The New Capital Markets Model Case Act: Five Key Changes for Companies

Since July 20, 2024, a reformed version of the Capital Markets Model Case Act (Gesetz über Musterverfahren in kapitalmarktrechtlichen Streitigkeiten – Kapitalanleger-Musterverfahrensgesetz – KapMuG) has been in force in Germany. The new version of this law for the collective assertion of claims due to false, misleading, or omitted public capital market information is accompanied by significant changes. Not only does the law aim to accelerate the duration of proceedings, it also extends rights of the Higher Regional Courts in determining the objectives of the declaratory judgment. The most significant effect on companies, however, will most likely have the introduction of “discovery” – like rules of evidence.

A. What is New?

1. Submission of Evidence

The most relevant provision from a corporate perspective is probably the new Section 17 KapMuG, which is based on the “discovery” principle applicable in U.S. procedural law. The “discovery” principle stands in contrast to the principle of production of evidence otherwise applicable in German civil proceedings. According to the latter, each party must provide the court with the evidence required for its submission. In disputes under capital markets law, according to Section 17 (1) KapMuG, the Higher Regional Court can now order that “a model case defendant or a third party submits evidence in its possession that is necessary for the model case plaintiff’s presentation of evidence” (“order to produce evidence under Section 17 KapMuG”). In the future, it is therefore not the plaintiff but the defendant who must provide the evidence for the plaintiff’s submission. Inversely, although probably less relevant in practice, the model defendant can request that the model claimant submit such evidence that is necessary for the defense (Section 17 (2) KapMuG).

The obligation to submit evidence is subject to three conditions:

• First, the model case plaintiff must credibly demonstrate that they have one of the claims specified in Section 1 KapMuG (e.g., a claim for damages due to incorrect capital market information).
• Second, he must describe the requested evidence as precisely as possible based on the “facts accessible with reasonable effort.”
• Third, a  insofar”defendant may not be ordered to submit evidence in favor of the plaintiff’s claim insofaras it would be disproportionate, taking into account the legitimate interests of the parties concerned and third parties” (Section 17 (3) KapMuG). In this regard, the court will have to consider, among other things, whether the protection of trade and business secrets or other confidential information precludes the submission of evidence by the defendant (Section 17 (3) nos. 3, 4 KapMuG).

According to the recitals to the law, Section 17 KapMuG’s purpose is to compensate for the “mutual asymmetry of information between the parties to the proceedings that can also be observed in [. . .] claims eligible for model proceedings.” The right to  an order to produce evidence under Section 17 KapMuGtherefore only relates to information to which the plaintiff has no access due to an information asymmetry inherent in his claims under capital market law. It does not, however, relate to situations in which the plaintiff has brought about an information asymmetry himself – whether through his own fault or not (e.g., due the loss of documents that were originally available to the plaintiff).

The German legislator used Section 33g of the German Competition Act (Gesetz gegen Wettbewerbsbeschränkungen – GWB) as a model when establishing new Section 17 KapMuG. It is therefore to be expected that courts will not make excessive demands on the plaintiff’s side when it comes to specifying the requested evidence, as it is already the case in antitrust proceedings. When interpreting the limits of the order to produce evidence under Section 17 KapMuG by weighing up the legitimate interests of the parties concerned (Section 17 (3) KapMuG), the case law developed for Section 33g (3) Sentence 2 GWB will apply. Therefore, the time, personnel, and financial expenditure of the party obliged to disclose will have to be taken into account. Even though the legislator recognizes that the preparation of information or the disclosure of evidence can significantly interfere with business operations, it remains to be seen how the courts will weigh this circumstance in their decision. Section 17 KapMuG will most likely lead to considerable legal disputes in the coming years regarding the scope and type of evidence that is to be provided. The administrative, personnel, and financial burdens that companies may face should not be underestimated.

The documents introduced into the model case by an order to produce evidence under Section 17 KapMuG can also be used as evidence in administrative offense proceedings against the company in accordance with Section 17 (5) KapMuG. However, as companies will often cooperate with the public prosecutor’s office anyway, they might have already made the relevant documents available to them.

2. Extension of the Scope of Application

The group of potential defendants in model case proceedings under the KapMuG has been expanded. Information in “auditor’s reports on annual financial statements and consolidated financial statements to be disclosed” has been included in the catalog of relevant capital market information (Section 1 (2) no. 9 KapMuG). An issue that was previously disputed by the courts has now been regulated by law: The KapMuG applies to claims for damages by investors against auditors because of statements in audit opinions of annual and consolidated financial statements. In the future, model proceedings can also be initiated against rating agencies - as well as against issuers of crypto white papers and securities information sheets (Section 1 (2) nos. 2, 5, 9 KapMuG) – on the basis of the extended catalog of applications.

3. Shortening of Court Deadlines

The reform of the KapMuG also aims to speed up investor proceedings. While previously the trial court had six months to review the admissibility of a model case application, this review shall now be carried out within three months (Section 4 (1) KapMuG). Also, the decision of the trial court to refer the matter to the Higher Regional Court (order of reference) must be made “immediately” after the announcement of nine further model case applications (Section 7 (1) KapMuG).

4. “Tailoring” of Objectives of Declaratory Relief

From now on, the Higher Regional Court is no longer bound by the order of reference of the trial court. This aims to achieve a stronger focus of the Higher Regional Court on relevant questions of fact and law. The new version of the KapMuG will enable the Higher Regional Court to “stratify the subject matter of the dispute and redefine the objectives of the declaratory judgment” in its own opening order (Section 9 (1) Sentence 2 KapMuG).

5. No Automatic Suspension of Individual Proceedings

The automatic suspension of all individual proceedings that are related to the content of the model case proceedings is history with the reform of the KapMuG. According to Section 6 KapMuG, only those proceedings are suspended in which the plaintiffs in the individual proceedings have themselves filed a model case application or have subsequently joined the model case. It is doubtful that this will achieve the intended acceleration of the proceedings and reduce the burden on the judiciary. Instead, courts and affected companies will be exposed to parallel individual proceedings and model case proceedings under the KapMuG. This will be accompanied by increased litigation and therefore costs. Remedial actions and model declaratory actions under the Consumer Rights Implementation Act will also continue to be possible in parallel (Section 1 (3) KapMuG).

B. Outlook

The reform of the KapMuG expands the possibility for the collective assertion of claims in Germany. The new KapMuG offers potential to speed up proceedings due to shorter deadlines. Granting the Higher Regional Court more powers regarding the organization of proceedings is logical and can help to negotiate the essential questions of facts and law more quickly. The legal provisions regarding the submission of evidence will however place a burden on companies. Contrary to the legislative objective, the to-be-expected disputes over the scope of this new disclosure obligation will lead to a prolongation of proceedings. Companies will also have to take into account possible effects, disclosed evidence might have on other proceedings.