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Author: Eva Lein

C. Financial market law

1. General description

Born out of the necessity to strike a balance between judicial economy and access to justice in the famous Telekom case in which 17000 investors were bringing claims against the Deutsch Telekom, the Capital Markets Model Claims Act (Kapitalanleger-Musterverfahrensgesetz, KapMuG) has been created in 2005. The Act established a proper sectoral collective redress regime for an experimental period of 5 years. After expiry of the Act's initial sunset clause and its subsequent prolongation of two years, it was recently revised. In its new version it is in force since November 2012, and will remain in force until 2020.

The test case proceedings under the KapMuG aim at deciding common questions of law and fact with binding effect for a plurality of claimants. They are proceedings in two steps: If a sufficient number of claimants (10) request test case proceedings, the individual lawsuits are stayed until the test case is decided. It ends in a declaratory judgment on whether the defendant is liable. This result is then binding on all claimants and will be the basis of their individual damages claims.

The 2005 KapMuG has been facing critics for not covering all situations in which investors need redress, for forcing investors to bring individual actions before opting into the KapMuG procedure and for not providing any viable option to settle. The main arguments have been taken into account in the 2012 revised version.

Until now, only a few test case proceedings have been terminated, a few more are pending. Many investor claims have not been brought to court, as civil damages claims often fail to succeed. This might change under the new version of the Act.

2. Scope

Proceedings can be brought where claims are based on wrong, deceptive or omitted public capital market information; or on the use of such information or the deficient clarification of the faultiness of such information; or on a contract under the Acquisition and Transfer of Securities Act (Wertpapiererwerbs- und Übernahmegesetz - WpÜG). Sec. 1 KapMuG further illustrates in para. 2 what the term 'capital market information' refers to. They aim at a declaratory judgment establishing liability of the defendant. It is clarified in the request for test case proceedings which issues of law and fact shall be the object of the declaratory proceedings (Sec. 2). The scope of proceedings can be extended if one of the involved parties so requests, provided that a few conditions are met (see Sec. 15).

3. Standing

Each affected investor and the defendant can request test case proceedings, but it needs a minimum of ten plaintiffs to initiate them. Once the proceedings are initiated, the court selects a lead plaintiff in its discretion (Sec. 9 (2) KapMuG). In doing so, it takes various issues into account such as the plaintiff's suitability and the value of his claim.

4. Procedure

a. Competent Court

The Code of Civil procedure provides for exclusive jurisdiction for first instance lawsuits based on damage caused by (A) false or misleading public capital market information or damages claims based on (B) the use of such information or the deficient clarification of the faultiness of such information or (C) a claim under a contract based on the Act governing the acquisition and transfer of securities (WpÜG). The courts at the registered seat of the concerned issuer, of the offer or of other capital investments, or of the targeted company are exclusively competent except where their seat is abroad (Sec. 32b ZPO). In cases of lawsuits against the same defendant, the same court will be competent.

It will be that court referring the case to the higher Regional Court in view of starting and managing the test case proceedings (Sec. 6 KapMuG).

An appeal to the Supreme Court is possible (Sec. 20 KapMuG).

b. Main Procedural Rules

Either investors, bringing a suit at the first instance court on the basis of wrongful capital market information or a contract under the WpÜG, or the defendant can make a request for test case proceedings to clarify specific questions of law and fact.

The court seized publishes the request. If within four months a minimum of 9 similar claims are filed, the first court seized refers the matter to the Higher Regional Court (Oberlandesgericht), which starts and leads the test case proceedings. During the latter, all individual proceedings are stayed the success of which depends on the declaratory judgment made in the test case proceedings, be it already pending proceedings or those made pending during the phase in which test case proceedings are running. It does not matter whether or not these parties have requested test case proceedings (sec. 8 KapMuG).

The court determines which case is dealt with in the test case proceedings, i.e. which plaintiff is the lead plaintiff. All other parties will be intervening parties (Sec 9 (3) KapMuG). They have to accept the litigation in whatever situation it may be in at the time they intervene but are entitled to assert means of challenge or defence and to effectively take all actions in the proceedings such that they are valid, provided that its declarations and actions are not in opposition to those made or undertaken by the lead plaintiff. (Sec. 14 KapMuG).

Sec. 10 (2) KapMuG also allows investors to join test case proceedings without filing an individual suit. They have to file a claim with the Higher Regional Court where the test case proceedings are pending within a period of six months after information on the plaintiff and defendant as well as the file number of the test case proceedings have been published. According to Sec. 204 (1) Nr. 6a of the Civil Code (BGB), the limitation period is interrupted once the investors have filed a claim with the Higher Regional Court provided that the test case proceedings concern the same facts and that an individual suit is filed three months after the test case proceedings have been terminated. This allows potential claimants to await the outcome of the test case proceedings before bringing an individual action.

