Court dismisses investor claims relating to restructured bank
Three recent Spanish pro-bank judgments dismissed misselling claims by investors in a financial entity which was rescued by the Spanish State during the financial crisis. Non-reliance and disclaimer clauses included in the contractual documentation, the publicly available information on the actual financial position of the financial entity at the time of the investment, and the causal link between the post-sale legislative activity and the final loss of the investment were key to dismiss the investors’ claims.
The global financial crisis that started in 2008 caused the value of Spanish real estate assets to plunge. Financial entities with large exposures to the real estate market were thus badly affected. There followed intense legislative activity aimed at strengthening the solvency of Spanish banking entities. As was reported in the media,1 there followed increased investment interest in Spanish banking assets.
In 2010, as part of a restructuring, two Galician saving banks (cajas de ahorro) merged into Novacaixagalicia, with a net worth (according to records) of EUR 1,771 million.
The merged savings bank did not comply with new core capital ratio requirements, so Novacaixagalicia sought capital investment from investors. During early 2011, marketing documentation was prepared for that purpose (the Documents). The Documents contained certain disclaimers regarding the statements made, and the financial information provided, about the savings bank.
By September 2011, not enough investment had been forthcoming, so Novacaixagalicia requested 100% of the necessary funds from the National Restructuring Fund (NRF). As a condition of that funding, Novacaixagalicia (still a savings bank) had to transfer its financial activity to a bank and, accordingly, the bank NCG Banco, S.A.U. (NCG) was incorporated. Before investing in NCG, the NRF asked three independent entities to carry out due diligence on NCG to assess the value of the business transferred from Novacaixagalicia to NCG.
It was concluded that Novacaixagalicia’s business value was EUR 181 million, not EUR 1,771 million (as was stated on 29 November 2010, when the merger into Novacaixagalicia occurred). The NRF invested EUR 2,465 million in NCG on 30 September 2011, obtaining 93.16% of NCG’s share capital, while Novacaixagalicia obtained the remaining 6.84% of NCG’s share capital in exchange for the transfer of its banking business.
After the NRF investment, several Galician companies and individuals acquired a minor participation in NCG’s capital from the NRF (the Private Shareholders). In June 2012, NCG’s annual accounts reflected the accounting adjustment due to the difference in value of Novacaixagalicia’s business (ie, from EUR 1,771 million to EUR 181 million) (the Adjustment). Subsequent financial and legislative events caused the NRF to redress the balance between the capital and the net worth by reducing NCG’s capital to zero, and increasing NCG’s capital with new funds for the purposes of providing it with new financial resources. This reduction and simultaneous increase of capital meant that the Private Shareholder’s participation in NCG was lost. They sued NCG and the NRF for damages on, essentially, the following grounds: (i) they believed that they were investing in a sound bank, given the assertions contained in, among others, the Documents; (ii) both NCG and the NRF hid that it was necessary to make the Adjustment; and (iii) the NRF was aware of new legislation (requiring additional capital requirements), that was to cause the loss of the Private Investors investment at the date of the execution of NCG’s shares sale and purchase agreement entered into by the Private Investors (the SPA).
The Galician Court of Appeal has decided in favour of the NRF and NCG. Of importance in the Court’s reasoning was that:
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The Documents contained a disclaimer which specifically stated that any investors would have to make their own legal and financial assessment of the transaction.
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The SPA stated that there were no guarantees as to the future value of the acquired shares, and it contained non-reliance wording.
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The Private Investors were sophisticated investors who had access to professional advice concerning how to assess the risk of the relevant investments, as well as the economic and political context in which the investments were made.
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The information contained in the Documents was out of date, since NCG’s value had changed dramatically between the date of the Documents and the date of purchase of the shares.
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The need for an Adjustment in NCG’s annual accounts was foreseeable, in light of the dramatic difference between Novacaixagalicia’s value in November 2010 (EUR 1,771 million) and in September 2011 (EUR 181 million).
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The cause of the Private Shareholders’ loss was the reduction and simultaneous increase of capital made by the NRF; this was necessitated by legislation, of which the NRF was not aware when the Private Shareholders brought their shares.
Comment
These rulings confirm that it is difficult for sophisticated investors in high risk investments, against a backdrop of political and financial turmoil, to escape their contractual bargain. A party that signs up to a risky investment, accepts contractually that it has done its own due diligence and has not relied on the information provided, cannot, absent any deliberate misrepresentations, complain if the investment does not progress as it had hoped.
Further information
This article is part of the European Finance Litigation Review, a quarterly publication on recent developments in the finance litigation and regulatory sector in key European jurisdictions. For more information please contact Amy Edwards amy.edwards@allenovery.com.
Footnotes
1. http://www.wsj.com/articles/ SB10001424052702304858104579262001343600012
