Corporate Governance –

The UK and the EU Agenda

Financial Statementsand

Management Responsibility

British Institute of International & Comparative Law

Professor Peter O. Mülbert, University of Mainz

Director of the Institute for German and international Law

of Financial Services (Mainz)

Overview

I. The Setting

II. A framework for the German discussion

III. The current liability regime for companies

IV. The current liability regime for (management) board

members

V. The current reform debate

VI. The draft proposal of the

Kapitalmarktinformationshaftungsgesetz (KapInHaG)

VII. Conclusion

I. The Setting (1)

1. Factual background

Steep decline of the “Neuer Markt” since 2000

False ad hoc disclosure statements by companies listed

on the “Neuer Markt”

Deutsche Telekom AG: purportedly false stock

exchange admission prospectus

2. Legal developments

1994: Sect. 15 (6) of the Securities Trading Act

2002: Sect. 37b, 37c amending the Securities Trading

Act

2004: Decision of the Federal High Court of Justice on

the Infomatec case

II. The Setting (2)

3. The current reform debate

2001: Government Commission Corporate Governance

(“Baums-Kommission”)

2002: 64th convention of the Association of German

Jurists

2003: Federal German Government: 10-Punkte-Plan

2004: presentation of the proposal of a

Kapitalmarktinformationshaftungsgesetz (KapInHaG) in

September

2004: withdrawal of the KapInHaG for the time being

II. A framework for the German discussion (1)

1. Liability of the company

towards the primary/secondary market public

2. Responsibility of board members

criminal sanctions/administrative fines/civil liability

internal liability towards the company/direct liability

towards shareholders

direct liability towards members of the

primary/secondary market public

II. A framework for the German discussion (2)

3. General problems

causality between the incorrect information and the

acquisition/sale of securities/”fraud on the market”?

presumption of causality between incorrect information

and the acquisition/sale of shares?

limiting liability to the intentional provision of incorrect

information?

limited or unlimited liability?

III. The current liability regime for companies (1)

1. False stock exchange admission prospectus: Sect. 44 et seq.

of the Stock Exchange Act

false or incomplete prospectus

acquisition within a six month period

presumption of causality between publication of the

prospectus and the acquisition

gross negligence at a minimum

restitution in kind

III. The current liability regime for companies (2)

2. False ad hoc disclosure statement: Sect. 37c of the

Securities Trading Act

false statement of any fact to be published pursuant to

Sect. 15 of the Act

known to the public only after the acquisition of the

securities

securities still in possession of the buyer

presumption of causality (between publication and

acquisition)?

gross negligence as a minimum

only compensation in cash, not restitution in kind

III. The current liability regime for companies (3)

3. False statements of any kind: Sect. 826 of the BGB (general

clause for tort liability) according to the principles of the

Infomatec decision

deliberate improper conduct if the company provides

o grossly false information

o with intent to mislead the public and to occasion a

loss

restitution in kind

no presumption of causality, however

4. Failure to publish a legally mandated ad hoc disclosure

statement: Sect. 37b of the Securities Trading Act

IV. The current liability regime for (management) board

members (1)

1. Responsibility for publishing financial information

a. The annual financial statements and the annual report

collective responsibility of all members of the

management board for the preparation

collective responsibility of all members of the

supervisory board for the examination

b. Other mandatory information

competence attributable to individual members of the

management board

residual collective responsibility of all board members

for the supervision of individual board members

IV. The current liability regime for (management) board

members (2)

2. Internal liability towards the company: Sect. 93 of the Stock

Corporation Act

for all losses incurred by the company

rebuttable presumption regarding the violation of duties

by a board member

ordinary negligence as a minimum

IV. The current liability regime for (management) board

members (3)

3. Direct liability towards (ex-) securities holders

a. False stock exchange admission prospectus

only in exceptional circumstances

b. False annual statements/false annual report/false interim

report: Sect. 331 Nr. 1 of the Commercial Code together

with Sec. 823 (2) of the BGB

c. False presentation of the financial condition of the

company at the shareholders’ meeting or to the public:

Sect. 400 (1) Nr. 1 of Stock Corporation Act together with

Sect. 823 (2) of the BGB

IV. The current liability regime for (management) board

members (4)

3. Direct liability towards the shareholders

d. Deliberate improper conduct pursuant to Sect. 826 of the

BGB (Infomatec-decision)

provision of grossly false information to the secondary

market public

with intent to mislead the public and to occasion a loss

restitution in kind

no presumption of causality, however

V. The current reform debate (1)

1. General thrust

massive expansion of the liability regimes for

companies and their board members

joint and several liability of the company and (some of)

its (management) board members

other sanctions relegated to the background

2. Arguments in favour of expanding company liability

V. The current reform debate (2)

3. Arguments in favour of expanding (management) board

member liability towards the secondary market public

increased deterrence, in particular

o … if board members own a substantial portion of

shares or stock options, or

o … if the company is in financial distress (last period-

problem)

catching up with international standards in order to

further the reputation of the German financial markets

V. The current reform debate (3)

4. The case against increasing board member liability towards

shareholders

no need to go beyond the Infomatec-rule

incorrect information results mostly in a redistribution

among investors on the secondary market

internal liability towards the company is adequately

effective in deterring misbehaviour

unequal treatment of investors and other creditors of the

company, in particular other pure tort creditors

liability for information supplied on a voluntary basis will

lead to a decline of the information provided by

management

VI. The Draft proposal of the

Kapitalmarktinformationshaftungsgesetz (KapInHaG) (1)

1. General features

joint and several liability of the company and (some of)

its board members

scope: all incorrect mandatory disclosure of information,

and all incorrect voluntary provision of information to a

larger public

presumption of causality for transactions undertaken

within a three month-period

gross negligence at a minimum

novel calculation of damages

2. Liability of the company

VI. The Draft proposal of the

Kapitalmarktinformationshaftungsgesetz (KapInHaG) (2)

3. Liability of board members

for incorrect information provided by themselves

for incorrect information provided by

o … other board members

o … employees of the company

limitation of liability towards

o the company, and

o the shareholders

in case of gross negligence on the part of the board

member; the maximum to be paid by the board member

is four times the amount of the compensation he

received the year before, and including also all variable

payments (stock options).

limitation as to the extent of the insurance coverage

provided by the company via concluding a D&O

insurance: two times the total annual compensation

VII. Concluding Remark

Withdrawal of the KapInHaG:

o giving in to management

or

o listen to reason?

Lessons for the EU?