The proceedings either end with a decision (sec. 16) or a settlement (Sec. 17 ff KapMuG). A settlement is agreed upon between the lead plaintiff and the defendant. The involved parties can declare an opt-out if they do not wish to be bound by the settlement. The settlement is only not binding if more than 30 % declare an opt-out. Otherwise, the settlement binds all parties except those who have declared to opt-out. The court has to approve the settlement.

c. Certification

There is no general certification process for collective actions. However, in cases under the KapMuG, a minimum of 10 claimants who request such proceedings is required to get model case proceedings started. Once the court seized with the first of these requests has approved the model case proceedings, the case is submitted to the Higher Regional Court and additional claimants are then joined automatically.

d. Opt-in/ Opt-out Procedure

On the one hand, KapMuG proceedings are in principle opt-in proceedings, as a request needs to be made that test case proceedings be initiated. Once the number of 10 claimants is achieved and proceedings commence, claimants who file a suit are, however, automatically included in the test case proceedings. Their individual suits are stayed until a result of the test case proceedings is achieved which is binding on them.

On the other hand, the KapMuG settlement procedure is an opt-out procedure. Although agreed upon between lead plaintiff and defendant, a settlement is binding on all involved parties, unless they opt out. The consequences of an opt-out system are less disputed in this scenario as all claimants have on their own motion and deliberately filed an action against the defendant at a first stage. However, they have not necessarily agreed on test case proceedings, in which they get automatically involved once they were started. They will be bound by a resulting decision. They will also be bound by a settlement unless they opt-out.

e. Multi-Stage Process

KapMuG proceedings are three-step proceedings: The first instance court needs to decide upon requests for test case proceedings. If approved, the original damages actions of the plaintiffs are stayed for the duration of the test case proceedings. The latter have binding effect on the individual actions, which are continued once the test case has been decided.

f. Participation of Foreign Plaintiffs

Participation of foreign plaintiffs is not excluded by the KapMuG, provided that there is jurisdiction to hear their cases.

g. Res Judicata

The decision taken in the test case proceedings is binding all courts that had to stay proceedings with respect to the questions that have been subject to the test case proceedings (Sec. 22 KapMuG). In case of a settlement, once the court has declared it valid, it is binding all parties who have not opted-out (Sec. 23 KapMuG).

5. Available Remedies

Test case proceedings end with a declaratory judgment or settlement, which either establishes grounds for a liability of the defendant or a right to performance under a contract governed by the WpÜG. In a second step, this result becomes the basis for the individual damages actions brought by the plaintiffs.

6. Costs and Funding

The loser pays principle applies. The three-step procedure renders the distribution of costs more complicated but also cheaper for each involved litigant: there is a pro rata distribution of costs for the test case proceedings. They are considered as a part of the costs of the subsequent individual lawsuits and depend on their value (Sec. 24 KapMuG). In addition, costs for the individual proceedings (court fee and legal advice) have to be assumed.

7. Number of Claims

To date more than 10 test case proceedings have been brought, the majority of which is still pending.

8. Critiques

The critiques of the 2005 KapMuG have been taken into account in the 2012 revision of the Act. Its scope was extended to claims based on the use of wrongful or deceptive information or the deficient clarification of the faultiness of such information. This makes it easier for the plaintiffs to establish grounds for a liability of the defendant. Also, settlement procedures have been included which have proven successful in financial market cases in the Netherlands.

A persisting critique concerns the 'individualistic' procedural rights of the involved plaintiffs. It is asserted that they would hinder the KapMug from being a truly efficient collective mechanism. Plaintiffs can, for example, request an extension of the test case proceedings beyond their original scope, thus prolongating the proceedings. In reality though, the differentiated pleading of each claimant can prove very effective for the others: if one plaintiff does not succeed with his arguments, an other might well establish facts pointing to a liability of the defendant. As the declaratory judgment on all aspects of the case is binding on all parties involved, the complainant whose argument did not succeed will, in the end, nonetheless be successful with his individual damages claim, with the help of his co-complainant.

It has also been criticised that the test case proceedings involve two courts which slows down the process.

1. The trial has been decided by the Higher Regional Court (OLG) Frankfurt on 16 May 2012 and is currently pending at the Federal Court of Justice (BGH), XI ZB 12/12; see also ZIP 2012, 1236.


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