Market trends and climate
Market trends and climate
What is the general state of the securities markets in your jurisdiction, including any notable trends and recent transactions?
Sustainable financing is becoming increasingly important for issuers and investors. This has led to a significant growth in green finance (eg, green bonds).
Furthermore, securities markets and securities law are affected by other regulatory measures, in particular the EU Markets in Financial Instruments Directive (2014/65/EU) and the Markets in Financial Instruments Regulation (600/2014/EU).
Regulatory framework and enforcement
What is the primary legislation governing the offer and trade of securities in your jurisdiction (both primary and secondary markets)?
The Securities Prospectus Act and the Securities Trading Act are the main German statutes governing the offering and trading of securities. The Securities Prospectus Act sets out the rules on prospectus publication, governs the approval process and details prospectus liability. The Securities Trading Act contains transparency rules and rules on securities trading.
Both the Securities Prospectus Act and the Securities Trading Act serve to transpose EU directives into German law. In addition, the EU Market Abuse Regulation (596/2014), which came into force in 2016, provides rules regarding, in particular, inside information, disclosure of inside information, insider dealing and further disclosure requirements.
Regulatory authorities and enforcement trends
Which authorities regulate the securities markets in your jurisdiction and what is the extent of their enforcement powers?
The German Federal Financial Supervisory Authority (BaFin) is the competent authority for the regulation and supervision of the securities markets.
BaFin exercises supervision, controls all areas of finance and ensures compliance with the prohibitions and requirements of applicable law. BaFin shall, within the limits of the tasks assigned to it, counteract irregularities that may adversely affect the proper conduct of trading in financial instruments. In other words, BaFin can make arrangements that are appropriate and necessary to remedy or prevent these abuses, such as issuing binding orders or imposing fines. BaFin itself is supervised by the German Ministry of Finance.
BaFin works closely with the European Securities and Markets Authority (ESMA) and applies ESMA’s guidelines on EU directives and regulations.
Have there been any notable public enforcement trends, including any key recent actions?
Not to the best of our knowledge.
How is the court system structured in your jurisdiction? Are there any specialist courts with jurisdiction over securities-related actions?
As Germany is a federal state, its court system is divided into federal, state (regional) and local courts. The system is further divided into ordinary and specialised courts. The ordinary courts have jurisdiction over civil and criminal matters, while the specialised courts have jurisdiction over labour, administrative, fiscal and social matters.
The trial court competent to decide on a civil matter will be either the local court or the regional court. Whether the local court or the regional court has subject matter jurisdiction in the first instance depends mainly on the amount in dispute. However, regional courts have exclusive subject matter jurisdiction with regard to certain actions concerning inaccurate capital market information. Some German federal states have assigned such securities-related actions to specific regional courts. For instance, the Regional Court of Frankfurt has sole jurisdiction in such matters for the state of Hesse.
Additionally, in cases of prospectus liability, parties have the option of bringing a claim before a chamber of the commercial division of the relevant regional court. This structure of the chamber consists of one professional judge and two honorary judges with a commercial background.
What rules govern court procedure? Are there any provisions specific to securities cases?
The rules that govern the court procedure are essentially the rules of the Code of Civil Procedure, including in securities cases. The Capital Markets Model Case Act provides for a procedure where several claimants may apply for the establishment of a model case proceeding (for more information, see in particular the answer to the questions “Have there been any notable recent cases involving private securities claims or trends in private securities litigation?” and “Are class actions or any other collective proceedings available for securities claims in your jurisdiction?”
What rules and procedures govern the appeal process?
There are two levels of appeal against final judgments issued by a trial court.
First appeals deal with both the facts and the law of the case. They are heard before the regional court or the higher regional court, depending on whether the appeal is filed against a trial judgment issued by a local or a regional court. As a general principle, the appeal court is bound by the factual findings of the trial court, unless these findings are erroneous.
