Newsletter | February 2014, Issue 1
	SECURITIES
	Supreme Court decision on the legal character of a fund prospectus
	The Supreme Court recently issued a decision on the contractually binding effect of a fund prospectus.  In the relevant case, an asset management company managed a fund (“Fund”) investing in equity-linked securities (“ELS”), an OTC derivative securities, which were linked to two common shares.  Although the prospectus of the Fund stated that the ELS counterparty of the Fund would be BNP Paribas, the asset management company instead entered into an ELS contract with Lehman Brothers for the Fund.  In the end, investors in the Fund suffered losses when Lehman Brothers became bankrupt and subsequently filed suit against the asset management company.  The Supreme Court held that the asset management company was not liable to the investors because the asset management company had no contractual obligation to have BNP Paribas as the ELS counterparty of the Fund.
	This Supreme Court decision is the first explicit ruling ever to address the issue of whether a fund prospectus is contractually binding to investors.  It is particularly meaningful in that the Supreme Court reversed the lower court decision which held that the asset management company, in managing the Fund, had the contractual obligation to have the specific ELS counterparty stipulated in the prospectus.
	In the lower court case, the asset management company was held liable against the investors for their entire losses because: (i) the prospectus mentioned the credit risk of the ELS counterparty as a major investment risk, (ii) the prospectus stressed the credit rating of BNP Paribas and (iii) the Fund used most of its investor funding for acquiring OTC derivatives products.
	The Supreme Court, however, ruled that matters set forth in the prospectus should not automatically be granted a contractually binding effect.  The Supreme Court reasoned that (i) changing the ELS counterparty is not the type of major event requiring an approval at an investors' general meeting and (ii) an important factor affecting the investors' decision making was future fluctuation in the value of the shares underlying the relevant OTC derivatives transaction, rather than who the ELS counterparty was, in so far as the ELS counterparty had a credit rating above a certain level.  In short, the Supreme Court held that notwithstanding the prospectus, the asset management company was not contractually obliged to have BNP Paribas as the ELS counterparty in managing the Fund.
	Kim & Chang, as defense counsel to the asset management company at the Supreme Court level, contributed to securing a favorable decision for the defendant.
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