Corporate governance and national models of regulation and governance
German securities regulation and corporate governance reform is an ideal test case for the Kelemen and Sibbitt thesis. Germany is among the least likely of cases to converge on the American model of law and economic organization. As an exemplar of organized, or coordinated, market capitalism, postwar Germany was characterized by its bank-centered financial system and a “stakeholder” governance regime that offered relatively weak legal protections and few practical litigation opportunities to shareholders. In this sense, Germany provides a strong test of the Americanization thesis: finding the emergence of adversarial legalism here would provide substantial support for the theory. On the other hand, financial markets and the financial services industry are the most thoroughly internationalized of all markets and sectors. Therefore, cross-national convergence on the liberal market model, and thus “Americanization,” would be most likely in the areas of financial and corporate governance regulation in response to international market and competitive pressures. If adversarial legalism is spreading cross-nationally, it would likely appear in these policy domains as a manifestation of investors' new-found political and economic clout.
Most of what is regarded as the German model of the corporate form and corporate governance developed over the course of the postwar period from 1952 through to 1972, with quasi-parity supervisory board codetermination being the last addition, coming in 1976 (Vagts 1966; Shonfield 1965; Katzenstein 1987; see also Zysman 1983). It thereafter remained remarkably stable for nearly three decades. From 1994 through to 2005, Germany went through a particularly astonishing period of reform as partisan and interest group politics shifted in favor of strengthening legal protections for shareholders in order to encourage greater equity investment, financial market development, increasingly market-driven financial relations, and faster, more efficient economic adjustment through corporate restructuring (Cioffi 2006a, 2002; c.f. Lütz 1998, 2000; c.f. Tiberghien 2007). This trend towards juridification has been most pronounced in the area of securities law, which has been transformed by the creation of Germany's first federal securities regulator, the substantial and repeated strengthening of disclosure regulation, and further centralization of regulatory authority over all branches of the financial sector (encompassing banking, securities, and insurance) (Cioffi 2002, 2006a). Pro-shareholder juridification has also extended to the domain of company law, where successive reforms between 1998 and 2005 have expanded the legal powers of minority shareholders while seeking to reconcile pre-existing legal and institutional aspects of German managerialism and consensualist stakeholder governance (Cioffi 2002, 2006a).
These reform trends are not limited to Germany. They have swept across Western Europe and much of the rest of the world (e.g. Gourevitch & Shinn 2005; Tiberghien 2007). The 1990s, ostensibly a period of ascendant neoliberalism and deregulation, was the beginning of an era of pronounced regulatory expansion and deepening in corporate governance. National corporate governance regimes displayed consistent tendencies toward greater reliance on formal law in place of their traditional reliance on relational ties (i.e. relational banking, blockholding, and cross-shareholding networks) and discretionary state power as modes of regulation or economic governance. Finance capitalism has brought forth an era of legalism.
The European Union (EU) has played an increasingly prominent role in framing the new pan-European regime of financial and corporate governance regulation through positive legislation on transparency rules, free mobility of capital, and liberalization of financial services (Cioffi 2002, 2006b). It has influenced negative integration (or downward harmonization) by barring state aid to firms and through the European Court of Justice's invalidation of national company laws that created de facto or de jure barriers to cross-national corporate chartering. However, corporate governance reform has been largely driven by domestic politics, and this is particularly true of litigation rules. The EU has been highly successful in harmonizing and strengthening securities regulation, but there was substantial consensus over the need for greater transparency and more robust national regulatory institutions. The EU's cumbersome and veto-prone political machinery tends to grind to a halt when it encounters issues over which there are deep divisions among the member states. This has long hobbled attempts to harmonize company law with respect to board structure, shareholder voting rights, takeovers, and codetermination (Cioffi 2002, 2006b). Enforcement mechanisms and procedures, public and private, are matters left to the discretion of the member states. Hence, a focus on domestic politics tells us more about the forces impelling reform.
