i Sources of law
Securities constitute a private law contract between the issuer and the security holder. German securities are therefore primarily governed by civil law, namely, the law of obligations (codified in the German Civil Code (BGB)) and – as far as equity securities are concerned – by corporate law.
Individual types of securities or specific features of their legal status can be subject to specific civil law legislation, sometimes with public law elements. For example:
- a bonds and the rights of bondholders are dealt with in the Bonds Act (SchVG);
- b the safekeeping of securities is governed by the Custody Act (DepotG); and
- c the Stock Corporation Act (AktG) includes numerous provisions that apply specifically to public stock corporations. According to modern academic interpretation they form – together with relevant capital market supervisory law (see Section I.ii, infra) – what is called the ‘law of public stock companies’.2
Publicly offered or traded securities as well as issuers and intermediaries are subject to a comprehensive set of regulations, which are supervised and enforced by the German Federal Financial Supervisory Authority (BaFin). Security-related supervisory law in Germany is deeply rooted in harmonised European legislation, which aims to create an integrated European financial market. Currently, the transposition of the revised Markets in Financial Instruments Directive (MiFID II)3 into German national law is under way. The directive encompasses provisions on investor protection, notably on safeguarding of clients’ assets, product governance and monetary and non-monetary compensation. Its implementation is due to be completed by 3 January 2018.
In addition, the updated Market Abuse Directive (MAD II)4 and a new Market Abuse Regulation (MAR)5 became effective in July 2016. MAR substitutes a large amount of national law and establishes a single rule book on market integrity. The new framework applies equally on traditional trading platforms, multilateral (MTF) and organised trading facilities (OTF). MAR regulates, among others, insider trading, market manipulation, ad hoc disclosure of inside information, over-the-counter (OTC) trading and high-frequency trading (HFT). The new set of rules required extensive changes to national law. The German implementation act entered into force on 2 July 2016.
Against this background, the most relevant pieces of supervisory law relating to securities are:
- a the Securities Trading Act (WpHG), which includes provisions on investment services and ancillary investment services of banks, the disclosure of major shareholdings in public companies and the publication of financial reports by public companies;
- b the Capital Investment Code (KAGB), which regulates the issuance and marketing of collective investment funds, covering both UCITS and non-UCITS;
- c the Securities Acquisition and Takeover Act (WpÜG) regulating the takeover and mandatory bids for the acquisition of shares in public companies;6 and
- d the Securities Prospectus Act (WpPG), which applies to the drawing up, approval and publication of prospectuses for securities to be offered to the public or admitted to trading on a regulated market.
ii Common securities claims
Apart from claims pursuing the mere fulfilment of contractual duties, such as a claim for due payment according to the final terms of a bond, most securities claims are based on wrongful capital market disclosure or other abusive behaviour that results in securities holders suffering a loss. There is no specific act that would regulate securities claims. Accordingly, a significant amount of case law has evolved.
The following claims are most common.
Incorrect or omitted publication of inside information
Issuers of financial instruments shall inform the public as soon as possible of inside information that directly concerns them (Article 17(1) MAR). The rule addresses issuers of all kind of financial instruments that are traded on a regulated market, as well as on MTFs and OTFs. Article 7(2) and (3) MAR clarify that in the case of a protected process (such as the early resignation of a member of the board of directors, or a transaction) the intermediate steps as well as the final event may be deemed to be inside information and trigger the obligation to publish this information. This provision implements the reasoning of the European Court of Justice in the Daimler case.7 In addition, Article 17(4) MAR refines the rules on a temporary withholding of inside information by the issuer.
Until 2002, claims for damages were based on (general) tort law and very often failed to fulfil the statutory requirements as interpreted by the courts. The leading case on this is Infomatec, in which the Federal Court of Justice (BGH) held members of the management of Infomatec AG responsible for the wilful dissemination of false information.8 The court reasoned that such wilful action was contrary to boni mores (i.e., it was immoral) and granted damages pursuant to Section 826 BGB.9 In later decisions, the BGH refined this line of argument. In EM.TV the Court clarified that an issuing company is liable for the wilful actions of its managers (Section 31 BGB).10 In Comroad, however, the BGH emphasised the prerequisite of a full proof of causation between the incorrect notification and the plaintiff’s decision to acquire or sell shares,11 which, in most cases, is difficult to furnish.12
The special rules on liability in Sections 37b and 37c WpHG were introduced to facilitate claims for damages against an issuing company.13 Under Section 37b WpHG, shareholders only need to show that the company did not publish inside information without undue delay, that they acquired the shares after the information should have been published and that they still held the shares when the information came to light. The shareholder can claim the difference between the share price that was originally paid and the share price the shareholder would have paid had the information been published in time. The company is only exempt from liability if it can prove that its managers acted neither wilfully nor with gross negligence.14 The BGH, however, denied a similar reversal of the burden of proof if the claimant aims to retrieve the full share price that was initially paid (while concurrently offering to transfer the shares to the company); in this case the shareholder will need to prove that he or she would not have bought the shares had the disclosure obligation not been breached.15
From an investor’s point of view, one of the disadvantages of Sections 37b and 37c WpHG is their personal scope of application, which is restricted to the issuing company. In a number of cases issuers have become insolvent when threatened with a large number of claims for damages. This is one of the reasons why investors continue to seek damages against the members of an issuer’s management under the general tort law provision of Section 826 BGB.
Shareholders v. Volkswagen AG and Porsche Automobil Holding SE
The case against Volkswagen AG (VW) is well known around the world. VW admitted to having used in about 11 million diesel cars a ‘defeat device’, which helps to reduce emissions of nitrogen oxide and carbon dioxide when the cars are in testing mode.
On 22 September 2015, VW published an ad hoc notification admitting the use of a defeat device and announcing that it will set up accruals of about €6.5 billion. Within days after the information first broke, VW’s preferred shares’ price dropped by 40 per cent. The EPA’s and VW’s statements suggest that for several years VW may have deceived authorities, investors and customers as to the actual level of pollutant emissions of some of VW’s most promising models. Apart from multiple lawsuits in the United States and elsewhere, a significant part of which have meanwhile been settled by VW, the company is confronted in German courts with claims by a growing group of investors under Section 37b WpHG and Section 826 BGB, with the volume of claims filed at the Regional Court of Braunschweig by more than 1,500 shareholders being around €9 billion in aggregate. In addition, Porsche Automobil Holding SE (Porsche), the majority shareholder of VW, is facing a growing number of claims made by its own shareholders for reasons similar to those affecting VW. However, this combined with the fact that there had been personnel integration between VW and Porsche at management level has triggered ‘model proceedings’ (see Section II.i, infra): the Regional Court of Braunschweig accepted several ‘establishment objectives’ applied for by plaintiffs and VW, and submitted these to the Higher Regional Court of Braunschweig.16 The latter appointed a model plaintiff and announced deadlines for further submissions by the parties.17 Similarly model proceedings have been initiated in the cases of shareholders against Porsche, with the district court of Stuttgart delivering an order with detailed reasoning regarding why it accepted certain establishment objectives while rejecting others.18
Shareholders v. Hypo Real Estate Holding
The downfall of Hypo Real Estate Holding AG (HRE) furnishes an outstanding example of the impact of the global financial crisis in Germany. HRE was a commercial property lender and financing company, the shares of which were admitted to trading at the Frankfurt Stock Exchange. It ended up in a complete bail-out purchase by the German government.
In mid-January 2008, HRE announced by way of an ad hoc notification a considerable depreciation of its portfolio of collateralised debt obligations in the amount of €390 million. Within one day, the price of HRE shares dropped by 35 per cent.19 A diverse group of investors (including retail investors, but also large investment funds) claimed damages against the company totalling about €1 billion, arguing that the write-offs should have been disclosed as early as autumn 2007.20 In December 2014, the Higher Regional Court of Munich ruled in favour of the plaintiffs in a model proceeding.21 The BGH has not yet rendered its judgment on the appeal on points of law.
Article 12 MAR sets out detailed rules on market manipulation, provided that the manipulative action may influence the market price of financial instruments. The rules apply to all kinds of markets, including OTF and MTF. They extend to manipulative high-frequency trading and to the abuse of benchmarks. Article 15 MAR prohibits market manipulation, as well as attempts to engage in market manipulation.
In contrast to the treatment of deceptive ad hoc disclosure, German law does not provide for civil sanctions in cases of market manipulation. This might change with the MAR, which strongly emphasises investor protection.22
Under German tort law, the general provision to claim damages is Section 823(2) BGB, which requires the breach of a ‘protective provision’ by the injuring party. In consequence, courts have had to deal with the question of whether Section 20a WpHG, the predecessor of Article 12 MAR, constitutes a protective provision. The BGH rejected this assertion in the IKB case, holding that the national rules primarily aim at ensuring the functioning of the markets on a macro level.23
As a result, Section 20a WpHG only provided for supervisory actions and penal sanctions. Therefore, as was the case with incorrect disclosures of inside information until 2002, investors were restricted to claim damages against the issuer and its managers on the grounds of wilful causation of damage contra bonos mores (Sections 826, 31 BGB). Again, investors faced great difficulties in proving that these requirements were met.
Hedge funds v. Porsche (re Volkswagen)
The takeover battle between Porsche AG (subsequently Porsche SE) and Volkswagen AG was one of the most thrilling events in recent German economic history. In a nutshell, in March 2008 Porsche announced its intent to acquire 50 per cent of the shares in Volkswagen following a continuous stake-building by Porsche since 2005. Shortly thereafter, Porsche declared that it would not acquire a stake of 75 per cent or more in Volkswagen. This announcement resulted in heavy short sales by market participants. During the following months, Porsche continued to buy shares and cash-settled equity swaps for shares in Volkswagen up to a total of 74.1 per cent. In October 2008 Porsche announced its intention to raise its holdings up to 75 per cent, which led to a sharp rise in the market price of Volkswagen shares.24 Hence – having bet on falling prices – short sellers suffered severe losses amounting to approximately €10 billion–€15 billion.25
In August 2014 the Higher Regional Court of Stuttgart admitted a criminal trial against former members of the Porsche management on the grounds of market abuse. The indictment alleged that certain managers intentionally disguised their intention to acquire a stake of at least 75 per cent in Volkswagen in a series of press communications between March and October 2008.26 However, the Regional Court of Stuttgart rendered a non-guilty verdict in March 2016.27
Under civil law, investors have filed claims for damages against both Porsche and Volkswagen on the grounds of information-based market manipulation and incorrect publication of inside information. Most claims have been dismissed. The Higher Regional Court of Stuttgart decided that the incorrect press releases of Porsche did not qualify as a wilful causation of damage in a particularly reproachable manner, thus rejecting claims on the grounds of Sections 826 and 31 BGB.28 The court further held that Section 20a WpHG would not provide for monetary compensation of investors. The BGH upheld this decision.29 Similarly, the Higher Regional Court of Brunswick reasoned that Sections 37b and 37c WpHG would not apply to press releases, arguing that they do not reach the ‘quality’ of ad hoc notifications, and it dismissed the claims filed against Porsche.30
On the other hand, the Higher Regional Court of Celle recently proceeded with a model proceeding filed by aggrieved investors against Porsche and Volkswagen.31 While the outcome of this proceeding is still open, the decisions illustrate that rulings may differ between the Higher Regional Courts.
