AIDA FRANCE - CLIMATE CHANGE WORKING PARTY

1. AIDA FRANCE - CLIMATE CHANGE WORKING PARTY The Volkswagen Dieselgate (VWDG) A First Survey on the Main Facts and Legal Issues by Professor Marco Frigessi di Rattalma with the assistance of Professors Sara Landini, Paolo Rainelli and Francesca Romanin-J Jacur

2. The United States Environmental Protection Agency (EPA) issued a notice of violation of the Clean Air Act to German automaker Volkswagen Group on 18 September 2015 On 18 September 2015, the United States Environmental Protection Agency (EPA) enacted a ”notice of violation” of the Clean Air Act to German automaker Volkswagen Group, as it was found that VW had intentionally programmed turbocharged direct injection (TDI) diesel engines to activate certain emissions controls exclusively during laboratory emissions testing. The programming caused the vehicles' nitrogen oxide (NOx) output to accommodate with U.S. standards during regulatory testing, but produce up to 40 times higher NOx output in real-world driving. An estimated eleven million cars worldwide, and 500,000 in the United States, produced between model years 2009 and 2015, included such programming.

3. Environmental Protection Agency (EPA) EPA issued a notice of violation (NOV) of the Clean Air Act (CAA) to Volkswagen AG, Audi AG, and Volkswagen Group of America, Inc. (collectively referred to as Volkswagen). The NOV alleges that four-cylinder Volkswagen and Audi diesel cars from model years 2009-2015 include software that circumvents EPA emissions standards for certain air pollutants. California is separately issuing an In-Use Compliance letter to Volkswagen, and EPA and the California Air Resources Board (CARB) have both initiated investigations based on Volkswagen’s alleged actions. • “Using a defeat device in cars to evade clean air standards is illegal and a threat to public health,” said Cynthia Giles, Assistant Administrator for the Office of Enforcement and Compliance Assurance. “Working closely with the California Air Resources Board, EPA is committed to making sure that all automakers play by the same rules..”“Working with US EPA we are taking this important step to protect public health thanks to the dogged investigations by our laboratory scientists and staff,” said Air Resources Board Executive Officer Richard Corey. “Our goal now is to ensure that the affected cars are brought into compliance, to dig more deeply into the extent and implications of Volkswagen’s efforts to cheat on clean air rules, and to take appropriate further action.” • As described in the NOV, a sophisticated software algorithm on certain Volkswagen vehicles detects when the car is undergoing official emissions testing, and turns full emissions controls on only during the test. The effectiveness of these vehicles’ pollution emissions control devices is greatly reduced during all normal driving situations. This results in cars that meet emissions standards in the laboratory or testing station, but during normal operation, emit nitrogen oxides, or NOx, at up to 40 times the standard. The software produced by Volkswagen is a “defeat device,” as defined by the Clean Air Act.

4. EnvironmentalProtection Agency (EPA) • The Clean Air Act requires vehicle manufacturers to certify to EPA that their products will meet applicable federal emission standards to control air pollution, and every vehicle sold in the U.S. must be covered by an EPA-issued certificate of conformity. Motor vehicles equipped with defeat devices, which reduce the effectiveness of the emission control system during normal driving conditions, cannot be certified. By making and selling vehicles with defeat devices that allowed for higher levels of air emissions than were certified to EPA, Volkswagen violated two important provisions of the Clean Air Act. • EPA and CARB uncovered the defeat device software after independent analysis by researchers at West Virginia University, working with the International Council on Clean Transportation, a non-governmental organization, raised questions about emissions levels, and the agencies began further investigations into the issue. In September, after EPA and CARB demanded an explanation for the identified emission problems, Volkswagen admitted that the cars contained defeat devices. • NOx pollution contributes to nitrogen dioxide, ground-level ozone, and fine particulate matter. Exposure to these pollutants has been linked with a range of serious health effects, including increased asthma attacks and other respiratory illnesses that can be serious enough to send people to the hospital. Exposure to ozone and particulate matter have also been associated with premature death due to respiratory-related or cardiovascular-related effects. Children, the elderly, and people with pre-existing respiratory disease are particularly at risk for health effects of these pollutants. • VW may be liable for civil penalties and injunctive relief for the violations alleged in the NOV. • The allegations cover roughly 482,000 diesel passenger cars sold in the United States since 2008.