Legal reforms inevitably raise the issue of litigious enforcement and its prevalence. If legal rules and principles are to be more than symbolic acts, legal reforms must provide for credible public (governmental) or private enforcement mechanisms. Each may be litigious in form, but vastly different in their practical implications. Governmental regulatory and prosecutorial enforcement is limited by the (i) adequacy of regulatory resources; (ii) professional (i.e. technical) competence of regulatory officials; and (iii) integrity of regulators against the threat of capture by private interests or ideological resistance to enforcement activities. The chronic problems of governmental enforcement, highlighted by regulatory failures leading up to the current financial crisis, thus point to the alternative of private enforcement through private litigation.
Private litigation theoretically enhances enforcement and compliance by delegating monitoring corporate and financial actors and enforcement capacities to parties who have an economic incentive to protect their legal interests. Private litigation also reallocates the burden of funding enforcement proceedings to those threatened or injured by legal violations. Litigants and courts partially displace regulators and politicians as the principal actors involved in compliance and enforcement. This, however, entails both a diminution of state control over policy and a potentially substantial conveyance of power to shareholders and, more problematically, to plaintiffs' attorneys. Litigation as an enforcement mechanism raises all the familiar criticisms of litigiousness – inefficiency, ineffectiveness, rent-seeking through strike suits and collusive settlements, distortions of managerial and market behavior – voiced in the large literatures on adversarial legalism, securities litigation, and tort reform. We are left with practical tradeoffs and political choices as to the appropriate mix of and structure of enforcement mechanisms with no ideal solution.
German stakeholder governance and the structural approach to regulation
Juridical and institutional differences between the American and German financial systems and corporate governance regimes derive from their roots in divergent conceptions of law and governance. The legal liberalism underlying the American market model relies on an enforceable framework of legal rights and obligations that facilitate and inform market transactions. German governance, in contrast, traditionally rested on more corporatist legal and institutional foundations that utilize politically created and legally constituted representational structures to order bargaining relationships among privileged interests. The governance structure of the German corporation, as constituted by law, performs a crucial regulatory function by influencing individual and organizational behavior to achieve desired social and economic ends. In contrast with the American reliance on the allocation of legal rights and duties to individual actors, along with procedural rules conducive to their litigious enforcement, the German corporate governance relies primarily on the legal and consequent institutional architecture of representation and decisionmaking power with respect to institutional groups (e.g. Teubner 1985, pp. 155–156; c.f. Roe 1993, pp. 1969–1970). Firm governance becomes a largely self-executing intra-corporate process. Formal rights always provided a backdrop to ensure good faith participation in bargaining and consultation among legally recognized stakeholders.12 However, with significant exceptions described below, lawsuits brought on behalf of individual shareholders played, at most, a secondary role alongside the institutionalized structures of corporate governance.
The juridical structure of German corporate governance institutionalizes representation and negotiation among managers, shareholders and lenders, and employees. Labor is granted a legally defined role in the governance structure through supervisory board and works council codetermination. German corporate and financial market law made use of the banks' traditional dominance of external corporate finance by granting them significant control over proxy voting and allowing them to maintain extensive webs of supervisory board mandates (Roe 1994, 1993). German managers are hardly powerless, but their power was simultaneously maintained and constrained by intra-firm institutional arrangements that allowed shifting alliances among management, shareholders, lenders, and labor.
