MASS SHAREHOLDER S’ CLAIMS v. LISTED COMPANIES: GLOBAL, EUROPEAN AND CROATIAN PERSPECTIVE

1. 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

2. 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

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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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.)

11. 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

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

13. 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

14. 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

15. 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)

16. 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

17. 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”

18. 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

19. 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

20. 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