Lorena Kern
Katja Bullemer-Wülfert

The German Bundestag, or Federal Parliament, passed a reform of the Capital Markets Model Case Act (KapMuG) on June 13, 2024, and Germany’s Federal Council (Bundesrat) passed it on July 5, 2024. The reform is expected to take effect before the previous version expires on August 31, 2024. In the following guest post, Lorena Kern and Katja S. Bullemer-Wülfert of the DRRT law firm take a look at the reformed KapMuG and consider the possible implication of the reformed Act’s new provisions. A version of this article previously was published as a DRRT law firm client alert. I would like to thank Lorena and Katja for allowing me to publish their article on this site. I welcome guest post submissions from responsible authors on topics of interest to this site’s readers. Please contact me directly if you would like to submit a guest post. Here is Lorena and Katja’s article.

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After a heated debate, the new reform of the Capital Markets Model Case Act (Kapitalanleger- Musterverfahrensgesetz, KapMuG) has finally been passed by parliament and will soon come into force. In the reformed version of the law, which is now no longer time-limited, significant adjustments in the areas of suspension of proceedings and access to evidence point the way towards increased efficiency and the strengthening of the balance between the opportunities afforded to the parties involved in the proceedings (i.e., equality of arms).

1. Brief History of the KapMuG

    The KapMuG was introduced in 2005 to relieve the burden on the courts by bundling individual lawsuits related to the IPO of Deutsche Telekom AG in 2000 and the truckloads of documents associated with it. Prior to the KapMuG, there was no comparable instrument of collective legal protection in German civil proceedings; “class actions” in the sense of U.S. “class actions” were always frowned upon.

      However, procedural obstacles and complications for claimants and their legal representatives are increasingly the order of the day. In addition, considerable cost risks make it very difficult to finance proceedings that are otherwise too expensive, even for institutional investors.

      Will this change with the new KapMuG 2.0?

      2. Reform Before the End of Its Term

      The KapMuG was set to expire at the end of August 2024. The German Bundestag passed the latest reform of the KapMuG on June 13, 2024, with the reformed KapMuG set to come into force this summer with no fixed term ending. At the last minute, the legal specialists and practitioners consulted were able to introduce positive, investor-friendly amendments. It may still be a long way from perfection, but it is certainly a big step towards protecting investors who have suffered losses.

      What happens next?

      3. Significant Changes Compared to the Status Quo

      Expansion of the scope of application: In an effort to keep up with the market, the new KapMuG now also covers claims against custodians of crypto assets, rating agencies, and auditors.

      Acceleration of proceedings: The primary aim of the reform is to speed up model case proceedings. The Telekom and Hypo Real Estate proceedings lasted 20 and 13 years, respectively, before reaching a settlement.

      How is this supposed to work?

      The higher regional courts will be given more powers in the future: Model proceedings brought before them are only to be opened if they deem this appropriate. In addition, the higher regional courts will formulate the objectives of the model case themselves in an opening order, instead of relying on orders of reference from the regional courts and expanding these with laborious supplementary applications. According to the legislator’s intention, the higher regional courts can also fall short of the parties’ requests and reduce the subject matter of the model case proceedings to ensure efficient implementation.

      It is also no longer necessary to stay all court proceedings whose outcome depends on a model case, but only those in which an application for the conduct of KapMuG proceedings has been filed, or the plaintiff has expressly requested a stay after the commencement of model case proceedings.

      As a fundamental change, sections 3, 6 and 10 KapMuG now explicitly set out an abstract dependency standard for the first time. With the announcement of the model case application, the respective initial proceedings are interrupted insofar as the decision in the legal dispute is likely to depend on the asserted declaratory objectives. By introducing the term “presumably”, the flexibility originally intended by the legislator is anchored in the legal text, clearly rejecting the concrete dependency standard “interpreted” into the old KapMuG by the Federal Court of Justice (Bundesgerichtshof, BGH), which unduly strained the preliminary review by the regional courts and thus the duration of all proceedings before suspension. This amendment significantly lowers the hurdles for a stay and thus makes it considerably easier for plaintiffs in initial proceedings to access model proceedings in the future. It no longer depends on every detail, and time-consuming taking of evidence at the level of the regional court can and should therefore be avoided.

      Concerning the collection of evidence, the legislature also reformed the KapMuG in a positive way for plaintiffs. The previous version of the KapMuG was particularly unsatisfactory in this regard, especially in proceedings against large corporations where the parties involved are simultaneously engaged in various civil and criminal proceedings, as relevant evidence produced in those proceedings was often unobtainable by investors. The reform seeks to rectify this by mitigating information disparities between parties and enhancing the appeal of KapMuG proceedings from the plaintiff’s standpoint.

      At the request of the model claimant or the model defendant, the Higher Regional Court must order the other party or a third party in possession of the evidence to submit it if the relevant requirements are met. The change is expected not only to increase efficiency and speed but also increase the pressure on the parties involved to reach an agreement more quickly.

      Accompanying changes will also affect the measures to be taken in the event of an impending statute of limitations and the German Civil Code (Bürgerliches Gesetzbuch, BGB). According to the new version of the KapMuG, the suspension of the statute of limitations begins with the public announcement of the order of reference (section 7 (4) sentence 1 KapMuG) if a claimant files a claim in the model case based on the same facts as the declaratory objectives. Consequently, it will no longer be necessary to wait for the later date of the model claimant’s announcement. The aim of this change in timing is to strengthen the application as a comparatively cheaper and lower-threshold form of initial legal action in the interests of the bundling effect of the model case. In the future, claims can therefore be filed by exhausting the time limit under section 13 (1) sentence 1 KapMuG, if they were not yet time-barred at the time of the public announcement of the order of reference. This means that, depending on the current limitation periods, it is likely that more notifying parties will be able to benefit from this over time and at a lower cost risk.

      4. Effects on Pending Proceedings

      The new regulation will only apply to newly initiated proceedings from the time it comes into force, and therefore has no retroactive effect.

      However, the amendments made express the legislative will so clearly, particularly regarding aspects such as the abstract dependency standard and the obligation to produce documents, that the changes can also simplify the interpretation of the existing provisions and should therefore also have a meaningful impact on the legal interpretation of the old KapMuG in proceedings that are already pending.

      For now, the courts’ approach of imposing excessive formal requirements, especially in the initial stages of proceedings, often block efficiency. However, it remains to be seen whether the lower courts will follow this logic and the now expressly announced will of the legislator.

      5. Outlook

      The new regulation represents an important milestone, and it will be interesting to see what influence the new law will have on the application and interpretation of already pending capital investor test cases, especially in view of the unfortunate BGH decision in the XI ZB 13/18 case and its interpretation and application in the lower courts. This will be particularly relevant in more recent proceedings, such as the claims against Bayer AG (arising from the Monsanto takeover and the Roundup risk) and against EY (arising from the Wirecard scandal).

      As some of the amendments can clearly be categorized as “that’s what was always meant”, from a lawyer’s point of view, the approach that complications and delays, as well as practically and tactically absurd and unnecessary hurdles such as splitting up proceedings, must become obsolete in ongoing proceedings must be clearly advocated. The will of the parliamentary legislators has been clearly set out in black and white since the amendment to the KapMuG was passed. The pending amendments represent a clear removal of unnecessary obstacles. Allowing the ideas of the reformed wording to take effect now, as far as possible, is not an option, but a necessity in terms of legal protection.