Substantive and procedural law subordinated litigation to the imperatives of iterative bargaining relationships. Shareholder rights were generally minimal and exceedingly difficult to enforce.13 Weak Länder securities regulation provided for little financial disclosure by listed firms. Claims for materially false or misleading statements were therefore impracticable in all but the most egregious cases. Plaintiffs had to prove willful deception – an extremely demanding standard of proof and difficult to satisfy (Baums & Scott 2003, p. 20). Insider trading was not legally prohibited and thus not a basis for shareholder litigation.14 Under the law of corporate groups (the Konzernrecht), minority shareholders in controlled subsidiaries had comparatively strong rights to challenge related-firm transactions ex post, but they had limited access to material information. The external auditor's annual report and reports on intra-group transactions was disclosed to the firms' supervisory boards, not to the shareholders, and practically speaking only through the management board's summary (Baums & Scott 2003, p. 13).15
Fiduciary duty claims were likewise legally discouraged. This in part reflected both the stakeholder character of corporate governance and the practical problems of enforcing governance norms and protecting shareholder interests through the imposition of personal liability on corporate directors and officers. Where shareholders, managers, employees, and lenders are all legally recognized stakeholders, litigation of right-based claims would have mired the courts in an endless series of exceedingly difficult, perhaps intractable, conflicts over which stakeholder's rights trumped and would have undermined negotiation as the favored means to resolve conflicts among stakeholder groups. Tellingly, in one early and important appropriation of American corporate governance law, German courts adopted the pro-management business judgment rule, which virtually eliminated liability in mismanagement (duty of care) cases and sharply circumscribed it in cases addressing conflicts of interest over self-dealing transactions (duty of loyalty).16
Procedural constraints on private lawsuits further inhibited shareholder litigation. Would-be plaintiffs faced procedural obstacles such as limits on discovery, a “loser pays” rule for attorney's fees and court costs, the prohibition of contingency fee retainers, and, in many cases, the right of the supervisory or management board to bring lawsuits rather than shareholders themselves. German law exacerbated the classic collective action problem of dispersed shareholders: each has a small amount to gain from successful litigation, but much to lose from an unsuccessful lawsuit. They will not litigate in the absence of procedural mechanisms that pool the costs of litigation and/or shift the risk of failure onto plaintiffs' attorneys. Germany developed no equivalent of the American class action or the derivative shareholder suit. Suits against the management board (or an individual member) were brought by the supervisory board; suits against the supervisory board were brought by the management board. Given the close relationship between the two bodies, this procedure cultivated conflicts of interest. Further, until 1998, shareholders seeking to compel a suit against the management or supervisory board had to represent at least 10 percent of outstanding share capital – an exceedingly high threshold (Stock Corporation Act § 112).
Finally, the German inquisitorial civil law tradition confers control over the discovery process to judges, not to attorneys as in common law systems. The courts' limitations on discovery further weakened the plaintiffs' litigation position and perpetuated the opacity of corporate finances. Even if publicly available information alerted shareholders to a potential violation of their rights, constraints on discovery rendered proving the case difficult, if not impossible. Strict limits placed on discovery by German courts further reduced the plaintiffs' chances of prevailing in a lawsuit, the corporation's likely transaction costs in litigating a case, and thus the shareholders' leverage in settlement negotiations.17 Overall, German procedural law therefore strongly and consistently discouraged litigation by shifting the risk–benefit calculation in the corporate defendant's favor. Given weak disclosure rights, managers and controlling shareholders could block informational channels, raising the risks of opportunism. Weak procedural rights left shareholders with little leverage or formal legal recourse to protect their interests. Not surprisingly, postwar Germany had high levels of stock ownership concentration and notably low levels of equity financing and stock market capitalization relative to GDP (see comparative statistics in Roe 1994; Gourevitch & Shinn 2005).
Shareholder litigation did flourish, however, in one area of German corporate governance law: legal challenges to the conduct of shareholders' meetings. Under German company law, shareholders must approve a much wider array of business decisions than is the case under American law. To protect these governance rights, shareholders' meetings are subject to complex disclosure and procedural rules, and an alleged violation of these rules can provide the basis for an action to block or rescind a corporate decision taken or ratified at the meeting. In situations requiring rapid execution of important business decisions, such as capital increases, major investments and divestments, or mergers, plaintiffs' attorneys were in a strategically superior position to managers. They frequently brought lawsuits to enjoin managers from acting where time was of the essence and extracted lucrative settlements. Germany thus developed its own problems with abusive corporate litigation that gave rise to criticisms similar to those heard in the US after the 1970s. Litigation was commonly referred to in German legal circles as the “American disease,” but German managers, their attorneys, and policymakers were well aware that they had an outbreak of their own. The experience of lawsuits as borderline extortionate, ineffective in the achievement of policy goals, and potentially disruptive to stakeholder cooperation and negotiation jaded many of those later involved in corporate governance reform regarding the use of shareholder litigation as an enforcement mechanism.
