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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.
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