Second appeals against first appeal judgments concern only issues of law. They are heard by the Federal Court of Justice. Second appeals must be found admissible by a court. Admissibility is established if the matter is of fundamental significance. Second appeals are admitted either by the first appeal court or, upon complaint, by the Federal Court of Justice.
Recent case law and litigation trends
Have there been any notable recent cases involving private securities claims or trends in private securities litigation?
In recent years securities litigation has become more common in Europe, including Germany. This is probably partly due to the presence of litigation funders. In Germany, one can see an increase in the number of specialised claimant attorneys using the media to promote their interests and solicit further claimants to join their suit.
The most notable (ongoing) case involving private securities claims is the model proceeding against Volkswagen AG brought before the Higher Regional Court of Braunschweig in the wake of the diesel emissions scandal. In 2016 investors filed an action for damages amounting to roughly €9 billion with the Regional Court of Braunschweig and applied for a model proceeding pursuant to the Capital Markets Model Case Act. The investors claim that Volkswagen did not inform the market in a timely manner of the fact that 11 million vehicles had been fitted with cheat software. Volkswagen has filed its statement of defence in the model proceeding. Oral hearings are due to begin in September 2018.
Another recent notable case is an action against Steinhoff International Holdings NV (whose seat is in the Netherlands) before the Regional Court of Frankfurt, in connection with an alleged accounting fraud. One claimant filed the first action in December 2017. He alleges that Steinhoff published untrue financial statements and has consequently filed for damages based on statutory prospectus liability, incorrect or omitted capital market information and tort law. He also applied for a model proceeding.
Court approach to securities cases
Would you consider your jurisdiction to be a more claimant-friendly or defendant-friendly forum for securities litigation?
Compared to some jurisdictions (eg, the United States), Germany is not particularly claimant-friendly. The main reason is the claimants’ structural lack of factual information as Germany has no pre-trial discovery and disclosure mechanism. Claimants must state in their pleading all the factual elements of their claim. Consequently, in the majority of cases the claimant must:
- rely on publicly available information; or
- in the case of criminal proceedings, request the inspection of files from the public prosecutor’s office.
The introduction of the Capital Markets Model Case Act has partly removed the structural problem for claimants in securities litigation where small damages per claimant means that there is less pressure on the defendant in any individual proceeding. However, as the model proceeding is slightly more ‘opt-in’ than ‘opt-out’ (see below), the pressure on the defendant is not comparable to the class action regulations in, for example, the Netherlands or the United States.
How do the courts in your jurisdiction address cross-border securities litigation?
Cross-border securities litigation raises questions of jurisdiction, applicable national law and the lis pendens rule.
Claimants domiciled in a foreign country may file a lawsuit against a German seated company in securities-related actions before a German court. Moreover, within the scope of the Recast Brussels Regulation (1215/2012) on jurisdiction and the enforcement of judgments in civil and commercial matters, claimants whose account is situated in Germany may bring a claim before a German court if they have suffered a loss in their account, regardless of the defendant’s seat. Moreover, the Regional Court of Frankfurt has also affirmed its competence in the scope of the Recast Brussels Regulation if the trading location where a loss in the value of securities occurred is situated in Germany. Thus, it is conceivable that claimants domiciled in another EU member state may bring a claim before a German court against an issuer with its seat in a different EU member state if the securities are listed on a German stock exchange. It is also worth noting that bond terms often have jurisdiction clauses, which typically include an additional forum for the parties.
Applicable national law
German courts will most likely apply German law if the claimant has its residence in Germany and, conversely, foreign law if the claimant has its residence in a foreign country. However, ad hoc liability under German law requires that the securities be admitted to trading on a German stock exchange. Moreover, the statutory prospectus liability requires that, where securities of an issuer are also publicly listed abroad, the securities were purchased on the basis of a transaction concluded in Germany or an investment service wholly or partially rendered in Germany. Consequently, in addition to their jurisdiction clauses, bond terms often include prevailing choice of law clauses.