Legal reform and the ambivalent liberalization of litigation
These legal foundations of German finance and corporate governance have undergone a striking and extraordinary transformation since the mid-1990s. The speed and significance of these legal reforms has led some commentators to speak of an “Anglo-Saxonization process of the German system of corporate finance” (Deeg 1999, p. 74).18 More precisely, political and economic actors in Germany sought to appropriate some of the legal strengths (and what were then regarded as the economic benefits) of American-style market finance while preserving the traditional strengths of German bank-centered finance and the political economic stability and comparative advantages, particularly in export-oriented manufacturing sectors, of a more highly institutionalized and organized form of capitalism. The regulatory politics of securities law reform reflects these sometimes conflicting and often complementary agendas. One of the most controversial areas of legal reform, and one of the last to be adopted, was the liberalization of the rules governing shareholder litigation. The need for effective enforcement mechanisms forced litigation remedies on to the public policy agenda, but serious reservations and political conflicts over the merits of litigiousness produced a set of reforms that were strikingly ambivalent and rather modest.
The politics of the German financial system and corporate governance reforms was driven by domestic political and economic forces (Lütz 1998, 2000, 2005; Ziegler, 2000; Cioffi 2002, 2006b; Lütz & Eberle 2007). The internationalization of capital markets, the desire to attract international capital flows and (more importantly) retain domestic financial services business, and the Europeanization of both markets and economic regulation were to varying degrees necessary but not sufficient conditions for substantial legal change. Foreign and transnational investors, financial institutions, and regulatory authorities played a role in fomenting the legal changes that swept over Germany since the early 1990s, but they were subordinate to the powerful interest groups and peak associations that drove the pace and substance of reform (Cioffi 2002; Lütz & Eberle 2007). The interest group coalition that formed in support of reform favored the “modernization” of Germany's traditional bank-centered, opaque, and insider-dominated financial system with a more securitized, transparent, and diffusely owned one (Cioffi 2002).19 To accomplish this transition, the country's political and economic elites embarked on a process of securities and company law reform that (i) constructed a more legalistic and centralized securities regulatory regime and (ii) repeatedly strengthened the legal protections and relative power of minority shareholders (Cioffi 2006b).
This was an extraordinary undertaking and it reflected a transformation of interest group preferences and partisan political strategies that broke with the relational finance model that constituted one of the foundational features of the postwar German political economy (Cioffi & Höpner 2006a,b; Cioffi 2006a,b). Large financial institutions, particularly the large universal banks, insurance companies, and investment funds wanted to encourage the domestic development of market-driven finance that would generate more profitable lines of business than their traditional lending and advisory roles. Large, internationally oriented public corporations wanted better access to equity capital and other market-based financial products without having to leave the domestic market (Cioffi 2002, 2006a,b). Large banks, shareholders' associations, and activist investors sought greater legal protection for shareholders to enhance shareholder value and market liquidity (Lütz 1998, 2000; Cioffi 2002). Germany's powerful labor movement acquiesced, and sometimes actively supported, the reform agenda because any strengthening of the supervisory board would also strengthen employee representation through codetermination, and enhanced transparency would aid unions in collective bargaining (Cioffi 2002; Höpner 2003).
Politically, the center-left Social Democratic Party (SPD) during the Schröder era embraced the reform agenda to position itself as the party of economic modernization and the foe of entrenched managerial and banking interests – and in hopes that its repositioning would allow the Party to tap support in the financial sector that had long been aligned with the center-right Christian Democratic Party (CDU-CSU), and the neoliberal Free Democratic Party (FDP) (Cioffi 2002). The SPD therefore pursued a strategy that would strengthen the legal rights and institutional position of shareholders within the firm and the securities markets, but left labor codetermination laws intact (Cioffi 2006a,b). The CDU was politically outflanked on these issues during the late 1990s and early 2000s. Not only was it out of government during the Red–Green coalition of 1998–2005, its leadership was placed in the difficult position of trying to negotiate the tensions between pro-shareholder corporate governance reform and its established alliances with corporate managers, many of whom sought to protect their autonomy from financial market and shareholder pressures for short-term earnings growth. Notably, once the Schröder government and the Red–Green coalition collapsed in 2005, largely as a result of labor market and social welfare policies rather than its financial market and corporate governance agenda, the rapid and far-reaching reforms stalled. International market and political pressures did not make up for the erosion of the domestic political conditions that drove pro-shareholder legal change.
