8.4.1 The Capital Markets Model Case Act

In 2000, Deutsche Telekom, a German (mobile) phone operator, issued shares on the Frankfurt Stock Exchange. Prior to the issue, Deutsche Telekom published and distributed a prospectus. The share price was determined at EUR 66.50 per share. However, soon after the issue, the share price of Deutsche Telekom fell quite considerably. A high number of investors that suffered losses on this transaction started individual court proceedings against Deutsche Telekom. They claimed damages for the losses they incurred as a result of the publication of a prospectus allegedly containing misleading statements. German private law did not provide explicit rules on model case proceedings. Without a statutory regulation and due to traditional res judicata rules, a court judgment in a model case selected by the group of claimants and the defendant has no binding effect upon the other members of the group which are not a formal party to the court proceedings.1

In a reaction to the Telekom mass claim, the German legislator adopted the Capital Markets Model Case Act (Kapitalanlager-Musterverfahrensgesetz, KapMuG)2 in order to alleviate the courts from the burden to deal with the vast number of identical individual claims against the same defendants.3 Furthermore, the Act aims to facilitate court access and compensation for investors that suffered a relatively small loss relative to the costs and risks of litigation.4 This Act provides the investors with the possibility to initiate a model case proceeding in which the Higher Regional Courts (Oberlandesgericht, OLG) rule with binding effect on factual and legal issues that these claims have in common. The use of this method of collective redress in mass claims is limited to damage claims for losses suffered as a result of false or misleading information disseminated on public capital markets.5

The enactment of the Capital Markets Model Case Act provides investors with the option to some form of collective action in which damages can be claimed from an issuer that published false or misleading information in a prospectus. When at least 10 investors with an identical claim request the courts of their region to initiate model case proceedings, the Higher Regional Court selects one of the claimants as model case claimant. In the model case proceedings, the Higher Regional Court rules with binding effect on factual and legal issues that these claims have in common.

Issues that may be common to all claims are the fact whether there was an investment market sentiment such that liability constituting causation is established, i.e. the claimants made that investment decision on the basis of the prospectus containing false or misleading information. Furthermore, the Higher Regional Court may establish the extent to which the fall in the securities market price can be attributed to the facts about which false or incomplete information was provided in the prospectus, i.e. liability completing causation.

Lower courts dealing with other claims in which one of these common factual and/or legal issues also arise, have to stay the proceedings ex officio until the Higher Regional Court has given its model case ruling. This ruling is binding in the sense that the lower courts have to apply this ruling in their decisions on the pending claims. The individual circumstances of each claimant will be dealt with by the lower courts when they resume the pending proceedings after the model case ruling. Issues of fault on part of the claimant and causation that are not common to all claimants remain to be decided by the lower courts when they rule upon the claim for damages. An example of these individual circumstances is the defendant who claims and proves that the individual purchaser knew at the moment of acquisition the falseness or incompleteness of the information contained in the prospectus.

In order to facilitate the effective management of the mass claims, the Act also introduced section 32b in the German Code of Civil Procedure (Zivilprozessordnung, GCCP). The competent court to bring damage claims for losses caused by false or misleading information disseminated on public capital markets is the court of the issuing company's seat.6 The following defendants that qualify as persons responsible for the prospectus can be sued at this court: the issuing company, its members of the board of directors and the supervisory board, the offeror, the lead manager and the other sponsoring banks.7 It is important to note that section 32b is only applicable to companies with a seat in Germany8 such that this jurisdiction rule is not in contravention with the jurisdiction rules laid down in the Brussels I regulation.9 I will now provide an overview of the model case procedure.