Takeover law-related claims
Pursuant to Section 10(1) WpÜG, a bidder must publish without undue delay its voluntary decision to submit an offer to the shareholders of the target company. Section 35(1) WpÜG provides that the same applies if a bidder obtains direct or indirect control over the target company. The law irrefutably presumes a controlling position of the bidder if it holds 30 per cent of the voting rights of the target company.32 In this case a mandatory offer must be published.
Under Section 12 WpÜG shareholders of the target company are entitled to damages if they have tendered their shares on the grounds of an incorrect or incomplete offer document. In legal practice, however, case law rather deals with the timeliness of an offer since the time of an offer sets the amount of the consideration.33 In this respect debates focus on the question of how to determine whether and when a person has acquired the direct or indirect control over a target company. It must be noted that voting shares of third parties may be attributed to the bidder (Section 30 WpÜG), but usually the facts are not as clear as voting rights held by a subsidiary of the bidder. In the case of Schaeffler/Continental the BaFin had to deal with the difficult question of whether cash-settled equity swaps held by a minority stakeholder (Schaeffler Group) could convey the direct or indirect control over the target company (Continental AG).34 The prevailing view is that they do not.35 In addition, the rules on acting in concert appear even more controversial and relevant in practice.36
Minority shareholder v. Deutsche Bank (re Postbank)
In September 2008 Deutsche Bank AG and Deutsche Post AG, the holding company of Postbank AG, signed an agreement that granted Deutsche Bank the right to acquire 29.75 per cent of the shares in Postbank plus the right to acquire a further 18 per cent within 12 and 36 months after the acquisition of the first stake. In January 2009 Deutsche Bank and Deutsche Post amended their agreement and redefined their cooperation. Thereafter, Deutsche Bank purchased 22.9 per cent of Postbank shares and in October 2010 submitted a voluntary takeover bid to the free-float shareholders of Postbank.
Since the offered purchase price was unattractive, a minority shareholder sued Deutsche Bank for a higher consideration on the assumption that Deutsche Bank should have made a takeover bid as early as October 2008 or January 2009. At both times the market price of Postbank shares was considerably higher. The plaintiff alleged that Deutsche Bank had passed the threshold of 30 per cent by acquiring the right to purchase additional shares from Deutsche Post in September 2008 or at least because of the attribution of the voting rights held by Deutsche Post, with the attribution resulting from the cooperation agreement between the two companies. In July 2014 the BGH expressed sympathy for the latter assumption.37 The case is still pending with the Higher Regional Court of Cologne.
In addition, the BGH decided on a number of controversial legal issues. First, it granted shareholders of the target company who had tendered their shares to the bidder a right against the bidder to demand an adjustment of the offered purchase price if the latter was found to be unreasonable.38 Some commentators had argued that shareholders faced with an unreasonable offer were merely entitled to damages for an incorrect or incomplete offer document pursuant to Section 12(1) WpÜG.39 By acknowledging the shareholders’ right to demand an adjustment of the purchase price, the BGH rejected this view. The Court further distinguished this breach of obligation by the bidder from a situation in which the bidder omits to publish a mandatory offer altogether. In this situation shareholders are not entitled to damages.40 Finally, the BGH affirmed the view that the attribution of voting rights held by a third party requires that the bidder disposes of an unconditional right to acquire these shares and that the (simple) contractual right against a third party to demand the transfer of the shares does not suffice.41
The ruling of the BGH strengthens the rights of shareholders and at the same time provides clarity for investors and bidders. Somewhat ironically, Deutsche Bank later announced the divestment of Postbank as part of its consolidation strategy.42
Section 21 et seq. WpPG provides a cause of action for an investor who acquires securities that are admitted to trading on a regulated market where the underlying prospectus contains incorrect or incomplete information.43 The list of persons who can be held liable for the losses that the investor has incurred is fairly broad and encompasses the issuer, persons who have assumed liability for the prospectus (e.g., the guarantor) and other persons who initiated the publication of the prospectus.44 If securities of an issuer domiciled outside Germany are also admitted to trading on a foreign regulated market the investor may only establish a claim under German law if the securities were purchased on the basis of a transaction concluded in Germany or an investment service fully or partially rendered in Germany (Section 21 WpPG, paragraph 3).
The investor is entitled to rescind the purchase contract and render the securities against reimbursement of the purchase price provided that the purchase was concluded after publication of the prospectus and within six months after the first listing of the securities. If the investor is no longer the owner of the securities, he or she may claim the payment of the difference between the purchase price and the selling price of the securities.
A defendant cannot be held liable if it can prove that it was not aware of the incorrectness or incompleteness of the prospectus and that this ignorance was not due to gross negligence. In practice, it is, however, very difficult for a defendant to provide such exonerating proof.45
Section 23 WpPG provides for further exclusions of the defendant’s liability. For example, the investor will fail with its claim if the defendant can show that the investor knew that the statement in question was inaccurate or incomplete (Section 23 WpPG, paragraph 2).
Section 306 KAGB provides for similar rules in respect of units or shares in investment funds, where the defendant is either the management company or any other person who has taken responsibility for the accuracy of the prospectus. Section 165 KAGB lists in detail the necessary content of such prospectuses (in the specifically important case of closed-end funds in conjunction with Section 269 KAGB).
