In Germany, investors that have suffered losses in connection with the trade of securities can claim damages in a quasi-collective mechanism, the so-called “KapMuG”. In addition to the KapMuG, there is now a new instrument called Abhilfeklage (“Remedial Action”) that investors could potentially use to reclaim investment losses. The Remedial Action may allow recoveries with greater speed and finality than the KapMuG. However, the new mechanism comes with a number of restrictions that make it rather impractical for investment recovery cases. These include limitations on the types of eligible claimants and limitations on the use of third-party funding. As a result, we believe the KapMuG, despite its weaknesses, is and remains the most feasible instrument for institutional investors to reclaim securities losses due to illegal conduct.
In Germany, investors that have suffered losses in connection with the trade of securities caused by unlawful conduct can claim damages in a quasi-collective mechanism, the so-called Capital Investors Model Declaratory Action or Kapitalanlegermusterverfahrensgesetz (“KapMuG”). The KapMuG was initially enacted in 2005 and has since received mixed feedback from academia and practitioners alike. It is not a true class action but has some relevant features that make it easier for groups of damaged investors to reclaim their losses. The key benefit is that key issues regarding the defendant’s liability, such as market misrepresentation, stock price relevance, and culpability, can be addressed and decided with binding legal effect for the whole group of participating and registered claim holders.
The KapMuG mechanism is, however, designed as a declaratory and intermediate step only, and investors participating in a KapMuG action will, even in the case of a fully positive finding of the KapMuG court, still need to continue and litigate their individual damages actions if the defendant refuses to settle. This can use up significant additional time and resources. Also, the KapMuG proceedings in front of the higher regional courts themselves have often taken much longer than expected.
Legislators are currently in the process of updating this type of proceedings based on the practical experiences had so far, and they are expected to remove the expiration date this mechanism had, as a piece of experimental legislation, initially come with. In a future article, subject to the enactment of the revision, we will feature an overview of the relevant changes to the law and their practical effects on future investment recovery litigation in Germany.
In addition to the KapMuG, there is now a new instrument called Abhilfeklage (“Remedial Action”) that investors could also potentially use as a further mechanism to reclaim investment losses. The Abhilfeklage is part of Germany’s implementation of the European Collective redress directive, and it marks a further step towards making collective claims accessible in German courts. But could it also help speed up investment recovery cases?
A key advantage of the new mechanism compared to KapMuG proceedings is that the court can actually issue a final and binding decision on liability and quantum, i.e., a fully enforceable judgment.
This is a first time in German civil procedure. Please see here for a broader first analysis of the newly enacted mechanism from the Deminor team.
The scope of the new mechanism is rather broad. It can generally be used in all kinds of civil disputes, as long as a sufficiently large group of (at least 50) potential plaintiffs is affected by the alleged wrongdoing.
However, the new mechanism comes with a number of restrictions that make it, in our opinion, rather unappealing and impractical for investment recovery cases. First and foremost, participating claimholders in the action can only be retail investors (consumers) and small companies (up to 10 full time employees and up to EUR 2 million in annual revenue). This broadly excludes institutional investors.
What is more, eligible claimholders cannot simply join together and file an action. Only consumer protection agencies and comparable institutions can act as plaintiffs. Those institutions have access to limited financial and human resources and need to prioritize what actions to focus on, which rarely includes investment losses, unless a huge number of individual retail investors have been harmed.
Finally, the law has been updated during the last steps of the legislative process to include strict limitations on the possibility of third-party funding. This will limit the potential practical use of the mechanism in investment recovery cases and beyond.
In summary, we believe the KapMuG, despite its weaknesses, is and remains the most feasible instrument for institutional investors to reclaim securities losses from illegal conduct.
With the revision process underway, future cases may also lead to more efficient and quicker resolutions. We will follow up as soon as the revision of the mechanism has been enacted.
