Volkswagen AG (VW) has lost more than one-third of its value following the September issuance by the U.S. Environmental Protection Agency (EPA) of a Notice of Violation (NOV) of the Clean Air Act to VW and certain affiliated entities. The NOV alleges that almost half a million diesel VW cars sold in the United States since 2008 included a “defeat device” – software that could detect when the cars were being tested, changing the performance to improve results.1 In connection with this scandal, VW is accused of having announced incomplete capital market information.
Investors around the world have announced that they will file damage claims against VW – arguing that VW should have disclosed the enormous financial risks resulting from the implementation of the new software in the United States as early as June 2008, but in any case no later than May 2014 when it was reported that the EPA revealed its investigations to VW.
One avenue pursuant to which investors have sought relief is section 37b of the German Securities Trading Act (WpHG). This section imposes liability for damages on issuers of financial instruments admitted to trading on a German stock exchange, if such an issuer fails to publish without undue delay inside information that directly affects that issuer, unless the issuer can prove that it acted without intent or gross negligence. Provided the prerequisites of this section are met, each investor who purchased the issuer’s shares that are admitted to trading on a German stock exchange after the point in time the issuer should have disclosed the relevant information, and continued to hold the shares when the inside information became publicly known, can make a claim for damages against the issuer. The German law provides a method to calculate damages, and sets forth a statue of limitations for relevant claims.
In case German courts hold that VW should have disclosed the EPA investigations as early as May 2014, every shareholder who purchased VW shares (and potentially, other VW financial instruments) that are admitted to trading on a German stock exchange after the relevant date in March 2014 may have a damage claim against VW.
The German Act on Model Case Proceedings in Disputes under the Capital Market Law (KapMuG) provides the opportunity of a model case proceeding for plaintiffs who claim compensation for damages suffered due to false, misleading or omitted public capital markets information. In a model case proceeding, a larger number of individual claims will be tried in one single proceeding. To initiate a model case proceeding, at least 10 investors with similar claims need to file a law suit and apply for a model case proceeding. Prior to the publication of this article, to the best of our knowledge, two claims combined with the application for a model case proceeding have been lodged in the VW case. In consideration of the large number of potentially affected investors, it is anticipated that further claims will follow.
The competent German court will choose out of all claims filed against VW one proceeding as a model proceeding, and will render its decision on that case. There is an appeal procedure, as well as provisions to stay proceedings. Following the final model decision, individual damages will be determined. Further, the German Act on Legal Fees contains provisions and calculations pertaining to the payment of legal fees and court costs.
The filing of a claim against VW is but one method of potential recovery by aggrieved investors.