The character of the legal changes adopted as part of this great wave of reform help to answer the question of whether Germany experienced an “Americanization” of its securities and corporate governance law. The answer, in part, turns on the definition of Americanization. Germany did create the country's first federal securities regulator, the Bundesaufsichtsamt fur den Wertpapierhandel (BAWe), in 1994 and the momentum of reform consistently expanded and increased the stringency of disclosure rules (Lütz 1998, 2000, 2005; Cioffi 2002, 2006b; Lütz & Eberle 2007). German reformers, moreover, were well aware of the American model of a strong federal securities regulator and the substantive framework of American securities law. This suggests a degree of convergence on the American Securities and Exchange Commission (SEC) regulatory regime. However, this interpretation may rely on an overly expansive definition of Americanization. Germany, along with many other countries, did develop and strengthen domestic securities regulation, both substantively and institutionally. Yet had there been no SEC model it is likely that Germany would have pursued the same course of reform and regulatory structure as appropriate to the emerging market-driven financial system. From this perspective, reform was not a process of mimesis that appropriated American regulatory structures and mechanisms, but the product of largely domestic politics and law.
The continued centralization of German financial regulation supports this interpretation. Notwithstanding opposition from the Bundesbank, Germany's central bank, and from the Länder, securities, banking, and insurance regulators were consolidated in a single overarching regulatory body, the Bundesanstalt für Finanzdienstleistungsaufsicht (BAFin), in 2001 (Schüler 2004, pp. 12–13). By successfully integrating the regulation of all principal forms of financial business within one body, Germany adopted a far more centralized regulatory structure than the US (where continued regulatory fragmentation has been held partially responsible for catastrophic regulatory failures and vast economic damage in recent years). In addition, political control over financial regulation is more hierarchical and centralized than in the US. Unlike the independent SEC, the BAFin is under the direct oversight of the Ministry of Finance, as was the BAWe before it. Further, this centralization ultimately secured the support of Länder officials who wanted authority located in a more politically accountable body. In this case, political fragmentation and in-fighting did not thwart increasing institutional centralization.
Throughout its reform period Germany eschewed extensive enforcement of securities regulation and shareholder rights under company law through private litigation. Securities regulators in Germany therefore have taken on a much more important enforcement role in comparison with the US, not because of a preference for statist regulatory structures but because of deliberate policy choices to avoid wasteful and potentially abusive litigation. In the US, the entrenchment of institutions, legal structures, and interests preserved both regulatory fragmentation and an exceptional reliance on litigious enforcement. Powerful economic interests in Germany, shaped by the country's legal structure and stakeholder governance traditions, discouraged the adoption of litigation-driven enforcement mechanisms, but the absence of an established and bureaucratically entrenched securities regulation regime allowed the development of a more centralized regulatory structure without provoking the kind of turf battles seen in the US.
The limited nature of litigation reform and its belated adoption reflected the ambivalence of policymakers toward litigiousness and their reluctance to stoke conflict and controversy over the issue. The timing of the reforms is noteworthy. Shareholder litigation reform had been on the policy agenda since the 1990s, but only became the focus of policymaking in 2005 at the end of the reform period (Baums Commission 2001, pp. 88–90; Deutscher Juristentag 2002, Recommendation 1.15). Perhaps not coincidently, this occurred only after it had become apparent that Schröder's Red–Green government and “Neue Mitte” program were collapsing politically, and that the financial sector had not become a reliable SPD constituency.
Liberalization of litigations rules began with the passage of the Control and Transparency Act (the KonTraG), the first major revision of German company law since 1965, in 1998.20 The KonTraG lowered the threshold required for minority shareholders to demand the filing of a claim against supervisory and management board members on behalf of the corporation. This threshold was reduced from a vote of 10% of shares to 5% of shares or 1 million DM of nominal capital. However, the KonTraG did not strengthen the substance of Germany's historically weak fiduciary duties, nor did it alter the procedures for enforcing shareholder rights. The KonTraG litigation reform only extended to claims for gross breaches of the fiduciary duty of loyalty, not for breach of the fiduciary duty of care (i.e. negligence in carrying out directorial responsibilities) for fear of creating excessive litigation.
