual liability under Danish law. Case law has established that the following conditions must be met in order to impose non-contractual liability:

The legal basis for liability is proved, normally misconduct/misrepresentation or negligence
An economic loss has been suffered, and
A test of causation between the loss and the misconduct can be satisfied.

Prospectus liability

Section 12(1) of the Danish Capital Markets Act requires a prospectus to include all information necessary to enable investors to make an informed assessment of the issuer and the rights attached to the securities.

The Danish Supreme Court has, in two rulings, specified the basis for prospectus liability on the wording of a prospectus, namely that:

Persons responsible for a prospectus can face liability for losses caused by defects in the prospectus which are of significant importance to an investor’s assessment of the issuer
The responsible persons acted intentionally or with negligence, and
The defects are attributable to the responsible persons.

On the question of causation, the Danish Supreme Court stated that if a prospectus suffers from material defects, there is a presumption that the subscription process would not have taken place, had the prospectus been correct. Thereby the burden of proof regarding causation in cases of prospectus liability is placed on the defendant.

From a D&O and PI (professional indemnity) insurance perspective, it is highly relevant to establish those persons that can be held liable for defective prospectuses. Besides the issuer and the persons listed in the prospectus as being responsible, it is recognised that board and management members, banks, accountants, lawyers and other persons involved may be held liable. The fundamental question is not who formally represents the issuer but whether the person has in fact taken part in the offering phase or in the drafting of the prospectus.

The Market Abuse Regulation of the European Union (MAR)

Reference should be made to MAR when considering liability outside of the prospectus. Together with the Danish Capital Markets Act, MAR forms the legal basis for investors seeking indemnification for losses caused by reliance on published information or where information is delayed or held back without justification.

According to MAR Article 17(1), an issuer of securities is required to inform the public of inside information, that directly concerns the issuer, as soon as possible.

Article 7 defines inside information as information:

a) of a precise nature

b) that has not been made public

C) that directly or indirectly concerns the issuer, and

D) that if it were made public, would be likely to have a significant effect on the prices of the financial instruments.

An intermediate step in a protracted process is deemed to be inside information (MAR Article 7(3)).

MAR Article 17(1) introduces a significant change in Danish law, as it replaced the 'reality principle' set out in Section 27 of the Securities Trading Act.

Large pending cases before the national and international courts

From March 2019 onwards, a number of Danish and international investors have filed class actions against the largest Danish bank, Danske Bank, and certain individuals for the purpose of seeking indemnification for declining share prices and violation of disclosure requirements following the money laundering case relating to the bank's Estonian branch.

Four class actions have been initiated before the Danish courts, and one civil action has been commenced in the United States. In August, the US action was dismissed with prejudice by the United States District Court for the Southern District of New York. The claimants have since filed a notice of appeal. According to Danske Bank’s interim report (Q1 to Q3) 2020, the total claim under the Danish class actions is approximately DKK 14 billion.

Another bundle of securities claims involve the former Danish bunker oil trading company, OW Bunker A/S. In March 2014, OW Bunker earned a market capitalisation of approximately DKK 5.3 billion in a public offering, only to face bankruptcy just seven months later in November 2014.

Four securities claims have been filed by Danish institutional investors, a consortium of private Danish investors and a consortium of primarily international institutional investors. Beside these filings, the estate of OW Bunker A/S has initiated a case against the issuer.

Adding further complexity to the procedural web, the former owner of OW Bunker (the private equity fund, Altor) and former members of OW Bunker’s management have filed a claim against Deloitte in Singapore for damages over breaches of their contractual audit obligations relating to the financial statements of the OW Bunker subsidiary, Dynamic Oil Trading (Singapore) Pte Ltd.

Another case that has attracted considerable attention is the civil litigation brought by the estate of the former Danish lighting company Hesalight A/S against the founder and CEO, three former members of the company's board of directors and the company's accountant. The estate claimed damages of DKK 200 million. It argues that the defendants had neglected their duties and responsibilities, in relation to dissipation of a DKK 562 million investment in corporate bonds from six institutional investors, and by presenting incorrect financial information in the company's annual accounts.

In its judgment of 31 March 2020, the court held the former CEO, two of the former members of the board of directors and the accountant jointly liable to pay damages for the amount of DKK 200 million. The court found that the fact the investors had not performed their own due diligence before investing in Hesalight, did not exclude civil liability, as the management had known the institutional investors had relied upon information in the company's annual accounts, including information that the annual accounts were confirmed by a state-authorised public accountant. The judgment is currently awaiting appeal to the High Court.

Comment

The number of securities claims in Denmark will probably continue to rise over the coming years. We now also see recovery companies such as Deminor Recovery Service operating in Denmark to assist shareholders in potential lawsuits against large companies and the management/board of directors in such companies.

As the claims become larger, the premium for D&O insurance in Denmark is also on the rise. It is therefore of the essence for large companies to ensure a sufficient sum on their D&O insurance, and it is necessary for insurance companies to ensure that the premiums collected and coverage are tailor-made for each company based on a thorough risk assessment.

Read others items in Professions and Financial Lines Brief - December 2020