Lis pendens rule
German courts also apply the lis pendens rule, even if a lawsuit is pending in a foreign country (whether in the European Union or elsewhere).
Causes of action
Which causes of action can be asserted by claimants in relation to the offer and trade of securities and which are most commonly asserted?
Claimants can assert:
- prospectus liability claims pursuant to the Securities Prospectus Act;
- civil prospectus liability claims; and
- claims regarding non-compliance with the obligation to publish inside information in accordance with the Market Abuse Regulation (596/2014).
Sections 21 and following of the Securities Prospectus Act stipulate statutory prospectus liability in case of:
- an incorrect listing prospectus;
- an incorrect other prospectus; or
- the failure to publish a prospectus where required pursuant to the Securities Prospectus Act.
Furthermore, statutory prospectus liability requires a purchase of securities in reliance on prospectus, causation and damages. In case of an incorrect prospectus in which material information regarding the assessment of the securities is incorrect or incomplete, those who have taken responsibility for the prospectus or those who have issued the prospectus may be held liable by the purchaser of the relevant securities if they acted wilfully or with gross negligence. If the securities are listed on a stock exchange, the stocks must have been purchased within six months of a public offering of indistinguishable securities. In addition, the plaintiff must prove that the misrepresented facts had a negative impact on the price.
The above-mentioned claims are applicable only in relation to prospectuses within the scope of the Securities Prospectus Act. German courts have, in analogy to statutory prospectus liability, developed general prospectus liability in relation to other written information. Its requirements are similar to those of statutory prospectus liability.
Sections 97 and 98 of the Securities Trading Act set out claims for failure to disclose inside information and disclosure of incorrect inside information.
Directors’ and officers’ liability
In what circumstances and to what extent can directors and officers be held liable for misrepresentations, omissions or other fraudulent conduct in relation to the offer and trade of securities?
German law does not provide special regulations on the direct liability of directors and officers in relation to the offering and trading of securities. Directors’ and officers’ liability is in principle limited to a recourse liability to the issuer pursuant to Section 93 of the German Stock Corporation Act.
However, in certain circumstances – such as in case of wilful breach of the obligation to disclose inside information – the courts may recognise the directors’ direct liability.
Can liability be limited in any way?
Liability against third parties cannot be limited if it occurs. However, issuers frequently provide directors’ and officers’ (D&O) insurance for the members of the management board, although such cover is not applicable to intentional acts. With regard to the recourse liability to such issuer, the D&O insurance must include a deductible of at least 10% of the damage, up to a minimum of 150% of the annual fixed remuneration of the member of the management board.
In what circumstances and to what extent can secondary actors (eg, attorneys, auditors and underwriters) be held liable for misrepresentations, omissions or other fraudulent conduct in relation to the offer and trade of securities?
Secondary actors are not addressees of the liability pursuant to Sections 21 and following of the Securities Prospectus Act. However, under general civil liability secondary actors can be held liable for misrepresentations, omissions or other fraudulent conduct if they act wilfully and knowingly and, from the perspective of a purchaser of securities, perform a position of trust for the correctness of essential information on the offer and trade of the relevant securities. Therefore, auditors or lawyers who render a comfort letter or a legal opinion while knowing that such document contains incorrect statements can be held liable on the basis of general tort law, such as Section 826 of the German Civil Code.
Can liability be limited in any way?
The liability for secondary actors according to Section 826 of the German Civil Code cannot be limited.
Who may file securities claims? Are there any restrictions on foreign claimants? Who are the most common claimants (eg, pension funds, institutional investors)?
Statutory prospectus liability claims may be filed by each purchaser of securities. However, the purchase must have been completed within six months of the publication of a prospectus, the listing or the initial public offering of securities, as the case may be. Claimants are eligible to file ad hoc liability claims if they have purchased the securities and held them during specific time periods as set out in Sections 97 and 98 of the Securities Trading Act.