5. US Laws and Regulations related to Volkswagen Violations • Defeat Devices • Section 203 (a)(3)(b) of the Clean Air Act (CAA), 42 U.S.C. Sec. 7522(a)(3)(b), prohibits the manufacture, selling, or installation of any device that intentionally circumvents EPA emission standards by bypassing, defeating, or rendering inoperative a required element of the vehicle’s emissions control system. • Section 203 (a)(1) of the same Act also prohibits the sale of motor vehicles or engines that are not covered by valid certificates of conformity. • 40 CFR Part 86, Subpart A contains the regulatory language pertaining to defeat devices. • •Section 86.1803-01 defines Auxiliary Emission Control Devices (AECDs) and defeat devices • •Section 86.1809-12 sets forth the prohibition of defeat devices • Recall • EPA has the authority under Section 207(c)(1) of the CAA to require a manufacturer to issue a recall when EPA determines that a substantial number of vehicles do not conform to EPA regulations. Section 203(a)(4)(B) of the CAA makes clear that it is a prohibited act for manufacturers to fail or refuse to comply with an ordered recall by EPA. • 40 CFR Part 85 Subpart S contains the regulations (40 CFR 85.1801-85.1808) regarding recall requirements for light duty-vehicles.

6. Volkswagen's response • According to the EPA, Volkswagen had insisted for a year before the outbreak of the scandal that discrepancies were mere technical glitches. • Volkswagen only fully acknowledged that they had manipulated the vehicle emission tests after being confronted with evidence regarding the "defeat device". • Formal acknowledgement of the deception was made by Volkswagen executives in Germany and the United States to EPA and California officials during a 3 September conference call, during which Volkswagen executives discussed written materials provided to the participants demonstrating how Volkswagen's diesel engine software circumvented U.S. emissions tests. • That admission came after the EPA threatened to withhold approval for the company's 2016 Volkswagen and Audi diesel models.

7. CEO Martin Winterkorn’s declaration • Volkswagen's CEO Martin Winterkorn said: "I personally am deeply sorry that we have broken the trust of our customers and the public." Winterkorn was in charge at Volkswagen from the start of 2008 to September 2015. He attributed the admitted wrongdoing to "the terrible mistakes of a few people". Winterkorn initially resisted calls to step down from his leadership role at VW, but then resigned as CEO on 23 September 2015. • Volkswagen Group of America CEO Michael Horn was more direct, saying, "We've totally screwed up.“ Horn added, "Our company was dishonest with the EPA, and the California Air Resources Board and with all of you.“ • Olaf Lies, a Volkswagen board member and economy minister of Lower Saxony, later told the BBC that the people "who allowed this to happen, or who made the decision to install this software" acted criminally, and must be held personally accountable. He also said the board only found out about the problems "shortly before the media did", and expressed concerns over "why the board wasn't informed earlier about the problems when they were known about over a year ago in the United States".

8. Vehicle recall and consequences • On 29 September 2015, Volkswagen announced plans to refit up to 11 million vehicles affected by the emissions violations scandal. The recall will affect models fitted with Volkswagen's EA 189 diesel engines, including 5 million at VW brand, 2.1 million at Audi, 1.2 million at Škoda and 1.8 million light commercial vehicles. SEAT said that 700,000 of its diesel models were affected. In Europe, a total of 8 million vehicles are affected. • In Germany, 2.8 million vehicles will have to be recalled, followed by the UK, with 1.2 million. In France, 984,064 vehicles were affected, in Austria around 360,000, while in the Czech Republic 148,000 vehicles were involved (of which 101,000 were Škodas). In Portugal, VW said it had sold 94,400 vehicles with the software. The repair may not require a formal recall; in the UK, for example, the company will simply offer to repair the cars free of charge; a recall is only required, "when a defect is identified that... could result in serious injury". As the rules violation involved enabling emission controls during testing, but turning it off under normal conditions to improve performance or fuel mileage, the software update will make cars perform less efficiently and impair fuel economy.