The collapse of the high-tech Neue Markt in 2002 amid many accounting irregularities, the crash of Deutsche Telekom stock following an enormous government-sponsored public offering, and a number of other corporate scandals during the early 2000s raised the political salience of shareholder litigation rules (Freshfields Bruckhaus Deringer 2005). In response to these problems and scandals the Schröder government pushed through two far more sweeping legislative reforms of shareholder litigation in late 2005. These reforms had already been part of the government's 10 point corporate governance agenda and the recommendations made by two government corporate governance commissions (Baums Commission 2001; Cromme Commission 2003). Many of the Cromme Commission's recommendations regarding intra-firm governance structures and practices contributed to further juridification of corporate governance through the adoption of many of its proposed legislative changes and a “comply or explain” rule for firms' adherence to the Code's “best practices.” (Cromme Commission 2003, p. 3.10; AktG § 161). But the proposed changes to litigation rules were not amenable to this quasi-disclosure approach to regulation; they required legislative changes to procedural law.
Shareholder litigation reform embodied both the appreciation that litigation plays a necessary and inevitable role in protecting shareholder interests and the countervailing recognition that it is also prone to inefficiency, rent-seeking, and abuse. The UMAG amendments to the Stock Corporation Act, the core of Germany's company law, created an analog to the derivative action under American corporate law that gave minority shareholders the ability to sue directors on behalf of the corporation.21 The UMAG cut the thresholds for filing suit against supervisory or management board members from 5% (established by the KonTraG) to just 1% of shares or 100,000 Euros. The law also allowed shareholders to bring and control the suit directly (rather than by a court-appointed independent representative).22 The UMAG also relaxed the “loser pays” rule for court costs and attorneys' fees by allowing plaintiffs to seek reimbursement of costs regardless of the suit's outcome so long as the court upholds the action in a preliminary proceeding.
However, political conflict over the desirability and potential dangers of litigation also resulted in provisions designed to curb litigation and contain its costs. The UMAG codified a version of the business judgment rule, recognized by the Federal Court of Justice in 1997, and thus sanctioned a potent defense against all but manifestly egregious cases of director misconduct. In a compromise between the SPD–Green-controlled Bundestag and the CDU-controlled Bundesrat, the law created a new preliminary procedure to test the substance of derivative suits and screen out “professional plaintiffs” to prevent abusive strike suits (Noack & Zetzsche 2005, pp. 1041–1042; Lederer 2006, pp. 1603–1604). The reform thus imposes an important gatekeeper function on the courts to control the potential for abusive litigation. The legislation re-balanced the power of shareholders and managers by careful procedural design. The UMAG went further in curbing litigation by accelerating the dismissal of meritless lawsuits challenging decisions approved by the shareholders' general meeting – the most prevalent type of shareholder litigation and the single greatest source of abusive litigation. As noted above, actions to challenge important business decisions on highly technical legal grounds had led to Germany's own problems with professional plaintiffs and strike suits. The UMAG required a preliminary court proceeding to screen out baseless suits within four months and limited the plaintiff's ability to strike quick lucrative settlements by blocking urgent business decisions through litigation. The reform thus expanded shareholder litigation modestly in a new way while curtailing its most prevalent form.
The KapMuG securities law reforms passed in 2005 created a new form of collective litigation that, for the first time, created a procedure designed to overcome the imposing collective action problems confronting a diffuse class of shareholders.23 Though it fell short of the American class action, the KapMuG broke sharply with the historically individualistic character of German shareholder litigation. In part, this reform not only derived from the government's pro-shareholder reform agenda, but was also the product of a serious and politically damaging setback in the government's attempt to create a German shareholder culture (Aktienkultur). The CDU-led government under Helmut Kohl promoted Deutsche Telekom's 1996 privatization and initial public offering by guaranteeing the stock's value for a period of time. The market value of these shares collapsed in 2001 after the expiration of the guarantee and shareholders claimed that a large portion of their losses stemmed from fraudulent misrepresentations of the company's assets (Baetge 2007, pp. 7–9). Approximately 15,000 individual suits filed by more than 750 attorneys inundated a single judge with no procedure to consolidate the proceedings and litigate the common issues efficiently (Baetge 2007, pp. 7–9). After years of grinding litigation without a single final judgment, some plaintiffs filed an action with the Constitutional Court claiming denial of fundamental justice under law. The Court dismissed the claim, but it openly called for experimentation with collective litigation and shamed the government into reforming procedural law (Baetge 2007, pp. 7–9).