There are no restrictions on foreign claimants, except for the potential defendant’s motion for cost security pursuant to Section 110 of the Code of Civil Procedure.
Private individuals are the most common claimants, in particular in statutory prospectus liability cases. However, claimants with the highest individual claims are typically institutional investors, pension funds and sovereign wealth funds.
Pleading and evidentiary standards
What pleading and evidentiary standards apply to securities claims, including with regard to:
(a) Proof of reliance on the relevant misrepresentation, omission or other fraudulent conduct?
The general rule under German procedural law is that the burden of proof rests on the party that bases its claim or defence on these facts. However, the burden of proof for the reliance on the relevant misrepresentation is shifted to the defendant in the scope of the statutory prospectus liability. The defendant has to prove that the securities were not purchased on the basis of the prospectus. By contrast and according to the Federal Court of Justice, ad hoc liability has no such presumption of reliance. Thus, the claimant has to prove and state the factual elements of reliance.
(b) Proof of loss causation?
Again, a distinction must be made between statutory prospectus liability and ad hoc liability. The burden of proof and of stating the factual elements for the loss causation in prospectus liability cases lies with the defendant. The defendant has to prove and to state that the factual circumstances on which incorrect or incomplete information in the prospectus is based did not contribute to a reduction of the exchange price. With ad hoc liability, the claimant has to prove that the representation or omission caused a specific loss.
(c) Materiality requirements?
Statutory prospectus liability has a materiality requirement to the extent that the defendant may raise an objection that the claim is based exclusively on information in the summary (or the translation thereof) of the prospect. This objection excludes the defendant’s liability if certain further requirements are fulfilled. By contrast, ad hoc liability has no materiality requirements.
(d) Scienter requirements?
In both statutory prospectus liability and ad hoc liability for untrue inside information, the defendant has to state and prove that it was either unaware of the incorrectness or incompleteness, or that its ignorance was not due to gross negligence. In the case of ad hoc liability for failure to publish inside information without undue delay, the defendant has, accordingly, to state and prove that its omission was based on neither wilful intent nor gross negligence.
(e) Any other requirements, standards or considerations?
According to the general rule under German procedural law, the burden of proof for the issuer’s incorrect or omitted capital market information lies with the claimant as well. This burden causes difficulties, since the relevant information (eg, information about the incorrectness of certain facts or on the time when certain facts became known to the defendant) is often in the sphere of the issuer. In order to facilitate this burden, the German legal literature is of the opinion that the claimant is allowed to make factual allegations, as long as they are based on circumstantial evidence, and the issuer is required to be precise and rebut the claimant’s factual allegations.
What pre-trial disclosure/discovery mechanisms are available to support claims, if any?
Unlike US law, for instance, German law does not provide for a pre-trial disclosure/discovery mechanism.
What rules and standards govern non-disclosure of documents on the grounds of professional privilege or other confidentiality considerations?
What interim measures are available to claimants in securities cases?
German law provides for interim measures such as preliminary injunctions and attachments. Preliminary injunctions do not apply to monetary claims and have, therefore, no relevance for securities cases. Preliminary attachments are possible, but are more common in non-securities investment fraud cases. The prerequisite for a preliminary attachment is that there has to be reason to fear that unless an attachment is imposed, the enforcement of the judgment against the debtor would be frustrated or made substantially difficult.
Statute of limitations
What is the statute of limitations for filing claims?
Claims regarding prospectus liability and failure to disclose inside information become time-barred after three years (Sections 195 and 199 of the Civil Code). That period commences at the end of the year in which the claim arose and the claimant becomes aware of the circumstances giving rise to the claim, or would have obtained such knowledge if it had not shown gross negligence.
What defences are available to defendant issuers and broker-dealers?
