Bundestag passes new Capital Markets Model Case Act – Faster model case proceedings and broader scope

On 13 June 2024, the German Bundestag approved the reform of the Capital Markets Model Case Act (Kapitalanleger-Musterverfahrensgesetz or KapMuG). It is due to come into force this summer, replacing the previous law for new proceedings.

Background to the Capital Markets Model Case Act

The reason for the introduction of the Act in 2005 was the sheer volume of individual lawsuits filed by investors in connection with Telekom AG’s third IPO in 2000 and the resulting overloading of the courts. The idea was to establish a powerful instrument of collective legal protection for capital market disputes in Germany in order to improve legal protection for individuals and relieve the courts. Until the introduction of the Capital Markets Model Case Act, there were no comparable instruments of collective legal protection in German civil proceedings. The legislators’ apparent scepticism towards entirely new, collective civil proceedings was always evident from the fact that the Capital Markets Model Case Act had an expiry date. In its current version, it would have automatically expired at the end of August 2024.

New Capital Markets Model Case Act now applies indefinitely

In contrast, the Capital Markets Model Case Act, which has now been completely revised, no longer contains a sunset clause. It will continue to apply indefinitely. Numerous experts had spoken out in favour of extending the Capital Markets Model Case Act back in 2019. However, it was not a foregone conclusion that the Capital Markets Model Case Act would be extended. After all, collective redress was significantly expanded at the end of 2023 as part of the implementation of the Directive on Representative Actions through the newly introduced representative action. This raised the issue of whether the Capital Markets Model Case Act was still needed at all. Legislators in Germany are now clearly in favour of this. It now intends to place the various instruments of collective legal protection under the Representative Actions Act and the Capital Markets Model Case Act on an equal footing on a permanent basis. Affected companies must be prepared to be exposed to both a representative action and an investor test case at the same time.

As before, the Capital Markets Model Case Act only concerns specific issues of investment law, but is open to both companies and consumers.

By contrast, representative actions can only be initiated in the interests of consumers and micro-enterprises, albeit with a broad scope of application. (New collective actions - Act on representative actions in force)

Scope of application of the new Capital Markets Model Case Act – Crypto assets and rating agencies now also in focus

The scope of application of the Capital Markets Model Case Act will also be significantly expanded.

As before, the Capital Markets Model Case Act will allow the pooling of lawsuits by aggrieved investors for claims due to false, misleading or omitted public capital market information or for claims arising from the German Securities Acquisition and Takeover Act (Wertpapiererwerbs- und übernahmegesetz). In addition, claims against the custodians of crypto assets are now also to be pooled in proceedings under the Capital Markets Model Case Act. It was only in the course of the current legislative process that the Bundestag also decided to include rating agencies and auditors in the focus of the new Capital Markets Model Case Act. Pursuant to section 1(1) no. 9 of the new Capital Markets Model Case Act, ratings relating to issuers or providers of investments within the meaning of the Ratings Regulation will also qualify as “public capital markets information” in future and can therefore form the basis for model case proceedings. The same applies to auditors’ reports on the annual financial statements and consolidated financial statements of issuers of investments that must be disclosed. It can therefore be expected that rating agencies and auditors may also move into the focus of investor representatives and will have to defend themselves against model proceedings in the near future.

Faster proceedings – Strong higher regional courts, weaker parties

However, extending the scope of application of the Capital Markets Model Case Act was not the legislators’ primary aim. Rather, the primary aim was to significantly speed up the model proceedings, which are often perceived as cumbersome and too lengthy. To achieve this, the position of the higher regional courts in Germany, where test case proceedings will still be conducted at first instance, will be considerably strengthened. The higher regional courts are supposed to only initiate applications for model case proceedings addressed to them if they consider this expedient. In addition, they will have the task of formulating the objectives of the model case themselves by issuing an initiation order (Eröffnungsbeschluss). According to the express intention of the legislators, the higher regional courts will also have the option of reducing the applications formulated by the parties and tailoring the subject matter of the model case proceedings so as to guarantee efficient implementation of the model case proceedings.

The legislators hope to further accelerate proceedings by no longer having to stay all pending court proceedings in which the outcome depends on a model case. Rather, only proceedings in which an application has been made to conduct proceedings under the Capital Markets Model Case Act or in which the claimant has expressly applied for a stay after the commencement of model proceedings are to be stayed. This is expected to result in fewer parties having to be heard in the actual model case proceedings.

Submission of evidence may be ordered

If a model case comes about, it will be conducted in the first instance before the higher regional courts in accordance with the rules applicable to conventional first-instance civil proceedings between the model claimant and the model defendants, possibly with the participation of other interested parties. During the legislative process, however, the legislators decided to introduce a change to procedural law which may be significant especially for the defendants. In future, the higher regional courts may, at the request of one of the parties, order the other party or third parties to produce evidence that is necessary for the test case. The relevant new section 17 of the Capital Markets Model Case Act is based on the provision in section 33g of the German Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen), which was already included in 2017 as part of the implementation of the Cartel Damages Directive. As in that legislation, the legislators intend to eliminate asymmetries of information. Compared to other legal systems, German law rarely requires a party to provide evidence that could influence the outcome of the proceedings to its detriment. In light of this, it will be interesting to see to what extent submission orders under section 17 of the Capital Markets Model Case Act will be issued in the future and to what extent they will increase the attractiveness of proceedings under the Capital Markets Model Case Act from the claimants’ perspective.

Outlook

It remains to be seen whether the new Capital Markets Model Case Act will fulfil the expectations placed on the legal reform. In any event, the hundreds of model case proceedings in recent years, some involving billions of euros in dispute, show there is still a major need for collective legal protection in proceedings relating to capital markets law. The strong new role of the higher regional courts will undoubtedly speed up model case proceedings. It will be interesting to see whether it will make the proceedings more attractive for the parties, whose role will be weakened compared to the courts. In future we will also see whether the permanent coexistence of specific capital markets model proceedings under the Capital Markets Model Case Act and representative actions will lead to any friction. The legislators intend to evaluate the revised Capital Markets Model Case Act in five years’ time.