9. Government actions • Australia: The Australian Competition and Consumer Commission is investigating VW for possible violations of consumer and safety standards. • Canada: Environment Canada has announced that it has initiated proceedings to evaluate if "defeat devices" were installed in Volkswagen vehicles to bypass emission control tests in Canada. • France: French authorities have opened an inquiry into Volkswagen over the rigging of emission tests, with prosecutors investigating suspicions of "aggravated deception". • Germany: German prosecutors have launched an investigation against former Volkswagen chief executive Martin Winterkorn. Winterkorn had resigned over the scandal, saying he had no knowledge of the manipulation of emissions results. A German prosecutor later clarified the status of these inquiries, saying it was looking into allegations of fraud from unidentified individuals, but that Winterkorn was not under formal investigation. Police raided VW headquarters on 8 October 2015. On 16 October 2015 there were 20 investigators working on the case, targeting "more than two, but a lot fewer than 10" VW staff. The KBA is testing 50 cars from different manufacturers in November 2015, both in laboratory and on-road with PEMS.

10. Government actions • Italy: Italy's AGCM, the competition regulator, announced plans to investigate whether VW engaged in "improper commercial practices" when promoting its affected diesel vehicles. On 15 October 2015, Italian police raided VW offices in Verona, and the company's Lamborghini offices in Bologna, placing six executives under investigation. • Switzerland: Switzerland has banned sales of Volkswagen diesel cars, marking the most severe step taken so far by a government in reaction to the emissions crisis. • United Kingdom: The Department for Transport announced on 24 September that it would begin re-testing cars from a variety of manufacturers to ensure the use of "defeat devices" is not industry wide. • United States: The EPA announced that should the allegations be proven, Volkswagen Group could face fines of up to US$37,500 per vehicle (approximately US$18 billion in total). VW suspended sales of TDI-equipped cars in the US on 20 September 2015.In addition to possible civil fines, media reports state that the United States Department of Justice Environment and Natural Resources Division is conducting a criminal probe of Volkswagen AG's conduct. The United States House Energy Subcommittee on Oversight and Investigations has announced that it would hold a hearing into the Volkswagen scandal. New York Attorney General Eric Schneiderman said that his investigation was already underway and warned: "No company should be allowed to evade our environmental laws or promise consumers a fake bill of goods". Over 25 other states' attorneys general, as well as the FBI in Detroit, are reported to be involved in similar investigations. Following the scandal, the EPA decided to broaden its investigations, focusing on 28 diesel-powered models made by BMW, Chrysler, General Motors, Land Rover and Mercedes-Benz. The agency will initially focus on one used vehicle of each model, and will widen the probe should it encounter suspicious data.

11. INVESTORS’ ACTION • Derivative lawsuit by the company against its board of directors/top-management will be resolved by the competent corporate bodies according to German corporate law rules and will be arguably brought before German courts. • Volkswagen AG shares (ordinary and preference) are listed on Frankfurt stock exchange and suffered a significant loss as a consequence of the emission scandal (roughly 30% of its market value). Also bonds and other securities issued by VW suffered a huge negative impact. • VW investors (either individually or as category/class/group) will inevitably consider the possibility of shareholders’ claims against VW and/or against its management. • Venue of claims may be multiple jurisdictions, including Germany, U.S.A., U.K., country of residence of investors and /or country where the OTC trading took place. To determine jurisdiction investor should prove that VW issued inaccurate prospectus or similar document subject to a certain foreign law and jurisdiction (e.g., U.S. or U.K.) or that they relied on other financial statements over past years while senior management was aware of such inaccuracies. • The grounds for such claims are dozens (also depending on the applicable law), but they can be roughly classified in three categories: • Missing and misleading information to the market (including prospectus liability and MNPI); • Mismanagement by the board of directors/top-management (also supervisory board may be exposed); • Failure in the internal control/monitoring systems (possible spillover effect on auditors and rating agencies).

12. Claims- Class actions • By 7 October 2015 the L.A. Times reported that the number of class-action lawsuits filed had grown to more than 230, filed in the U.S. and Canada on behalf of Volkswagen and Audi owners, claiming fraud and breach of contract, positing the "diminished value" of diesels that will be fixed to conform with pollution regulations, due to expected reductions in horsepower and fuel efficiency. • On 19 November 2015, ABC News Australia reported that more than 90,000 VW, Audi and Skoda diesel vehicle owners had filed a class action lawsuit against VW in the country's Federal Court.

