RI news analysis: what would a ‘class-action’ lawsuit in Germany look like for investors in Volkswagen?

Since the emissions rigging scandal at Volkswagen (VW) broke nearly two months ago, the auto giant has been hit by a flood of lawsuits from domestic investors seeking compensation for the steep fall in VW’s share price caused by the scandal. Now, there are reports that big international investors like Nordea Asset Management of Sweden and Dutch pension investor APG, are considering litigating for the same reason. Regarding the German lawsuits, Responsible Investor has already reported on one, filed last October by the Tübingen-based law firm TILP. The investor in the suit alleges VW violated German securities law (Wertpapierhandelsgesetz or WpHG) by failing to disclose in a timely manner that its diesel engines had been rigged to have lower nitrogen oxide (NOx) emissions during tests.
But it’s emerged that the TILP lawsuit is just the tip of the iceberg. More than a dozen lawsuits alleging breach of the WpHG have been filed with appellate courts in Germany, where VW is listed. TILP lawyer Marc Schiefer says there are more are to come from his firm, including a case involving US-based institutional investors. Schiefer also says that TILP has been contacted by 2,000 investors in total, with around 100 of them expressing a wish to bring a claim against the German automaker. It has been reported that Nordea and APG are also considering litigation as one option in the wake of the scandal. Both companies had no further comment.
The purpose of the lawsuits filed is to bring about the German equivalent of the class-action lawsuit, which, in the short version, is called ‘KapMu.’ The KapMu process starts when ten or more investors file claims against the same defendant and based on the same facts with an appellate court (Oberlandesgericht or OLG in German). The OLG then decides if the claims are legitimate and which of them gets KapMu status – that is serves as a “model” for the rest. “This is done for the sake of efficiency,” says Jürgen Kurz, a spokesman for German shareholder protection group DSW. Another feature of the KapMu is that if the court decides for the plaintiffs, the defendant does not pay out the compensation in a lump sum like in US class-action cases. “Instead, the compensation for each investor is calculated separately,” says Kurz.KapMu has only been around since 2005, as lawsuits seeking compensation due to breaches of German securities laws were much rarer before then. But the law became necessary after a high-profile case involving Deutsche Telekom, the German telecoms giant. In the event, no less than 17,000 of Telekom’s investors sued the company for violating the WpHG during a third public offering of shares in 2000. The investors charged that prior to the offering, Telekom misrepresented its finances to sell its shares at an artificially high price.
After years of legal wrangling, a German Federal Court last December issued a ruling partially upholding the investors’ view. This means Telekom may have to pay out some of the €80m in total compensation demanded by the investors. The only other prominent case involving KapMu dates back to 2007, when ten investors sued Daimler AG, another German auto giant, for failing to report the departure of Chief Executive Jürgen Schrempp in a timely manner. Daimler’s shares soared on the news in late July 2005, but the investors had already sold their holdings in the firm. The OLG in Stuttgart ruled against the investors. In the case of VW, the investors charge that VW violated the WpHG by waiting until September 18 to disclose the emissions rigging. In the days that followed, its share price lost almost 40%, wiping away billions of euros in VW’s market capitalisation. There is some evidence to support their claim. According to German press reports, VW’s senior management was made aware of the emissions rigging back in 2011 both by an employee and by Bosch, a supplier of fuel injectors for VW vehicles. VW itself has declined to comment further on the scandal until an investigation led by US law firm Jones Day is completed. It has, however, vowed to get to the bottom of the scandal and restore the damage done to its reputation. Since the scandal broke, VW has recalled 11m diesel engines to remove the rigging software, known as a “defeat device.” Last week, it also admitted that another 800,000 petrol-driven cars may be equipped with the device, which would have allowed them to manipulate emissions of carbon dioxide (CO2) during tests. Beyond the flood of lawsuits, VW faces possible regulatory fines totalling billions of euros.
That leaves the final question of whether a KapMu against VW will succeed. It’s too early to tell, not least because the Jones Day investigation is ongoing. TILP, however, was the lead law firm in the Deutsche Telekom KapMu case, so watch this space!