Banks subscribing for securities may attempt to prove that there has been no breach of their obligations. The due diligence defence, therefore, slightly modified under German law compared to the US model, is a form of defence to indicate that the defendant made a ‘reasonable effort’ to prevent the incident that gave rise to the suit. A proof of discharge is somewhat easier in Germany, since the defendant must have acted at least with gross negligence for there to be liability under Section 21 of the Securities Prospectus Act. According to the prevailing view, banks have not been grossly negligent if an independent expert with special expertise (eg, a lawyer, accountant or tax consultant) has provided them with confirmation that the information included in the prospectus is correct.
What preliminary procedural mechanisms are available to defendants to counter claims, if any (eg, motions to dismiss)?
Unlike US law, German procedural law does not provide for a motion for early dismissal of the case. The defendant has to submit a statement of defence, even if, for example, the action is obviously unfounded. However, if the judge acknowledges that essential elements in the claimant’s case are missing, he or she will work towards a quick final judgment against the claimant or suggest withdrawing the action.
Damages and costs
What rules and standards govern the calculation and award of damages?
The basic rule under German damages law is that the person liable must restore the position that would exist if the circumstance obliging him to pay damages had not occurred (principle of restoration). If restoration is not possible, as is often the case, the person liable for damages has to compensate the claimant so as to restore the state that would exist without the damaging event.
Statutory prospectus liability cases
The claimant in a prospectus liability case may file for the reimbursement of the purchase price against the return of the securities, as well as the costs usually involved in the purchase if it still owns the securities. Otherwise, if the claimant is no longer the owner of the securities, damages are calculated on the difference between the purchase price and the selling price, as well as the costs usually involved in the purchase and the disposal. In both cases, the purchase price is limited to the initial issue price of the securities.
Ad hoc liability cases
With regard to ad hoc liability, the Federal Court of Justice grants a right to choose between the following two types of damage:
- Reimbursement of the purchase price against return of the securities if reliance is established; or
- The price difference between the purchase price and the hypothetical purchase price had the issuer complied with its disclosure obligations.
Are damages capped?
Caps for of damages exist in specific areas under German law, but there are no caps with regard to securities-related damages.
Are punitive damages allowed?
Punitive damages are alien to German law. The claimant is entitled to claim only for actual occurred damages.
Are any other remedies available?
The defendant may also be liable for reimbursement against return of the securities, which is described above.
Who bears the costs of proceedings? Can this burden be shifted in any way?
Under the German law of civil procedure, the unsuccessful party bears the costs of the lawsuit. This includes the court costs, as well as extra-judicial costs such as own and the opponent’s lawyer's fees. Where both parties have partially won the case, the costs will be borne separately on a pro rata basis.
The cost burden of the losing party can be shifted only in the rare case of an immediate acknowledgment of the claim by the defendant, where the defendant has not given cause for an action to be brought. However, the costs (not the burden itself) can be at least partly reduced:
- for the claimant if it withdraws the lawsuit;
- for the defendant if it acknowledges the claim; or
- for both parties where the parties declare the lawsuit terminated or agree to settle.
How are costs calculated? Does interest accrue on costs?
The litigation costs include court fees and extra-judicial costs. Court fees will be determined based on the value of the dispute pursuant to the Court Fees Act. Attorney’s fees are, if no agreement on remuneration has been made, calculated in accordance with the Code for the Remuneration of Lawyers and determined also on the value of the dispute. The prevailing party’s claim to reimbursement of their own attorney’s fees against the losing party is capped under the Code for the Remuneration of Lawyers. The prevailing party must file a petition for assessment of the amount to be reimbursed with the court of first instance. Interest on costs accrues principally upon the date on which the court receives the petition regarding the assessment of costs. Interest amounts to five percentage points above the base rate of interest, which is currently minus 0.88%.
What rules and procedures apply to the provision of security for costs?
Sections 110 and following of the Code of Civil Procedure apply for the provision of security for costs. The claimant does not have to provide security for costs unless the defendant demands it. However, the claimant is not required to provide security for costs if it:
- has its habitual place of abode in an EU or European Economic Area member state; or
- is exempt from the obligation to provide security for costs under international treaties (eg, the Hague Convention on Civil Procedure 1954).
