An extract from The Securities Litigation Review, 6th Edition
Private enforcementi Forms of action
Currently, 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 markets 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 markets 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 markets 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).
Further, on 1 November 2018, the so-called Model Declaratory Action Act (MuFKG) entered into force in Germany. The model declaratory action is intended to facilitate collective redress for consumers in cases of mass damages caused by large companies.
The model declaratory action was introduced in the wake of the diesel scandal involving Volkswagen and other car manufacturers. In the view of the German legislator, a large number of diesel car owners hold claims against the relevant car manufacturers due to the diesel scandal. The German legislator takes the position that so far there have not been effective procedural means for diesel car owners to successfully assert and enforce their claims in court against the diesel car manufacturers. The model declaratory action is intended to change this. Broadly speaking, the concept of the MuFKG is to entitle consumer protection associations and other 'qualified entities' to sue enterprises, seeking a model declaratory judgment on legal or factual issues relevant for a multitude of similar cases on which, if successful, individual consumers may subsequently base their individual claims against the enterprise. What is interesting with a view to securities litigation, is the fact that the new Act does not expressly exclude capital-market-related claims from its scope so courts will have to determine whether the KapMuG and MuFKG exclude or partly overlap each other. The prevailing opinion in German legal publications is that the scope of application of the model declaratory action also encompasses capital-market-related claims. Therefore, it is possible that investors (provided they qualify as consumers as required under the MuFKG) may base potential claims on both the KapMuG and the MuFKG – which might lead to 'competing' law court judgments on an identical issuer.ii Procedure
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.Written pleadings
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 100 years into proceedings that are based almost entirely on written pleadings.
With the effective service of the statement of claim on the defendant, the action is pending. The statement of claim must comprehensively present all the relevant factual allegations on which the claim is based. 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. The hearing is preceded by settlement negotiations conducted by the court. If the court does not succeed in settling the case amicably, the settlement negotiations are immediately and automatically followed by the (main) hearing, 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 of being 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. 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. Judges are under a general duty to clarify the facts and allegations and to this end may obtain information from public sources 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. 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 general 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. 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.
The most significant consequence of the parties' wide discretion to determine the factual allegations and evidence 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.Settlements
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 must also 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 of 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 (RVG). 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, 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 that it would have been in had the relevant law 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 97 and 98 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.
This principle also applies to the prospectus liability. The investor may claim either reimbursement of its 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 must prove that the investor would have acquired the shares even if it had been properly informed.