Dispute Resolution – Litigation – Arbitration Proceedings04.11.2024 Newsletter
The reform of the KapMuG: phoenix from the ashes?
The Second Act to Reform the Capital Markets Model Case Act (Kapitalanleger-Musterverfahrensgesetz - KapMuG) came into force on 20 July 2024. The aim of the reform was to streamline and modernise this particular form of model case proceedings, which is intended to make it easier for aggrieved investors to assert their claims against supposedly unassailable opponents on an equal footing.
Functionality of the KapMuG
With the introduction of the KapMuG in 2005, the legislator created an instrument that to this day enables model case proceedings to be conducted in cases of false, misleading or omitted public capital market information, for example in annual financial statements or stock exchange prospectuses. As soon as identical factual or legal questions arise in at least ten individual, first-instance damages proceedings and the claimants in these proceedings submit a model case application, these questions can be submitted to the Higher Regional Court, which decides on them uniformly for all claimants. This so-called model decision subsequently binds the courts in the original proceedings with respect to their decision on the individual claims.
Advantages of the model case proceedings
In principle, model proceedings are a powerful instrument of collective legal protection for private investors and investors and offer major advantages. For example, there is a significantly lower risk of legal costs compared to an individual lawsuit, as the cost risk is generally only around 25 percent of that compared to a standard lawsuit that goes through three instances. In addition, the intention of the law was to relieve the burden on courts of first instance with the model case and the clarification of centralised proceedings and to prevent conflicting decisions.
Criticism of the KapMuG
Nevertheless, in practice, KapMuG proceedings often turn out to be lengthy and complicated processes. The first and probably best-known proceedings against Telekom AG were only concluded by settlement in 2021, around 20 years after the lawsuit was filed. The fact that all pending individual proceedings before the regional courts had to be stayed ex officio was criticised as particularly negative.
The original idea of relieving the courts of first instance did indeed come about, but at the same time led to an enormous delay in the proceedings for the individual investors. This was due to the fact that - as long as the Higher Regional Court had not ruled on the relevant issues in its KapMuG proceedings - the initial proceedings remain suspended and individual investors had no opportunity to advance their own case.
Furthermore, as its name suggests, the KapMuG procedure only has a model effect, i.e. the final decision on the individual claim remains the responsibility of the court of origin. This means that the courts have to "handle the individual file twice" in each case - which critics see as one of the main weaknesses of the law.
Reform-related changes with a focus on accelerating procedures
The legislator therefore decided to reform the KapMuG and focussed in particular on speeding up the procedure. To this end, various adjustment possibilities were utilised and the following amendments, among others, were adopted:
1. Shortening of legally defined periods
The first acceleration is achieved by shortening legally regulated time periods. For example, the period from the individual action to the model case proceedings has been shortened by reducing the period until the start of the model case proceedings before the Higher Regional Court. The Higher Regional Court is obliged to publish the model case applications in the model case register within three months of receipt of the application as opposed to six months as was previously the case (Section 4 (1) sentence 2 KapMuG).
2. Strengthening the position of the Higher Regional Court
Previously, the Higher Regional Court was bound by the order to refer the case and the declaratory objectives of the proceedings formulated therein and only had to select a model claimant on the basis of the reference order in order to initiate the KapMuG proceedings. Until now, it was only possible to amend or extend the questions referred by the parties involved by submitting an application for an extension. With the reform of the law, an order to initiate proceedings is now required by which the Higher Regional Court can "structure the matter in dispute and redefine the declaratory objectives of the proceedings" (Section 9 (1) KapMuG). This gives the Higher Regional Court flexibility in organising the proceedings and allows it to independently assess the relevance of individual declaratory objectives.
3. Reduction in the number of parties involved
The reform of the KapMuG weakens the close link between the initial proceedings and the model case. The regional courts are no longer obliged to stay all pending proceedings that are affected by the decision of the declaratory judgement ex officio. Instead, only those proceedings for which a model case application had been filed are to be stayed (Section 10 (1) in conjunction with Section 6 KapMuG). Unlike previously, the other original proceedings will only be stayed upon application. It now suffices that the proceedings are "likely" to depend on the declaratory objectives of the KapMuG proceedings. Although this makes the proceedings more flexible, the original aim of avoiding parallel proceedings and conflicting decisions has been significantly weakened.
Criticism of the reform: American conditions in German civil proceedings?
In addition to these adjustments, which were aimed at speeding up the proceedings, the legislator’s additional aim was to bridge the information gap between the claimant and the issuer. The aggrieved investors bear the burden of proof for practically all claim prerequisites, which presents them with difficulties when it comes to the level of knowledge of individual authorised representatives of the issuer. In practice, this proof often requires access to internal documents such as meeting notes, agendas or minutes of meetings. According to the general rules of German civil procedure, however, the injured party is not entitled to demand such internal information from the injuring party.
The reform legislator is countering this problem with the introduction of the new Section 17 KapMuG, according to which the Higher Regional Court may order the model defendant to produce certain documents, even if they are not publicly accessible or already in the claimant’s possession. Critics see this as a breach of the principles of German civil procedure and fear that the introduction of a discovery procedure will lead to the introduction of "American conditions".
In fact, the correction of the information gap in special types of proceedings is not new. The legislator had already introduced a similar procedure for ordering document submissions for cartel damages proceedings in 2017 (see Section 33g of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen - GWB). It remains to be seen how practicable the new provision in the KapMuG will be - in any case, Section 33g GWB is rarely applied due to the increased requirements for the exact designation of the documents to be submitted.
Similar difficulties in implementation are also to be feared with the new regulation in the KapMuG.
Outlook
The reform has made important changes and improvements to the law and laid the foundation for accelerated proceedings. It remains to be seen whether the legislator's plans will materialise and whether the new KapMuG will be practicable.
Implementation by the courts remains a relevant factor for accelerated proceedings. In particular, the courts' handling of possible parallel proceedings and the new procedural instrument of the document production order are likely to play a special role in the success of the reform.
The Litigation & Arbitration team at Oppenhoff helps you to avoid conflicts by carefully drafting contracts and clearly defining rights and obligations.
Where disputes are unavoidable, the team will represent your interests before the state courts and arbitration tribunals - with convincing arguments and customised litigation tactics. The team has already successfully defended against several class lawsuits.
You can read more regaring this topic here:
