Prof. dr. sc. Edita Čulinović-Herc, Faculty of law, Univerisity of Rijeka Dipl. iur. Mihaela Braut, Faculty of law, University of Rijeka MASS SHAREHOLDERS’ CLAIMS v. LISTED COMPANIES: GLOBAL, EUROPEAN AND CROATIAN PERSPECTIVE

INTRODUCTION Capital market requests higher level of investors’ protection to enhance investment culture in general Issuers/listed companies most often cause damages to investors when misleading them by making misstatements on capital market, whether in prospectus or in their financial reports Dispersed ownership structure of listed compaines usually creates large group of investors on the plaintiffs’ side

INVESTORS’ PROTECTION 1. INDIVIDUAL PROTECTION OF INVESTORS’ INTERESTS 2. COLLECTIVE PROTECTION OF INDIVIDUAL INVESTORS’ INTERESTS

INDIVIDUAL PROTECTION – MAIN CRITICISM - Ruling in individual litigation has the effect only for the litigants of that proceedings - it will not affect any other investor suffering the same damage - it will not prevent issuer of further fraudelant conduct - court can obtain two different rulings in two separated proceedings, although based on the same facts - Individual protection is time and cost ineffective for the parties and the court

COLLECTIVE PROTECTION - 4 TYPES- 1. CLASS ACTION - The U.S. – 2. OPT-IN GROUP LITIGATION - England & Wales - 3. MODEL CASE PROCEEDINGS - Germany - 4. OPT-OUT SETTLEMENT PROCEDURE - The Netherlands – for investors who suffered comon damages

CLASS ACTION OPT-OUT PROVISION –court’s ruling is binding upon all class members, regardless of their awarness about it - CRITICISM - “ignorante passive loser” CONTINGENCY FEES – NO WIN, NO PAY RULE - attorneys tie their fees to a percentage of the awarded recovery - CRITICISM - lawyers are the most interested parties in litigation

2. OPT-IN GROUP LITIGATION OPT-IN OPTION – ruling is binding only upon members who expressly opted in the group - register of plaintiffs - cut-off date NO CONTINGENCY FEES – BUT LOSER PAYS WINNER’S COSTS

3. MODEL CASE PROCEEDINGS Interlocutory ≠separate proceedings Solely in securities disputes Complaint Registry – at least 10 similar claims higher court of instance Model case ruling – binding and final to the lower courts bring decision on individual damages Possible introduction of contigency fees in exceptional cases

4. OPT-OUT SETTLEMENT PROCEDURE Parties negotiate and settle the dispute out of the court Apply to the court to confirm their settlement Settlement is binding on the opt-out basis NO CONTINGENCY FEES - prohibited in any form

CROATIA – LITIGANTS AND COMPETENT COURT Right to sue - according to Capital Market Act claim can be filed by investors (→open list: shareholders, bondholders.. etc.) Jurisdiction - depending on the personal status of plaintiff: 1.Municipal court (→ physical person) 2.Commerical court (→ legal person) Who is being sued: listed company (additionally: members of the board, underwritters etc.)

CRITICS OF COMPETENCE RULES Unsatisfactory solution: if jurisdiction of two different courts is established (which is possible) two differing judgments on issuer’s liability could be rendered Risk: legal uncertainty Suggestion: to change jurisdiction rules in Code of Civil Procedure New solution: for capital market disputes → jurisdiction of commercial courts regardless of status of plaintiff

SUBJECT MATTER OF DISPUTE Claimant suffered the damage because of: false, inaccurate prospectus, delayed or inaccurate publication of inside information, inaccurate (false) financial statements

IS THERE COLLECTIVE ACTION FOR INVESTORS? Collective action – only in consumer protection law i.e. representative action of consumers’ association (udružna tužba) Type of protection: Protection of collective consumers’ interests (not individual) Prohibitive judicial protection (→ trader is forced to stop with wrongdoing) Compensation of individual consumers’ damages is unavailable

COULD INVESTORS USE REPRESENTATIVE ACTION? Investors could form an investors’ association Government’s Regulation: investors’ associations are not listed (exclusive list) Investors v. consumers Overlapping concepts – retail (small) investors are similar to consumers Overprotected? Substantial difference: risk taking is inherent to investors, consumer are more focused on quality of consumption

EXISTING PROCEDURAL DEVICES Concept of joinder – a person who is joining a party to a suit Type of joindership: common (formal); substantial (material); unique (unison) if claimants are unique joinders, the court should render the identical award towards all of them (not always the case) Request for declaratory ruling – if claimants are not sure how strong is their case they would ask the court first to decide about respondent’s liability (if sucessful they would sue for damages)

PROPOSALS Jurisdiction – Commercial Courts as specialized courts Introduction of group action - group of investors entitled to sue for damages Opt-in option – investors have to expressly opt into the group Complaint Registry – public, containing all similar claims

Marc Gertl and others v. Daimler Chrysler The biggest currently going model case in Germany The facts / cronology: 1st Feb 2005 – president of the board in a letter to president of the supervisory board announces his resignation of the mandate before expiration 16th May 2005 - Marc Gertl sells 100 Daimler shares 31,85 EUR/per share “Sometimes” in May 2005 – president of the board (Mr. Jurgen Schrempp) in a conversation with a president of the supervisory board tells him that “he leaves the mandate at the disposal”

Marc Gertl and others v. Daimler Chrysler 28th July 2005 9:00 Marc Gertl sells 800 shares (36,50 EUR/share) 9:30 session of the supervisory board was scheduled – the board accepts pre-temporary resignation of J. Schremmp and quaterly reports 10:02 – after closure of the meeting Daimler sends notice to BaFiN and stock exchange 10:32 – Daimler sends notice to DGAP (official register of information for listed companies) After notice was sent → price of the share jumped at 40,40 EUR

Marc Gertl and others v. Daimler Chrysler The law: issuer is obliged to publish inside information without delay (the very moment it arises) resignation before termination of the mandate is inside information that should be published immediately Facts: Marc Gertl sued for damages 100 shareholders joined him in a lawsuit Alleged damage – price difference (between sell price in transactions before publication and stock market price after publication) Plaintiff: damage occurred as a result of delayed publication of the inside information

Marc Gertl and others v. Daimler Chrysler Plaintiff’s allegations: inside information came into existence after conversation of JS and president of Supervisory Board Defendant’s allegations: inside information came into existence at the Supervisory’s board session Compensation of damages depends on the court’s decision when inside information had occured OLG Stuttgart: ruled for defendant Supreme Court (BGH): annulled decision and returned it to the trial court Case is pending before OLG Stuttgart