Until July 2005, no disclosure requirements existed with regard to certain non-securitised investments, such as closed-end funds, which were most often structured as a GmbH & Co KG.46 Mainly for tax reasons, these investments were particularly popular among retail investors and have continued to be so in spite of the fact that some issuing companies went bankrupt. As a result, it is not surprising that a lot of case law on prospectus liability involves the liability for these ‘grey market’ investments. In this regard courts have distinguished between the prospectus liability in a restrictive sense and in a broader sense. While the former deals with the general liability of certain persons for an incorrect prospectus because of their interest in the issuance, the latter deals with the liability of persons who provided confidence in the investment.47
In general, courts tend to issue investor-friendly rulings. This has increasingly been the case, with persons held responsible for the issuance of securities or financial instruments as well as alleviations of the burden of proof of causation and damages.48 The case law also supports the interpretation of the complex prospectus liability rules set out in Section 306 KAGB.49
Shareholders v. Deutsche Telekom AG
A well-known case on prospectus liability relates to the third initial public offering of Deutsche Telekom AG shares in the year 2000. The company was formed in 1996 when the formerly state-owned monopoly Deutsche Bundespost was privatised. In December 2014 the BGH held that the prospectus published by Deutsche Telekom AG for its third IPO contained misleading statements on the valuation of the company’s real estate assets and on certain shares held by a subsidiary.50
Wrongful investment advice
Claims based on wrongful investment advice are usually filed against the advising bank or individual advisers. Disclosure obligations of the advising banks vary on a case-by-case basis. In 1993 the BGH ruled in a principle-establishing judgment that any given advice must be investor-specific, which requires that a recommended product shall match with the risk tolerance of the customer, and investment-specific, meaning that the adviser must inform the client about all material aspects of the product.51 Courts tend to render investor-friendly judgments and to hold advisers responsible for even minor disclosure infringements.
Retail investors v. investment banks (re Lehman Brothers)
For several years, case law had involved in particular holders of Lehman Brothers securities who had filed claims against their investment banks for wrongful investment advice. The BGH has dismissed most of these claims.52 In November 2014, however, the court found in favour of the plaintiffs that the bank’s advice lacked information on an exceptional right of termination of the Dutch issuing company (Lehman Brothers Treasury Co BV) and granted damages to the plaintiffs.53
The liability of third persons (i.e., neither the issuer nor its managers or directors) plays a minor role in German securities litigation. In theory, advisers of an issuer such as attorneys, lawyers and investment banks, may be held liable if they intentionally cause damages contrary to public policy (Section 826 BGB).54 With regard to the liability for incorrect or omitted publication of inside information as well as for market manipulation, these requirements are difficult to prove (see Section I.iii, ‘Market manipulation’, supra).
In legal practice, secondary liability is confined to the field of prospectus liability, without substantial differences between prospectuses published for securities admitted to trading on a regulated market (Section 21 WpPG) and those published for investment funds (Section 306 KAGB).55 An action for damages can be brought against the banks issuing the securities,56 against accounting firms that audited the incorrect prospectus and whose final report is included in the prospectus57 as well as against any other person upon whose initiative the publication is based or who assumes responsibility for it.58 German legal literature does not, however, assume liability of advisers who drew parts of the prospectus or advised on its content (such as attorneys, tax lawyers or experts) unless they have a particular economic interest in the issuance of the securities.59
Cause of action
Sources of claims for damages
Prominent case law
Incorrect or omitted publication of inside information
Sections 37b and 37c WpHG (against the issuer) and Sections 826 and 31 BGB (against the issuer and its managers)
Infomatec I–II (BGH, judgments of 19 July 2004 – II ZR 218/03 and 402/02)
EM.TV (BGH, judgment of 9 May 2005 – II ZR 287/02)
Comroad I–VIII (Comroad I: BGH, guidance order of 28 November 2005 – II ZR 80/04)
HRE (OLG Munich, order of 15 December 2014 – Kap 3/10)
Sections 826 and 31 BGB (against the issuer and its managers)
Infomatec I–II (BGH, judgments of 19 July 2004 – II ZR 218/03 and 402/02)
IKB (BGH, judgment of 13 December 2011 – XI ZR 51/10)
Porsche (OLG Stuttgart, judgment of 26 March 2015 – 2 U 102/14)
Takeover law-related claims
Sections 12(1), 31(1) and 39c WpÜG (against the bidder)
WMF (BGH, judgment of 18 September 2006 – II ZR 137/05)
Schaeffler/Continental (BaFin, press release of 21 August 2008)
Deutsche Bank/Postbank (BGH, judgment of 29 July 2014 – II ZR 353/12)
Sections 21 ff WpPG,
Section 306 KAGB and
BuM (BGH, judgment of 12 July 1982 – II ZR 175/81)
Telekom (BGH, order of 21 October 2014 – XI ZB 12/12)
Wrongful investment advice
Lehman Brothers (e.g., BGH, judgments of 27 September 2011 – XI ZR 182/10; of 15 October 2013 – XI ZR 51/1; and of 25 November 2014 – XI ZR 169/13)
II PRIVATE ENFORCEMENT
i Forms of action
For the time being, there are no types of action in Germany comparable to class actions as they are known in the United States. Nonetheless, in 2005, the German legislator introduced the Capital Markets Model Case Act (KapMuG), which provides for a very specific form of class action (model cases) for capital market litigation. The Act allows for a concentration of legal or factual issues concerning a great number of pending or future proceedings in one court to reduce the caseload caused by mass litigation and to prevent contradictory decisions on similar issues. The scope of the KapMuG is, however, very limited; only claims for damages or for contractual performance can be pursued in these ‘model proceedings’ – and only if the claim can be based on wrongful capital market information (damages) or can rely on offers according to WpÜG (performance claims). Also, these model proceedings do not abandon the rule that any injured party must litigate its own case and prove its own damages. Rather, the KapMuG allows for parties who actively choose to participate in the model proceedings to receive a preliminary ruling on legal or factual questions that are of significance beyond their individual cases. Also, the German capital market model proceedings require every potentially injured party to actively opt in to the proceedings. Only those parties who have actively chosen to participate in the model proceedings will be legally bound by the rulings and, in particular, only those parties can make use of the preliminary ruling when proceeding with their individual cases.