The resulting KapMuG created a new procedure in which the first filed claim is certified as the “lead case” (Musterverfahren) once 10 cases based on the same set of facts are filed. The regional court defines the common issues of law and fact, and then, with the support of other claimants, the lead case is adjudicated by the provincial court. All claimants contribute to the costs of the lead case if the action is dismissed. The court's rulings on common factual and legal issues in the sample claim are binding on all other cases based on the same set of facts. Plaintiffs do not have to opt-in to the collective procedure, nor is there any possibility of opting-out of it. However, the procedure was so controversial that the statutory provision creating it was drafted to expire on 1 November 2010, five years after its effective date, unless renewed by the legislature (Baetge 2007, pp. 7–8).
The litigation reforms laws were the product of political compromise amid serious interest group conflict. Business interests, including the Association of German Industry (BDI) and the Association of German Banks (BDB), were opposed in particular to derivative actions but were assuaged sufficiently by the provisions curtailing litigation over decisions approved by the shareholders' general meeting and continued procedural obstacles and attendant practical difficulties in bringing successful private suits.24 The peak business associations were adamantly opposed to an even more fundamental reform of securities law that would have made material misrepresentations actions if made negligently, rather than the established standard of intent. The intensity of opposition forced the government to withdraw the proposed legislation. The managers and banks split over collective proceedings in securities litigation, with the BDB favoring a pro-shareholder litigation position as a way to encourage further capital market development, yet opposing the importation of class action procedures.25 Shareholder groups and the plaintiffs' bar demanded the adoption of a true class action, but did not have sufficient influence to sway the policy debate. The legislative outcomes suggest the waxing influence of the financial sector and the BDB, particularly in policy areas where managers (and thus the BDI) is split over reforms.26 Where the BDB opposed liberalization, as with derivative actions, the reforms were more modest and contained significant concessions to business.
Some commentators consider these litigation reforms to be a transformative moment in German corporate governance. Such extravagant claims are at best premature. Insurers issuing directors and officers policies covering board members' liabilities have not discerned an increase in litigation (though they warn of increasing risks) (Daucourt 2009). In fact, premiums have remained far below those in the US and have reportedly decreased in recent years before spiking recently with the onset of the global financial crisis (Fromme & Kruger 2008; Daucourt 2009; Newsblaze.com 2009). Business interests may have brokered political deals over litigation rules that arguably gave them as much or more than they gave up. Lack of data precludes a more definitive assessment, but it appears that only a small number of derivative and collective actions have been brought.27 Collective actions can serve either as a shareholder sword if a lead case is successful or as a liability shield if it is dismissed, leading to the dismissal of all other related cases, as in a recent case against DaimlerChrysler.28
Further, German procedural law is still largely antagonistic to litigation. Contingency fees are still not allowed in securities and corporate fiduciary cases and there are no juries or punitive damages. Most importantly, there is still no American-style discovery in German litigation procedure. This poses a fundamental problem for proving cases, and may make the lead case mechanism an even greater boon for companies by effectively shutting down litigation of alleged disclosure violations by maintaining an informational vacuum. Lack of discovery also substantially tilts bargaining power towards management. Where expenses of litigation are lower for the corporation, plaintiffs have less leverage in settlement negotiations. There may be fewer strike suits under these rules, but there will also be fewer successful meritorious ones. Litigation reform may reframe the politics of litigation by inducing shareholder advocates to press for more pro-litigation reforms going forward (Freshfields Bruckhaus Deringer 2007, p. 29). Given the strenuous opposition by managerial interests and skepticism in the policy community towards litigation, this remains a matter of sheer speculation.