Securities litigation in Germany has become ubiquitous, certainly since around 17,000 investors filed lawsuits against Deutsche Telekom AG based on allegedly false statements in its prospectus for a public offering in 2000. To help the court cope with the resulting caseload, the legislature enacted Germany’s first collective litigation scheme, the Capital Investors Model Proceedings Act, in 2005 (KapMuG).
Apart from the Deutsche Telekom case - which, 15 years later in November 2016, resulted in an appellate judgment on common issues by the Frankfurt Higher Regional Court that has since been appealed once again before Germany’s Federal Supreme Court - relatively few model proceedings have been initiated, and even fewer have been completed. This is mostly because the drafters of the KapMuG carefully avoided affording model plaintiffs the extra leverage that, for example, US class actions provide. However, the diesel emissions issue recently inspired KapMuG cases against Volkswagen and Porsche that have much bigger volumes than the Deutsche Telekom case. Moreover, a small number of large individual securities actions brought by litigation SPVs and individual investors in connection with the attempted takeover of Volkswagen by Porsche SE around 2008 was recast as a KapMuG case with a volume of several billion euro. In addition, innumerable individual actions filed by investors are keeping the courts busy.
The 2012 KapMuG reform somewhat increased the popularity of model proceedings, as the legislature introduced an unbureaucratic method of registering additional claims in such proceedings, suspending the statute of limitations and creating de facto precedents for the benefit of the claimants. While on average there were around 30 applications for model proceedings per year under the old regime, this figure has now risen to more than 50 applications per year. It remains to be seen whether this is a short-lived wave of renewed interest, similar to the wave following the introduction of the original KapMuG, or a continuing trend.
Recent developments indicate that institutional investors may have discovered model proceedings as an additional weapon in their arsenal, potentially combining the KapMuG with other securities litigation trends, such as assigning numerous securities claims to litigation vehicles to benefit from various economies of scale. Institutional investors use these litigation vehicles to pool collective claims of, for example, a €1 billion or more in a single action. Such vehicles also have the advantage that litigation funders may cover de facto contingency fees or purchase claims at variable prices. In addition, domestic vehicles may be exempt from providing security for costs and are more likely to be able to avoid cost reimbursement claims from opposing parties. If the litigation vehicle ultimately loses the action, it may avoid having to compensate the defendant’s substantial statutory cost reimbursement claims simply by filing for insolvency.
The German plaintiffs’ bar, which has firmly established itself in the wake of the Deutsche Telekom model proceedings, has also taken to bringing thousands of parallel cases in almost identical ‘copy and paste’ complaints. These cases are often directed at the initiators of investment funds, for example. However, the German plaintiffs’ bar has suffered major setbacks owing to its extensive use of mediation requests to certain publicly recognised mediation providers. In 2015, the Federal Supreme Court held (i) that such mediation requests only toll the statute of limitations if they provide sufficient information to the opposing party to give a reasonable basis for its decision whether or not to participate in the mediation proceedings, and (ii) that, if the opposing party has made clear that it will not participate in such mediation proceedings, the plaintiff may not rely on a subsequent mediation request to toll the statute of limitations.
Moreover, parallel securities claims against initiators of investment funds or issuers are often supplemented by mis-selling claims against brokers and dealers, a trend that has been fuelled by a series of Federal Supreme Court judgments holding that a bank’s failure to disclose sales commissions received behind customers’ backs constitutes mis-selling and gives rise to a damages claim to unwind the tainted transaction. Until 2012, mis-selling claims were excluded from model proceedings, probably also contributing to the KapMuG’s initial lack of popularity.
In 2011, the Federal Supreme Court issued a controversial judgment on complex swap agreements, allowing banks’ counterparties to unwind the transactions under ill-defined conditions. Among other things, the court requires banks to disclose sufficient information to customers to provide a level playing field for the contract negotiations, including disclosure of initial negative market values of the swap from the customer’s perspective. The court’s vague and perhaps indefinable criteria have led to a significant wave of follow-on litigation, enabling municipalities and public utility companies in particular to unwind swap transactions and avoid losses. In 2015, the Federal Supreme Court issued two further opinions on swap agreements, specifying that the initial negative market value generally only has to be disclosed by the bank that is party to the swap agreement, not by third-party investment advisers. This is because in the court’s view the initial negative market value gives rise to a conflict of interest for the swap party that stands to benefit from it. Further, the court held that the duty to disclose the initial negative market value does not exist if the customer enters into the swap agreement to reduce risks inherent in a loan agreement subject to a variable interest rate.
In 2018, the German legislator introduced a new model action allowing certain consumer protection bodies to file declaratory actions to have courts determine liability claims of consumers against commercial parties. This legislation was inspired by the claims of thousands of Diesel car owners against Volkswagen group in connection with the Diesel emissions issue. The first action was filed on 1 November 2018 and by 31 December 2018, more than 300,000 consumers registered their individual claims with the Federal Justice Office. The new legislation combines elements of the KapMuG with elements of the German implementation of the EU Injunctions Directive. While aimed at consumer claims in general, the new legislation may also allow the assertion of securities claims.
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