Directors' and shareholders' liability for capital increases

DIRECTORS' AND SHAREHOLDERS' LIABILITY FOR CAPITAL INCREASES 

Following the bankruptcy of online betting startup OneBet Holding AS (OBH), the founders of the company were sued by 18 investors who claimed repayment of the invested amounts based on alleged incorrect, misleading, and deficient information in connection with a capital increase. The founders were acquitted by both the District Court and the Borgarting Court of Appeal (LB-2022-82142).

In connection with capital increases in limited liability companies, the company itself, the board, the shareholders, the manager/investment bank, and other advisors may, under certain circumstances, be held liable for losses incurred by investors if the individual investor's decision to subscribe for shares is based on incorrect, misleading, or incomplete information.

Those who contribute to the preparation of a capital increase therefore have a responsibility to ensure that the information provided is correct, complete, and not misleading, and that essential information relating to the company is not omitted.

In the case of the capital increase in OBH, the founders of the company were sued, both as such and in their capacity as board members and managing director of OBH. No manager/investment bank was used.

The facts of the case and the verdict are quite extensive, but illustrate, among other things, certain matters that serve as useful reminders for both investors and companies and which needs appropriate focus in connection with capital increases and their marketing: 

- Claims in the investor presentation: The plaintiffs argued that OBH's business was incorrectly described in the investor presentation, including, for example, that the technical solutions of OBH were less developed than expected. The investor presentation contained only limited formulations about the status of the gaming platform, limited to formulations such as "Lean operation with top-of-the-line IT partners," while the investor presentation also included certain limiting risk factors related to the company's technical solutions . Based on such limited "claims" from the company's side, the Court of Appeal concluded that "the wording of the presentation does not say anything specific about the status of the gaming platform at the time of the presentation" and that investors could not, therefore, justify having specific expectations in this respect based on the investor presentation. The lesson for companies is not to make promises or statements in the investment documentation than they can reasonably support or deliver on. The lesson for investors is to read investor presentations and other investor material very carefully and to be extremely cautious about building specific expectations based on general/unspecific language in the investor documentatoin. If the information is vague and non-committal, this will, in practice, indicate a higher risk investment, and investors must act accordingly.

- Subsequent deviations: The plainfiffs argued that OBH did not develop as expected after their investment, based on the information provided in connection with the capital increase. Regarding the general development of OBH after the capital increase, the verdict states that the parties in the case agreed that the presentation of OBH in the investor presentation and other contexts was "characterized by strong optimism." Although the Court of Appeal emphasizes that one of the defendants "to some extent can be blamed for being overly optimistic," the Court of Appeal concludes that as long as the financial numbers presented to investors are based on correct information, this will give investors the opportunity to make their own independent assessments, and that the failure to do so, seek advice or obtain further information, will be at investors' own risk.

- The Importance of Risk Factors: Many are familiar with so-called “Risk Factors” often included investor presentations. The purpose of these is to highlihgt to investors both company-specific and other factors that may entail risk of the future being different from what the company at the time of the issuance wishes and hopes for. The plaintiffs argued that the risk factors in the OBH investor presentation appeared as "standard" and that the investors, due to their relationship with one of the founders, did not place particular emphasis on them. However, the Court of Appeal firmly states that "investors must be presumed to have read descriptions of risks in the investor presentation and on the subscription form. Failure to do so, regardless of the cause, is the individual investor's own risk." In practice, the Court of Appeal is stating the obvious - investors cannot just read the “selling” and optimistic part of the investor presentation but must take into account the totality of the information provided. For companies, this illustrates the importance of including thoroughly prepared risk factors in any investor presentation used in connection with capital markets transactions such as equity rounds, even if one manages the capital round oneself and does not use an external manager.

AGP regularly advise both companies and investors in connection with share issuances, bond loans, and other capital market transactions, both in listed and unlisted instruments. As the Court of Appeal's judgment shows, in line with a number of other previous court decisions, the liability risk for companies, boards, and arrangers is real, whilst investors must actively evaluate the investment opportunities presented to them and safeguard their rights.

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AGP is a law firm specializing in transactions, capital markets, and corporate. Advisory services related to capital increases in stock and public limited liability companies are one of our core competencies.