Are class actions or any other collective proceedings available for securities claims in your jurisdiction? If so, what is the procedure for their formation and what benefits do they afford claimants? Are class actions formed on an opt-in or opt-out basis?
Class actions in Germany
German law does not provide for class actions in terms of proceedings that are binding for non-claimants. Thus, even if there is a mass procedure, every party entitled to damages must file its own action. However, in cases concerning capital market disputes, the Capital Markets Model Case Act enables claimants to petition the appellate court to decide on certain general questions of law or fact that are identical and relevant for other parallel cases. Applications for the model proceeding before the higher regional court must be filed with the trial court (ie, the regional court). The regional court shall order the referral of the decision if at least nine other related applications for the establishment of a model case have been announced within six months of the first announcement of an application for the establishment of a model case. The model case commences before the higher regional court upon issuance of the order for referral. Parties with parallel actions against the defendant are summoned to the model case proceeding, regardless of an application for the model proceeding. The regional court shall suspend the trial proceeding ex officio until the model case ruling comes into force.
Benefits for claimants
Advantages for claimants are in particular the decrease of litigation costs and more effective law enforcement, as conflicting decisions are avoided.
Opt-in / opt-out
The Capital Markets Model Case Act has both ‘opt-in’ and ‘opt-out’ elements, with the opt-in elements prevailing. The requirement for establishing a model case includes the opt-in model, as the interested parties summoned must be claimants before a trial court. By contrast, the provisions for the settlement of the model case and the main case (Sections 17 and following of the Capital Markets Model Case Act) provide for an opt-out model with regard to the summoned parties.
Is public or third-party litigation funding available in your jurisdiction? If so, what rules, standards and procedures apply?
Yes, both are available.
Third-party litigation funding
Commercial third-party funding is allowed under German law. However, as a result of the general prohibition of conditional/contingency fees, tax consultants, auditors and lawyers are explicitly prohibited from financing proceedings in which they represent a party. As third-party funders are neither qualified as banks nor as insurers, no regulatory provisions apply.
Public legal aid funding
Public legal aid funding is available for litigants with very limited financial means. The provisions in Sections 114 and following of the Code of Civil Procedure regulate legal aid for court proceedings. The application for legal aid is typically lodged together with the draft of the complaint. A party applying for legal aid must show that it is unable to pay the costs of litigation because of its personal and economic situation. The relevant party needs to show that the action or its defence against an action has sufficient prospects of success and does not seem frivolous
Is insurance available to cover the costs of litigation?
Yes. Private insurance is an important source of financing, especially in securities litigation cases.
Rules and procedure
What rules and procedures govern the settlement of securities litigation?
Apart from the Capital Markets Model Case Act, the general rules of the Code of Civil Procedure apply for the settlement in securities litigation. If the settlement is governed by those general rules, the parties are virtually free to determine the contents of the settlement. Assessment or approval by the court is not required.
The Capital Markets Model Case Act provides, under Sections 17 and following, specific requirements for a settlement. The model case claimant and the model case defendant may conclude a litigation settlement agreement by submitting to the court a written settlement proposal ending the model case proceedings and the main case proceedings, or by accepting a written settlement proposal from the court through a written pleading to the court. The court shall approve the settlement through an order if it deems it to be a suitable amicable settlement of the suspended legal dispute. When making its decision, the court has to consider the previous state of affairs and of the dispute of the model case proceedings, and of the outcome of the hearing of the interested parties summoned.
How common are settlements in securities-related cases?
As of 2016, between 11.1% and 19.5% of all civil proceedings ended in settlements. There is no statistical data for the frequency of settlements in securities-related cases. As parties are more determined to settle if they face long and extensive proceedings, as might be the case with securities-related proceedings, the frequency of settlements in securities-related cases could be slightly higher.