Whether investors make use of the model proceedings under the KapMuG or not, as the law currently stands they will always have to initiate an individual claim against an issuer before the competent regional court. The regular rules of procedure apply as provided for in the German Code of Civil Procedure (ZPO).
Since securities constitute private law contracts between the parties, the ordinary civil courts of justice are competent to decide disputes between the parties. The procedural rules are laid down in the ZPO.
The two single most obvious differences between the ZPO and common law rules of civil procedure are the outstanding significance of written pleadings in German civil courts and the absence of discovery proceedings.
The original principle of German civil procedure according to which the essential parts of a lawsuit should be conducted orally has been reversed over the past hundred years into proceedings that are based almost entirely on written pleadings.60
With the effective service of the statement of claim on the defendant the action is pending. The statement of claim has to comprehensively present all the relevant factual allegations on which the claim is based.61 Upon receipt of the statement of claim the defendant is required to file its defence, normally within a period of three to five weeks, to which the plaintiff may reply. There is no limit to the number of briefs that each side may subsequently submit to the court before the first hearing. Before the hearing takes place, all relevant legal and factual aspects of the case shall have been presented to the court in writing and very strict rules apply restricting any delayed presentation of facts.62 The hearing is preceded by settlement negotiations conducted by the court.63 If the court does not succeed in settling the case amicably, the settlement negotiations are immediately followed by the (main) hearing,64 which is generally a fairly short event in which the court orally presents the facts of the case and each party has an opportunity to comment on them.
The main hearing will either be followed by a judgment, which terminates the first instance or the court might schedule an additional hearing for taking evidence, such as hearing witnesses or experts testimony before rendering its judgment. Judgments of first instance become final and binding unless they are appealed against within one month after they have been rendered.
No discovery proceedings
It is a basic principle of German civil procedure that the parties enjoy a wide discretion in deciding which issues and which factual allegations they choose to present to the court.65 It is in their discretion to determine their allegations and counter-allegations as well as the factual claims that they intend to prove by evidence and the type of evidence they would like to present.
The parties are obliged to tell the truth,66 judges are under a general duty to clarify the facts and allegations and to this end may obtain information from public sources67 and may order the presentation of documents if they have been referred to by, and are in the possession of, a party to the dispute.68 However, there is nothing in German civil procedure even remotely resembling subpoena proceedings or disclosure proceedings as they are known in the US legal system. There simply exists no duty on one party to produce all relevant material in its possession.
Consequently, as there is no obligation to disclose all the facts of a case to the court, there are (with very minor exceptions) no pretrial discovery proceedings in German law of civil procedure.69 Therefore the parties depend on other sources of information, which may involve requests under the German Freedom of Information Act or requests to access records of criminal investigations if the case is being investigated by public authorities. Administrative courts, however, have strengthened the right and obligation of BaFin to withhold information that concerns third-party rights.70
The most significant consequence of the parties’ wide discretion to determine the factual allegations and evidences to be submitted to the court is that any factual allegations that remain uncontested by the other party are deemed to constitute a true fact on which a judgment can be based without any further proof.71
It is a key principle in German civil proceedings that the court shall facilitate an amicable solution of the legal dispute (Section 278 ZPO). A dispute litigated in court may be settled at any time within or outside the proceedings. A settlement may in particular be reached by submitting a proposed settlement to the court. The court will not review the proposed settlement for adequacy or fairness of the terms. However, the court may refuse to issue an order establishing that a settlement has been reached if the settlement violates mandatory statutory law or public policy.
Special rules apply in proceedings under the KapMuG. The model plaintiff and the model defendant may conclude a settlement before the court by submitting to the court a proposed settlement of the model proceedings and of the original individual cases or by accepting a settlement proposed by the court (Section 17 KapMuG). The proposed settlement also has to be submitted to any intervening party, namely, plaintiffs under parallel proceedings who have not been chosen as the model plaintiff. Intervening parties may comment on the settlement and may reject their participation (opt out) within one month from receipt (Section 19 KapMuG). Unlike in standard civil proceedings, the proposed settlement also requires approval by the court including on the adequacy of the settlement, taking into account the status of the model proceedings and the result of consultation with intervening parties (Section 18 KapMuG). The settlement will become valid and binding upon approval by the court, provided that less than 30 per cent of the intervening parties opt out of the settlement.
Attorneys’ fees are governed by professional rules stipulated by the Lawyers’ Remuneration Act. Attorneys are under an obligation to charge at least the fees stipulated by this act for representation in court cases. These fees depend on the value of the dispute. An attorney who contributes to finding a settlement that ends the dispute is entitled to an additional statutory fee.
Damages and remedies
Remedies for violations of securities laws, including the determination and calculation of damages, depend on the cause of action. Generally speaking, damages for violations of securities laws shall result in a natural restitution to the extent of the negative interest. That means that the claimant is to be placed in a position in which he would have been, if the relevant law had not been violated. Depending on the cause of action and the current status, this may include a right of choice. For example, in the case of incorrect publication or failure to publish inside information (Sections 37b and 37c WpHG), the investor may choose either to reverse the relevant securities transaction or to claim the difference between the price actually paid and the price that would apply, if the information had been duly published.72
This principle also applies to the prospectus liability. The investor may claim either a reimbursement of his expenses (particularly including the capital contribution and any premium) against return of the shares and an earned interest or for compensation of the reduced value of the shares plus interest resulting from the inaccurate or omitted information. The claim for damages includes indemnification against tax and other disadvantages resulting from the investment. In addition, the investor may claim for loss of profit from a missed opportunity of an alternative investment.
