In a milestone in the development of collective investor actions in Germany, a plaintiff in a proceeding against Hypo Real Estate Holding and arising out of the global financial crisis had reached an agreement to settle the action for €190 million. The case against Hypo Real Estate Holding was brought under the German Capital Markets Model Case Act, known as KapMuG. As discussed below, this settlement has very important implications for the development of collective investor actions in Germany, and, indeed, worldwide. A copy of the plaintiff law firm’s June 1, 2022 press release describing the settlement can be found here.
This case goes back to the global financial crisis. Hypo Real Estate Holding was at the time (and remains) one of the largest commercial real estate lenders in Germany. As the financial markets began encountering turbulence in 2007, HRE provided reassurance that it would remain unaffected by the market disruption and the subprime crisis. However, in a January 15, 2008 disclosure statement, the company announced a €390 million write-down on collateralized debt obligations (CDOs) for the fourth quarter of 2007. The company’s share price declined over a third on this news. Following this development, the company’s difficulties began to spiral, and in October 2008 the company received a massive German government bailout. The size of the rescue package ultimately reached €50 billion.
In January 2009, Christian Wefers of the DRRT law firm initiated court proceedings against HRE under the Kapitalanleger-Musterverfahrensgesetz (KapMuG), the German Capital Markets Model Case Act. The Act’s basic features and comparison to the U.S. securities class action procedures are discussed in detail here. The aim of the model case proceeding is the issuance of a ‘model case ruling’ by the competent Higher Regional Court that resolves all factual and legal questions of general relevance for all and not only for individual cases pending before the courts trying the matter.
In the KapMuG proceeding, Wefers acted as the model plaintiff for over 100 clients. In the model case, the statement of claim alleged that HRE had disseminated false or misleading information and intentionally delayed the distribution of material information concerning the company’s actual financial situation.
On February 5, 2021, nearly eleven years after the model proceeding was commenced, the German Federal Court of Justice (BGH) released its decision in the matter, making several key findings of importance for the continuation of proceedings in the Higher Regional Court. Among other things, the BGH make determinations concerning certain statements of HRE during 2007 about the company’s financial condition; the quality of the company’s CDO holdings; and the exposure of its CDO holdings to subprime-related lending. In effect, the BGH decision resolved all of the major substantive issues for the parties in the model case.
In recent months, the parties to the model proceeding were able to negotiate a settlement on behalf of the group of investors represented in the proceeding. Pursuant to the settlement (the specific terms of which are confidential), HRE is to pay the group of investors €190 million. The settlement resolves the claims of the claimants represented by Wefers, who are the vast majority of claimants.
As I noted at the outset, the settlement of HRE proceeding represents an important milestone on the global rise of collective investor actions. For many years even in the recent past, collective investor actions were principally limited to the U.S. and a few other common law countries (primarily Canada, Australia, and, to a lesser extent, the U.K.). As this settlement, and other high-profile settlements in other countries, collective investor actions are now evident elsewhere, and as the size of this settlement shows, of increasing importance as well.
The settlement in the HRE proceedings comes shortly after the 2021 settlement of the Deutsche Telecom KapMuG proceeding, which had been pending since 2001. To my knowledge, the HRE settlement is the largest ever in a KapMuG case; while there is no official figure on the Deutsche Telecom settlement, estimate put the value of that settlement below €100 million.
In addition to the settlement’s size, the HRE settlement is also important for what it represents. In its press release describing the settlement, the plaintiff firm DRRT stated that the settlement is “the first time” that “capital market claims of large German and international institutional investors have been successfully enforced against a German credit institution before German courts.”
The recent substantial settlements in this case and the Deutsche Telecom case show that the KapMuG proceedings can be used to obtain substantial remedies for allegedly aggrieved investors. However, the fact that the HRE case was in process for over 13 years and the Deutsche Telecom case went on for over 20 years suggests that actions under the KapMuG procedures can be time-consuming and cumbersome. The KapMuG procedures have been criticized as too long, too inconvenient, and too complex, although the German Bundestag did in 2020 extend the applicability of the KapMuG legislation through to December 31, 2023, as possible procedural alternatives are considered in the interim.
For all of the criticisms of the KapMuG process, the recent settlements of KapMuG proceedings do show, as the plaintiff law firm’s press release puts it, “that investors can still be successful through the KapMuG process.” There are in fact several high-profile cases using the KapMuG process currently pending including, among others, ongoing proceedings against Wirecare, Volkswagen, Porsche, Daimler, and Bayer.
I have said it before and I will say it again, the global rise of collective investor actions outside of the U.S. is one of the most interesting and most important developments in the world of corporate and securities litigation. Among many other things, the significance of this development is that companies may now face significant securities litigation risk not only in the U.S but in their home countries as well. This fact has significant implications for the companies themselves and for their D&O insurers.