Why the Higher Regional Court Munich’s ruling in favour of Wirecard shareholders on ranking of capital market claims in German insolvency proceedings is a positive signal to investors seeking to recover damages in Germany.
In a recent decision, the Higher Regional Court Munich ruled that also in the issuer’s insolvency, shareholder claims for damages asserted on the basis of capital market fraud are not based on the shareholders' membership in the company. In the past, the Federal Court of Justice (“FCJ”) had already ruled that in the event of fraudulent misrepresentation, shareholders are not to be regarded as shareholders, but as third-party creditors because the issuer’s deception has an effect on the capital market from the outside, thus initially leading to the investor's decision to becoming a member in the company in the first place and leaving no room for protection of other creditors to their detriment. 
The Higher Regional Court Munich now confirmed that the same rationale also applies in the issuer’s insolvency. This means that such claims are treated as shareholder claims regardless of membership and are therefore not subject to subordination under German insolvency law, implying that shareholders are eligible to recover anything at all instead of being left with nothing in the issuer’s insolvency.
Background: Wirecard’s Massive Fraud and Investor Claims
After the scandal surrounding Wirecard, thousands of shareholders registered their capital market claims for damages resulting from the massive fraud scheme set up by Wirecard’s former board of management with the insolvency administrator. However, the administrator, together with a joint representative of Wirecard bondholders, objected to these claims, arguing primarily that shareholder claims would rank inferior to other creditors’ claims under German insolvency law because they related to the company’s equity. Betrayed shareholders strongly opposed to this argument, arguing they would never have invested in Wirecard’s equity without falling victim to the Ponzi scheme and that German law does not provide for their claims’ subordination.
Based on the administrator’s and bondholders’ objections, a large German institutional investor therefore initiated court proceedings against the administrator and the bondholders’ representative in 2020 in order to overcome their objections and seek verification by German courts that the administrator’s and bondholders’ legal position had no basis in German law.
After the District Court Munich had followed the administrator’s and bondholders’ position on the ranking question in its first instance judgment, the Higher Regional Court Munich now overturned this decision on appeal. The partial judgment is limited to the ranking question (i.e. does not address merits and quantum of the registered claims) and marks a significant step towards (re-) assuring Germany’s prime position in the international market for securities litigation.
German vs. U.S. Law on Capital Market Claims
Different to US law, which provides for inferior ranking of capital market claims in 11 U.S.C. § 510(b) in the issuer’s insolvency, German insolvency law is lacking an explicit provision subordinating shareholder claims to other creditors’ claims. The administrator’s and bondholders’ argument tries to overcome that hurdle by interpreting a statute dealing with transfer of a remaining surplus to shareholders if all creditors can fully be satisfied (Sect. 199 German Insolvency Code). It would follow from that statute that the administrator could in any case only satisfy shareholder claims if the estate shows a surplus after all creditors’ claims were fully paid. Also, the shareholders would have fallen victim to a fraud concerning the share’s value only, but not concerning their investment in the company’s equity.
The Higher Regional Court rejected these arguments. In its judgment, it sets out in detail that shareholder’s capital market claims rank pari passu with other creditors’ claims under German insolvency law. In essence, the judges rule that damage claims based on misinformation of the capital market have no roots in the shareholders’ equity position, but are rather based on the issuer’s fraud leading to the investor’s purchase of shares. In its reasons, the court extensively refers to the pertinent case law of the FCJ and the European Court of Justice, which had both ruled in favour of defrauded shareholders for the situation prior to the issuer’s insolvency (i.e. that their claims are not blocked by capital maintenance provisions, which effectively serve to protect the company’s other creditors in the same way as a subordination of shareholder claims would). Refuting the administrator’s argument, the court sets forth that this assessment would not change upon opening of insolvency proceedings over the issuer’s assets, also because the FCJ had already referred to its pre-insolvency rulings in decisions on post-insolvency situations concerning other types of companies than stock corporations. The Higher Regional Court concludes that the statutory requirement of protecting the secondary stock market would all the more require applying the same principles in the issuer’s insolvency, in particular because the shareholders position is protected by the constitutional right to property (Art. 14 of the German Constitution).
Interestingly, the court also repeatedly distinguishes German from US insolvency law by explicit reference to 11 U.S.C. § 510. While the US provision explicitly subordinates shareholder claims, there would be no comparable provision in German law. It would be nothing but a political demand to rank shareholder claims inferior to other claims in the absence of a comparable statute, and such statute would also be necessary to overcome the manyfold inconsistencies following from the insolvency administrator’s and bondholders’ legal position.
Implications for Germany's Financial Market
The relevance of the judgment cannot be understated in view of the figures at stake and its impacts on the financial landscape in Germany: For Wirecard, out of a total of registered claims amounting to approximately EUR 15.4 billion, some EUR 8.5 billion relate to shareholders’ capital market damage claims. With an estimated estate of approximately EUR 650 million, the quota will be below 5 percent if these claims rank pari passu with other creditors’ claims, but would rise to almost 10 percent in case they were treated as subordinated claims – at the same time implying that betrayed shareholders would be left empty-handed in that scenario. The latter would constitute a significant drawback for Germany and its reputation as a prime financial market because international investors in publicly traded companies regularly consider the impact of potential damages claims on creditors’ recoveries in an insolvency when reaching investment decisions. If they had to fear losing their entire investment in the company’s insolvency under German law, investors may be inclined to invest in less risky jurisdictions with better safeguards for their money. Against this backdrop, the Higher Regional Court’s judgment is a welcome proof that Germany is and shall remain a safe harbour for investors. The judgment is still subject to appeal on points of law at the FCJ, but it’s well thought reasoning paves the way for an investor friendly outcome of these landmark proceedings.
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