Damages comprise, and are limited to, the actual loss suffered (i.e., there are no punitive damages). As a general rule, the investor bears the burden of proof of the loss and of its causation by the violation. However, there are concepts that ease or even shift the burden of proof from the investor. Where the issue of whether or not a loss has occurred and its amount are in dispute, a German court shall rule at its discretion and based on its evaluation of all circumstances (Section 287 ZPO). The concept of prospectus liability also includes a reversal of the burden of proof regarding the causation of the acquisition of the share or interest by the inaccurate or omitted information, which means that the defendant has to prove that the investor would have acquired the shares even if he or she had been properly informed.
III PUBLIC ENFORCEMENT
BaFin supervises and enforces compliance with the requirements of all security-related supervisory rules (see Section I.i, supra) and may issue orders provided that they are appropriate and necessary. For example, pursuant to Section 4(2) WpHG BaFin may temporarily prohibit the on-exchange trading in individual shares to the extent that this is necessary to enforce the prohibitions or requirements pursuant to the WpHG (e.g., market manipulation).
To this effect, BaFin may request anyone to provide information, present documents and surrender copies as well as summon and question persons. During usual business hours, employees of BaFin must be given access to the property and business premises.
BaFin can publish on its website decisions that it has taken against companies for not complying with the provisions of the WpHG, provided that such decisions are legally binding, the authority deems the publication suitable and necessary and it would not significantly endanger the financial markets or lead to disproportionate damage to the parties involved and the publication (Sections 40b to 40d WpHG).
ii Sanctions, prosecutor and cooperation
In cases of a deliberate or grossly negligent breach of supervisory rules, German law provides for two classes of sanctions: criminal penalties for serious breaches and administrative fines for minor cases. The competent authority for the imposition of administrative fines is BaFin, while public prosecutors are responsible for the prosecution of criminal matters. Both authorities work closely together. With the implementation of MAD II and MiFID II, administrative fines have been increased substantially.
BaFin has to report without undue delay to the competent public prosecutor information on facts leading to the suspicion that a criminal offence may have been committed. It may transfer personal data of relevant persons who are under suspicion or who are contemplated to act as witnesses to the public prosecutors to the extent that this is necessary for purposes of criminal prosecution.
In return, the public prosecutor informs BaFin of the commencement of any investigation proceeding in respect of criminal offences. If experts are required during the investigation proceedings, employees of BaFin with the relevant knowledge can be called upon. If the public prosecutor considers discontinuing the proceedings, it is required to take the view of BaFin into consideration.
IV CROSS-BORDER ISSUES
There are no specific laws in place for cross-border securities litigation. Rather the general rules for cross-border litigation apply. Generally, a non-EU foreign issuer that does not maintain a branch office in Germany can only be subjected to legal proceedings before a German court if the parties have agreed on German jurisdiction, either when entering into a contract or at any time thereafter (Section 38 ZPO). The situation is principally the same if the foreign issuer has its corporate seat in the EU (see Article 25 of Regulation (EU) No. 1215/2012). German courts will always apply German rules of civil procedure, while the applicable substantive law is determined by conflict-of-law rules, the primary source of which in this case is the Regulation (EU) No. 593/2008 (the Rome I Regulation). A choice of law made by the parties is generally recognised under these rules (Article 3 Rome I Regulation), subject to certain exceptions such as overriding mandatory provisions (Article 9 Rome I Regulation) that may become relevant in the context of securities litigation.73
The degree of complexity that can be reached in cross-border securities litigation cases even within the EU (or especially in the EU) is demonstrated by the highly controversial case of HETA Asset Resolution AG (HETA), an Austrian ‘bad bank’ with many German – mainly institutional – creditors. On 1 March 2015, the Austrian Financial Market Authority (FMA) ordered a moratorium on the payment of HETA’s unsecured obligations until 31 May 2016. The decree was based on the Austrian Federal Law on the Recapitalisation and Liquidation of Banks, which implements the European Banking Recovery and Resolution Directive 2014/49/EU (BRRD) in Austria. The HETA case is the first example of the application of a liquidation measure under the provisions of a national implementation law of the BRRD. German HETA creditors called upon the Regional Court of Frankfurt am Main. The court indicated that it may not acknowledge the moratorium.
In June 2016 the court presented the case to the European Court of Justice to clarify a number of questions on the BRRD (preliminary ruling procedure).74 In particular, the ECJ shall decide whether the BRRD applies to an entity in resolution, which has lost the quality of a credit institution before the expiry of the implementation period.
Meanwhile a major agreement has been reached between a large number of investors that are not parties to the pending trials and the Austrian state of Kärnten, which could be liable for the outstanding debt.75
V YEAR IN REVIEW
Again, the Volkswagen (see Section I.iii, supra) and HETA cases (see Section IV, supra) have been the two most outstanding events in the area of securities litigation in Germany. In particular, the latter case displays a stunning interlinkage of civil law, insolvency law and European law (the BRRD) in a cross-border scenario.
vi OUTLOOK AND CONCLUSIONS
We expect the Dieselgate complex of VW and Porsche to remain the leading case in the coming year. The Higher Regional Court of Stuttgart will have to appoint a model plaintiff against Porsche and specify the further course of the model proceedings. In the model proceedings against VW, parties will file additional statements and applications, which are likely to multiply the volume of the court files and may jeopardise the schedule for hearings beginning in February 2018, as envisaged by the court in its initial order.
In the area of supervisory law, the transposition of MiFID II, which is due by January 2018, as well as the application of MAR as of July 2016, will attract further attention from banks, intermediaries and investors. In addition, we expect the first filing of claims for damages based on non-compliance with these new sets of regulations.
