The Supreme Court recently issued the final decision in a landmark securities case on damages in connection with bonds issued by a listed company in the retail industry.
The civil lawsuit was filed in 2012 by a group of investors that had purchased bonds below-par issued by Empresas La Polar not long before the corporation disclosed inconsistencies in their financial statements, a situation that ultimately led to a dramatic collapse of the share price and a reorganisation process.
The plaintiffs (bondholders of Empresas La Polar) sought damages against the former CEO and later president of the corporation, invoking wilful misrepresentation of the financial information disclosed to the market before the bonds were acquired. According to the lawsuit, the damages consisted of the difference between the face value of the bonds and a theoretical price in which those bonds could be sold in the market after new financial information had been made public. The report of the expert appointed by the lower court endorsed the plaintiffs' assessment of damages (approximately $50 million).
Speculative and uncertain damages
The Supreme Court, confirming a decision by the Santiago Court of Appeals which in turn upheld the first-instance court ruling, rejected the civil complaint in its entirety. The courts found that the lawsuit had failed to describe damages that ought to be compensated under Chilean law.
Chilean law provides for compensation of present or future damages that are certain. In the case at hand, the courts stated that the damages sought were hypothetical and speculative, which led to the dismissal of the claim.
As the lower court pointed out, when the lawsuit was filed, the plaintiffs were bondholders in a position to collect their credits against Empresas La Polar at the maturity date. Therefore, a claim for damages created the risk of an unjust enrichment should the plaintiffs collect capital plus interests against Empresas La Polar after having been compensated.
Further, the courts established that bondholders (including the plaintiffs) agreed on new maturity dates and interest rates in the context of the reorganisation process that restructured the debts of Empresas La Polar.
Finally, the price in which the bonds could be sold in the market (ie, the basis of the damages claimed) was an uncertain moving target in direct connection with future and unforeseeable circumstances beyond the parties' control. This fact was acknowledged by the plaintiffs.
Supreme Court decisions on damages in securities litigation cases are rare and no clear guidelines on the matter have been developed by case law.
The above ruling does not prevent the possibility of obtaining compensation by bondholders that have suffered losses in the securities market, but it does emphasise that in order to be compensable, damages must be certain according to general requirements of civil law.
