New case law about liability for board members' misleading information in private placements


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In December 2022, the Supreme Court of Norway issued a judgment clarifying the board's disclosure obligations to investors. The judgment discusses the due diligence requirements that apply to directors in investor presentations, including the responsibility for incorrect information and the responsibility for forecasting the company's development, which is communicated to investors.

For investors, the key takeaway from this judgement is clear: You cannot take the board's forecasts and predictions for granted. The risk of whether or not assumptions about the future will turn out to be true, lies with the investors. The Supreme Court communicates that the threshold for holding board members liable for such information is very high.

On the other hand, investors can safely rely on factual and verifiable historical information given by the board. This can include information about the company's assets, debt, or intellectual property, to name a few. As opposed to forecasts or predictions, this information is either true or false. The board therefore has an obligation to disclose correct information of this kind.

In the case before the Supreme Court, investors in a Norwegian company sued members of the board of directors for damages caused by alleged misinformation. The company was developing a medical product for the treatment of sleep apnea and other sleep-related issues. In the summer of 2014, the company needed more capital, and the board of directors reached out to potential investors. The investors thought the company was undervalued, and they invested roughly 14 million NOK through private placements. After a while, it became apparent that the completion and commercialization of the product would be delayed, and in the fall of 2017, bankruptcy proceedings were instituted.

After this, the investors sued members of the board of directors for damages caused by losing their investment. They alleged that the board of directors had given them misleading information about the technical risks relating to the product, which led to them making their investment. The board of directors agreed that they had made an error by not testing the product correctly, but alleged that no misinformation had been given.

Section 17-1 in the Norwegian Companies Act of 1997 sets out that the board of directors, and others, can be held liable for damages caused by their intentional or negligent acts. Disclosure of incorrect information, or withholding of important information, can in some cases constitute such acts.

The question before the Supreme Court was whether the information given by the board of directors constituted a negligent misrepresentation. The Supreme Court notes that even though there is no requirement to make a prospectus in private placements, the board of directors still has to give correct information about the company.

The Supreme Court sided with the board of directors and concluded that they had not acted negligently. They had made a wrong assessment and not tested the product in the correct way, but this was not enough to constitute liability. The investors should have considered the board's assumptions and predictions more carefully.

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