Clifford Chance

New "submission of evidence" procedure in capital markets-related group actions akin to Anglo-American discovery proceedings

The new "submission of evidence" procedure entitles a party to seek the submission of evidence from the counterparty. This could motivate plaintiffs to lodge unfounded actions and open up procedural side battles. What matters more is that the evidence submitted by a company may be used against it in criminal and administrative offence proceedings. 

1. Introduction

The Second Act to Reform the Capital Markets Model Case Act (Kapitalanleger-Musterverfahrensgesetz, "KapMuG") introduces a new "submission of evidence" procedure akin to Anglo-American discovery proceedings which entitles a party to seek the submission of evidence from the counterparty. This procedure stands contrary to the principle of German procedural law according to which it is for the party bearing the burden of proof to adduce the facts and evidence which are favourable for its case. The provision could motivate plaintiffs to lodge unfounded actions hoping to obtain evidence to substantiate their claim. It also introduces a ready opportunity to launch procedural side battles. Additionally, the provision has far-reaching practical implications as the evidence submitted by a company may be used against it in criminal and administrative offence proceedings. This post sets out the prerequisites of the new procedure and highlights its practical significance.

2. Background of KapMuG and its latest reform

The KapMug was initially enacted in 2005 and aimed to increase judicial efficiency by addressing the complexities and inefficiencies associated with numerous individual lawsuits, in which the same questions of fact and law arise in several individual proceedings. The Act allowed such proceedings to be heard and ruled on uniformly in a model case before a higher regional court. In a "lessons learned" approach, the German legislator now intends to overcome shortcomings of the Act with the recent reform which led to the last minute-introduction of section 17 providing for a submission of evidence proceedings. This provision allows a party to seek the production of documents from the respective counterparty and is supposed to balance out the mutual asymmetry of information between the parties (BT-Drs. 20/11787, page 48).

3. The "submission of evidence" proceedings

Section 17 para. 1 KapMuG incorporates a form of discovery which enables a party to obtain an order by the Higher Regional Court requiring the counterparty or even a third party to submit evidence which supports the plaintiff's case. The plaintiff is required to credibly establish the facts that it basically has a capital markets-related claim under section 1 KapMuG and to specify the requested evidence as precisely as possible. There is also a possibility in section 17 para. 2 KapMuG allowing the defendant to request the disclosure of evidence from the plaintiff or a third party which is relevant for the defence. In practice, however, most likely the defendants will face disclosure requests by the plaintiffs.

Even though it is a step in the direction of discovery proceedings, the regulation provides for restrictions to avoid a boundless exploration of facts and evidence. Accordingly, the court is required to take into consideration the interests of both parties and, upon its discretionary power, can even refuse the requested production of evidence if it appears to be disproportionate. The criteria for judicial assessment include (i) the extent to which a claim can be based on evidence that is accessible, (ii) the scope of the evidence, (iii) the costs associated with producing such evidence, (iv) the prohibition on exploring facts that are not relevant for the enforcement of the claim asserted or for the defence against it, (v) the protection of trade and business secrets and other confidential information, and (vi) means of protecting the contents of such documents against unauthorised access once they have been made available. There is no general concept of  a legal privilege protecting the interests of the party ordered to produce evidence.

4. Use of submitted evidence in criminal and administrative offence proceedings

A corporate party that is ordered to disclose evidence runs the risk that the evidence can be used against it in criminal and administrative offence proceedings according to section 17 para. 5 KapMuG. While the provision generally precludes the evidence disclosed from being used against the disclosing party in criminal and administrative offence proceedings without the party's consent, it also establishes that this rule does not apply to corporates. This means that corporates are denied the privilege against self-incrimination, which is rooted in the criminal law principle of "nemo tenetur", and will likely revive the debate whether it is applicable to corporates. The prevailing opinion of criminal law specialists is to assume that corporates should also be able to benefit from a (statutory) privilege against self-incrimination, if they have a position similar to that of an accused natural person as a (potential) secondary party in criminal proceedings. The same should also apply to administrative offence proceedings. The German legislator, however, obviously assumes that corporates are not in need of the same level of protection as private individuals.

5. Implications and outlook

Section 17 KapMuG is likely to have a significant practical impact on capital markets-related group actions. First, it has the potential to attract unfounded actions with plaintiffs speculating to obtain useful evidence during the proceedings which would help them substantiate their claims or create leverage for settlement negotiations. Moreover, the new provision is likely to open up a new procedural battlefield as the party facing the request for submission of the evidence will likely expend a great deal of argumentative efforts to interpret the vague legal terms in its favour and to avoid the submission of evidence. This will complicate the proceedings and, in any case, increase the legal costs.

Furthermore, the potential for evidence disclosed during civil litigation to be used in criminal and administrative offence proceedings means that corporate parties are well advised to exercise even greater caution in their legal strategies, and to prepare a defence in such proceedings, if they have any reason to believe that the documents provided could be self-incriminating. And, more generally, with regard to the fact German corporates are rather unfamiliar with discovery proceedings in domestic litigation, it seems advisable to take organisational precautions to handle complex document submission requests effectively and in due time.