Capital Markets and the Market for Judicial Decisions: In Search of Consistency

by Matteo Gargantini

MPILux Working Paper 1 (2016)

Abstract: The allocation of jurisdiction in securities litigation is a key factor in ensuring investor protection and legal certainty in international capital markets. Jurisdictional rules determine the litigation setting and its costs, and are therefore an element issuers and investors consider when deciding the cost of debt and equity capital. Ideally, such rules should be based on grounds of efficiency and predictability and should specify when the parties can deviate from them. This would allow an understanding of the extent jurisdiction agreements can contribute to the development of a market for judicial decisions and when, on the contrary, mandatory rules protecting weak parties thwart this result by prohibiting a more liberal approach. Unfortunately, recent CJEU cases – Kolassa v. Barclays; Profit Investment SIM v. Commerzbank – show that the EU regime on jurisdiction (Brussels I-bis Regulation) falls short of delivering this scenario for securities litigation. As for the default heads of jurisdiction, CJEU rulings and AG opinions stick to a formalistic interpretation of market transactions that does not draw any distinction between retail investors (or consumers) and professional investors, thereby harming issuer confidence at the indirect expense of non-litigating shareholders. As for opt-outs, a misguided concept of the economic function performed by tradable securities and other financial instruments extends the scope of mandatory provisions, thus curbing the possibility of contracting around default rules. This prevents issuers and (even professional) investors from ensuring predictability through private ordering solutions and from tailoring jurisdictional rules according to their own preferences. All in all, the legal framework rules out the opportunity to develop a market for judicial decisions even when this would be beneficial to issuers and investors alike, and is therefore likely to increase the cost of capital. An alternative system can instead be conceived where retail investors (or consumers) enjoy better protection, while professionals can play by their own rules. Although appropriate interpretation could in principle reach such an outcome de lege lata, consolidated CJEU case law makes some legislative amendments essential to ensure efficiency.

Keywords: capital markets, bonds, jurisdiction, Brussels I-bis Regulation, MiFID 2, contractual liability, tortious liability, investor protection.