13. Claims in Italy • CLASS ACTION by ALTRONOSUMO a CONSUMER ASSOCIATION • “WE ASK THAT VOLKSWAGEN REFUNDS MOTORISTS. JOIN us. • PARTICIPATE • The deception of Volkswagen • In the United States, as measured by the Environmental Protection Agency (EPA), Volkswagen has illegally used in his car a software specially installed in the engine control unit to obtain, in the homologation tests, emission data in line with the parameters required for vehicles Diesel: the result is that in normal road driving instead actual emissions can exceed up to 40 times those stated. Now Volkswagen has admitted that this trick has been used for the models sold in Europe and in Italy. • VW should compensate motorists • We had therefore sent a warning to Volkswagen Italy, asking not only to cease the sale of cars containing this software, but also to put in order, with a new permit models circulating and suitably compensate all those who have purchased one of the models involved, convinced of buying a car which is less polluting than that they are actually in their hands. Given the negative response, we launched a class action”. • -

14. How much damage is shifted to the insurance? • After the scandal, the VW group is looking for those responsible for the manipulation. An important role is played by the D&O insurance, the insurance policy which is designed to cover managers, to protect them in case of transgressions and negligence against claims for recourse by their employers (“Regressforderungen”). But experts expect that the insurers reimburse VW only a fraction of the billions in damage. • Much of the focus of investigation has been on individuals and their role in the emission scandal. Any time an individual, rather than an entity is the focus, there is a chance the D&O policy will be impacted. • 6.5 billion euros damages, perhaps 18 billion US dollars of fines: The scandal is costly for VW. Top managers can not pay such sums. However, the insurance does not cover everything.

15. How much damage is shifted to the insurance? • Errors and omissions in the executive board can pull in large enterprises immense damage. Executives and board members are liable for what is happening in their area of responsibility. Large corporations, as well as many medium-sized companies, insure their top-managers therefore with a directors‘ and officers' liability insurance (D&O). Otherwise the manager would have to pay compensation to their employer from their private assets. • VW estimates the damage from the exhaust scandal so far to 6.5 billion euros. In addition, the carmaker in the US threatens a fine of up to 18 billion US dollars. • Such sums could not afford even top managers. Even insurers share the load: when coverage of managers of large corporations are concerned several insurers are on board, at VW, among other things, the Allianz and according to "Börsen-Zeitung" the Swiss insurer Zurich.

16. How much damage is shifted to the insurance? • The D&O insurance covers pecuniary damage which may cause board members or supervisory board members by errors in the management of the company. These may be costs incurred by the Company directly - as compensation payments to injured customers. Or an image damage, which impacts only in the future on sales and profits. • Are EPA-penalties covered? Are they insurable? • Even fines, as they threaten VW in the US (EPA – fines) are insured under certain policies in some jurisdictions. Universally, all policies specifically exclude coverage for criminal fines, criminal penalties and criminal assessments. The coverage for civil fines and penalties is often found within the policy’s definition of loss or damages and the grant will only operate where “allowable” or “insurable” by law, is left to the each of the individual states to determine, often based upon an analysis of whether insuring them would violate public policy. • In existing policies on the market, fines are often excluded. The relocation of fines from managers to their insurance is also controversial from a law of torts perspective because the punishment then miss its effect. Obviously for knowingly caused violations there is no insurance.

17. How much damage is shifted to the insurance? -- Perhapsnotification by VW to insurers of potentialexposure to shareholders’ claims. --Possible impact on productliabilitypolicies ? The technologybeingdevelopedisnow so sophisticated thatidentifyingresponsibility for software malfunctionsis a major forensicchallenge. Defining were responsibility lies is critical and the insurance industry must make this top of their agenda. However product liability requests that a defective product causes property damage or severe personal injury or death, and the consumer becomes a victim and may take action in the form of a product liability lawsuit. --Possible impact on productrecallinsurancepolicies ? Automotive parts recall policy, a tailored product designed for suppliers in the automotive industry. The policy delivers a choice of coverage to respond to the increased exposures and liabilities related to automotive recalls. Recently, the number of automotive recalls has increased significantly around the world. In the US alone, the National Highway Traffic Safety Administration reported that in 2014, automotive product recalls reached a record high of close to 64 million vehicles, more than doubling the previous record set in 2004. The rise of global automotive recalls has put vehicle manufacturers under pressure and they are increasingly looking to push the liability down the supply chain. The additional exposure to automotive recalls is creating a demand for a stand-alone product recall policy that addresses the associated financial risk and contractual requirements on suppliers. The new stand-alone products offer a choice of specific triggers including product safety issues, product guarantee issues and government ordered recalls. However most recall insurance requires some degree of accident, rather than somebody knowingly taking certain action.