1 Lars Röh and Martin Beckmann are partners at Lindenpartners Partnerschaft von Rechtsanwälten mbB. The authors wish to thank Jan Willisch, Jonas Ulmrich and Bijan Moini for their valuable assistance in producing this chapter.
2 Marsch-Barner and Schäfer, Handbuch börsennotierte AG (Third Edition, 2014) passim.
3 Directive 2014/65/EU.
4 Directive 2014/57/EU.
5 Regulation (EU) No. 596/2014.
6 In spite of its economic importance, the takeover of private companies has not been regulated specifically until now.
7 ECJ, judgment of 28 June 2012 (Case No. C-19/11).
8 Infomatec AG (a mobile telephone provider) had published a notification stating that it had received an offer for purchase of the company’s products with a total order volume of more than 55 million deutschmarks (approximately €30 million). In fact, the binding part of the order had a volume of only 9.8 million deutschmarks. Immediately after the notification the share price rose by 20 per cent. For a summary of the facts as well as the judgment, see Koch in European Capital Markets Law (Veil (ed.) 2013), Section 19, paragraph 111 et seq.
9 BGH, judgment of 19 July 2004 (Case No. II ZR 218/03), BGHZ 160, p. 134 et seq.
10 BGH, judgment of 9 May 2005 (Case No. II ZR 187/02), NZG 2005, p. 572.
11 BGH, guidance order of 28 November 2005 (Case No. II ZR 80/04), NZG 2007, p. 345; see Koch (footnote 8, supra), Section 19, paragraph 114.
12 For a discussion on possible alleviations of the proof of causation, see ibid., Section 19, paragraph 115.
13 See Zimmer and Grotheer in Kapitalmarktrechts – Kommentar (Schwark/Zimmer (ed.) 2010), Section 37b WpHG, paragraph 2 et seq.
14 As Koch (footnote 8, supra) points out, none of the other EU Member States, with the exception of the United Kingdom, provide a special legal framework for the breach of the obligation to disclose inside information.
15 BGH, judgment of 13 December 2011, NJW 2012, p. 1800; Koch (footnote 9, supra), Section 19, paragraph 120.
16 Regional Court of Braunschweig, decision of 5 August 2016 (Case No, 5 OH 62/16).
17 Higher Regional Court of Braunschweig, decisions of 8 March and 3 April 2017 (Case No. 3 Kap 1/16).
18 Regional Court of Stuttgart, decision of 28 February 2017 (Case No. 22 AR 1/17 Kap).
19 See Hesse and Ott, ‘Doppelte Chance auf Schadensersatz’, Süddeutsche Zeitung, 18 January 2011.
21 Higher Regional Court of Munich, decision of 15 December 2014 (Case No. KAP 3/10). See ‘HRE drohen Klagen über Hunderte Millionen Euro’, Süddeutsche Zeitung, 15 December 2014.
22 Likewise see Mock (footnote 23, infra), Section 20a WpHG, paragraph 478 et seq.; and Hellgardt, AG 2012, p. 154, 163 et seq.; Beneke/Thelen, BKR 2017, p. 12.
23 BGH, judgment of 13 December 2011 (Case No. XI ZR 51/10), NJW 2012, p. 1800. On the facts and ruling of the case, see Mock in Kölner Kommentar zum WpHG (Hirte and Möllers (eds.), Second Edition, 2014), Section 20a WpHG, paragraph 475; BGH, decision of 15 November 2016 (Case No. KZR 73/15), BeckRS 2016, 21465.
24 For a brief time on 28 October 2008, Volkswagen was the world’s most valuable company.
25 On the facts see Möllers, NZG 2014, pp. 361 and 362.
26 Decision of 18 August 2014 (Case No. 1 Ws 68/14), ZIP 2014, p. 1829.
27 Regional Court of Stuttgart, decision of 18 March 2016 (Case No. 13 KLs 159 Js 69207/09); the judgment is final.
28 Judgment of 26 March 2015 (Case No. 2 U 102/14), BeckRS 2015, 05690; in this case hedge funds claimed damages in the amount of €1.76 billion for losses suffered as a result of short selling in 2008.
29 Decision of 15 November 2016 (Case No. KZR 73/15), BeckRS 2016, 21465.
30 Judgment of 12 January 2016 (Case No. 7 U 59/14), NJW-RR 2016, 624.
31 Decision of 5 December 2016 (Case No. 13 Kap 1/16), BeckRS 2016, 115907; becklink 2005201; cf. also Weber, NJW 2017, p. 991, 993 f.
32 See Section 29(2) WpÜG.
33 Pursuant to Section 31(1) WpÜG in conjunction with Sections 4 and 5 WpÜG-AngebotsVO (WpÜG Offer Ordinance) the consideration must be ‘reasonable’.
34 On the facts, see Habersack, AG 2008, p. 817 et seq.; and Schanz, DB 2008, p. 1899 et seq.
35 BaFin, press release, 21 August 2008; Cf. Wackerbarth in Münchner Kommentar zum AktG (Goette and Habersack (eds.), Volume 6, Third Edition, 2011), Section 30 WpÜG, paragraph 48; and von Bülow in Kölner Kommentar zum WpÜG (Hirte and von Bülow (eds.), Second Edition, 2010), Section 30 WpÜG, paragraphs 127 and 173 et seq.
36 See von Bülow (footnote 35, supra), Section 30 WpÜG, paragraph 203. See also, for example, regarding the WMF case, Veil in European Capital Markets Law (Veil (ed.) 2013), Section 24, paragraph 53 et seq.
37 See also BGH, judgment of 29 July 2014 (Case No. II ZR 353/12), NZG 2014, p. 985, paragraph 56 et seq.; the court remanded the case to the Higher Regional Court of Cologne for further investigation of the cooperation agreement and final judgment.
38 BGH, judgment of 29 July 2014 (Case No. II ZR 353/12), NZG 2014, p. 985, paragraph 19 et seq.
39 See, for instance, Krause in WpÜG (Assmann, Pötzsch and Schneider (eds.), Second Edition, 2013), Section 31 WpÜG, paragraph 166a.
40 BGH, judgment of 29 July 2014 (Case No. II ZR 353/12), NZG 2014, p. 985, para. 19.
41 BGH, judgment of 29 July 2014 (Case No. II ZR 353/12), NZG 2014, p. 985, paragraph 39 et seq.
42 See de la Motte and Maisch, ‘Und ab die Postbank’, Handelsblatt, 27 April 2015.
43 The Act is based on the European Prospectus Directive (2003/71/EC). The EU plans to establish a single rule book on prospectus liability and will adopt a binding regulation by 2017/2018.
44 See further ‘Secondary liability’, infra.
45 See Groß, Kapitalmarktrecht (Sixth Edition, 2016), Section 23 WpPG, paragraph 77 ‘probatio diabolica’.
46 This is a general partnership, with the general partner being a limited liability company. See also Zoller, Die Haftung bei Kapitalanlagen (Second Edition, 2014), Section 5, paragraph 4 et seq.
47 While in both cases the basis for a claim is in contract law (Sections 280(1) and 311(2)(3) BGB), the two forms of liability differ with regard to the persons held responsible and the limitation of actions. On the distinction, see Emmerich in Münchner Kommentar zum BGB (Säcker, Rixecker and Oetker (eds.), Sixth Edition, 2012), Section 311, paragraph 147 et seq.
48 See also Zoller (footnote 46, supra), Section 5, paragraph 20 et seq. and Section 6.
49 Likewise, see ibid., Section 6, paragraph 9.
50 BGH, judgment of 21 October 2014 (Case No. XI ZB 12/12), NJW 2015, p. 236; Higher Regional Court of Frankfurt am Main, decision of 30 November 2016 (Case No. 23 Kap 1/06).
51 Judgment of 6 July 1993 (Case No. XI ZR 12/93) – Bond.
52 e.g., BGH, judgment of 27 September 2011 (Case No. XI ZR 182/10), NJW 2012, p. 66. See also BGH, judgment of 15 October 2013 (Case No. XI ZR 51/11). Regarding the latter, see Zoller (footnote 46, supra), Section 2, paragraph 113 et seq.
53 BGH, judgment of 25 November 2014 (Case No. XI ZR 169/13), NJW 2015, p. 398.
54 In theory, the contract between an issuer and its advisers (e.g., accountants or lawyers) may grant third parties the right to claim damages against the adviser for breaching its obligations under the advisory contract. The courts, however, usually dismiss such assumptions; see Zugehör, NJW 2008, p. 1105 for a detailed analysis of the case law.
55 See also Paul in KAGB (Weitnauer, Boxberger and Anders (eds.)), Section 306, paragraph 8.
56 See Section 5(4) WpPG; therefore, banks usually intend to stipulate a hold-harmless agreement with the issuer. See Groß, Kapitalmarktrecht (Sixth Edition, 2016), Section 21 WpPG, paragraph 17 et seq.
57 Groß (footnote 56, supra), Section 21 WpPG, paragraph 37 with further references; Wagner in Münchner Kommentar zum BGB (Säcker, Rixecker and Oetker (eds.), Sixth Edition, 2013), Section 826, paragraphs 75 and 90. The BGH decided that an accounting firm is liable for auditing an unjustifiable profit forecast in a prospectus, judgment of 24 April 2014 (Case No. III ZR 156/13), NJW 2014, p. 2345.
58 For a more detailed discussion, see Groß (footnote 56, supra), Section 21 WpPG, paragraph 30 et seq.
59 Groß (footnote 56, supra), Section 21 WpPG, paragraph 36 with further references; Vokuhl in European Capital Markets Law (Veil (ed.) 2013), Section 17, paragraph 63.
60 Greger in ZPO (Zöller (ed.), 30th Edition, 2014), Section 128 ZPO, paragraph 1 et seq. and Section 129 ZPO, paragraph 1 et seq.
61 Section 253 ZPO.
62 Sections 296 et seq. ZPO.
63 Section 278(2) ZPO.
64 Section 279 ZPO.
65 Greger (footnote 61, supra), Section 128 ZPO, paragraph 10.
66 Section 138(1) ZPO.
67 Section 358a No. 2 ZPO.
68 Section 142 ZPO.
69 See also Higher Regional Court of Frankfurt am Main, decision of 16 May 2013 (Case No. 20 VA 4/13), BeckRS 2013, 12264.
70 VGH Kassel, judgment of 3 March 2015 (Case No. 6 A 1071/13), BeckRS 2015, 46064, relying on a decision of the ECJ dated 12 November 2014 (Case No. C-140/13); Weber, NJW 2015, p. 2307, 2308.
71 Section 138(3) ZPO.
72 BGH, judgment of 13 December 2011 – Case No. XI ZR 51/10.
73 See also Martiny in Münchner Kommentar zum BGB (Säcker, Rixecker and Oetker (eds.), Volume 11, Sixth Edition, 2015) Article 9 Rom I-VO, paragraph 74 et seq.
74 Decision of 21 June 2016 (Case. No. 2-12 O 114/15), WM 2016, 1681.
75 ‘Fast alle Gläubiger akzeptieren nachgebessertes Angebot’, Handelsblatt, 10 October 2016.