Porsche sports cars are made to move fast, and former parent Porsche SE did the same to avoid opening a new front in a $5 billion legal battle that’s the legacy of a failed bid to take over Volkswagen AG. (VOW)
Porsche raced to file a lawsuit in its hometown of Stuttgart before a Cayman Islands-based fund could do so in London. The holding company, which sold the Porsche car brand to VW this year, won by 11 days. Already fighting suits in Europe and the U.S., filing first may allow Porsche to keep the case in Germany and avoid a fresh wave of litigation in a third country, using a legal tactic that’s been called a torpedo.
“European Union rules say the venue where a party files an action first prevails and bars another country’s court to assume jurisdiction over the same issue,” said Christoph Thole, a law professor at Germany’s Tuebingen University. “Porsche’s attempt to keep the dispute in Germany isn’t without hope.”
The legal wrangling, stemming from Porsche’s bid for VW more than four years ago, ultimately scuttled a planned merger between the two companies last year. The risk of billions of euros in damages has been a drag on Porsche’s share price. The value of its VW holding is about 24 billion euros ($31.9 billion), while Porsche’s market value is 17.4 billion euros.
The fallout from Porsche’s failed bid has shown no signs of fading. After an investigation of more than three years, former Chief Executive Officer Wendelin Wiedeking and ex-Chief Financial Officer Holger Haerter, who led the takeover drive at the time, were charged with market manipulation, Stuttgart prosecutors said yesterday.
The indictment, which could give civil suits fresh momentum, underscores the importance of Porsche’s efforts to keep the legal process from spreading.
The plaintiffs claim Porsche lied for months about its intentions to acquire VW before disclosing on Oct. 26, 2008, that it controlled 74.1 percent of the larger company’s common stock and was seeking a takeover. The news caused the shares to surge as short sellers tried to cover positions.
Stuttgart prosecutors said their investigation found that Wiedeking and Haerter decided in February 2008 at the latest to prepare for a takeover. Lawyers for the two have denied the allegations and said the charges won’t stick, pointing to the fact that prosecutors dropped breach-of-trust claims.
Soaring debt eventually led the effort to unravel, prompting a rescue by Volkswagen and reducing Porsche to a holding company for 50.7 percent of VW’s common stock. The Wolfsburg, Germany-based manufacturer completed the purchase of the Porsche unit that makes the 911 sports car in August.
Winning the court race isn’t just about keeping U.K. judges out of the dispute. While the London suit, filed in June by Cayman Islands investment fund Pendragon (Master) Fund Ltd., seeks $195 million over losses on Volkswagen trades, its bigger threat may be its effect on the German suits. Porsche and Pendragon declined to comment because the cases are pending.
In Porsche’s home country, plaintiffs generally can’t force adversaries to produce documents to beef up a claim. Sometimes they can use findings by prosecutors. More recently, some plaintiffs in German cases have used documents produced in foreign lawsuits.
So far, Porsche has successfully blocked discovery in the U.S. cases. German prosecutors haven’t yet allowed investors access to their files. That may change after the charges.
Franz Braun, a lawyer representing plaintiffs suing for more than 2 billion euros combined in Braunschweig, said he will seek access to the files as soon as the court has ruled that the charges may go to trial.
“The prosecutors’ allegations are identical, including the dates, with what we say in our suits,” Braun said. “That’s nice, of course.”
The court in the Braunschweig suits has scheduled a hearing for April 17.
U.K. litigation could give Volkswagen investors, seeking more than 4 billion euros in German courts, another avenue to gather evidence. In the U.K., litigants can make pre-trial disclosure requests for e-mails, instant messages, text messages and commercial documents, said Marcus Rutherford, a lawyer at Enyo Law LLP in London.
While U.K. plaintiffs are barred from sharing documents received on disclosure, interested parties can request trial bundles, which contain the material, once the trial starts. During trial, the information will also become public when lawyers use it in oral arguments.
Even though the first two German suits, seeking less than 5 million euros combined, were rejected in September, plaintiffs in four other suits in Braunschweig could make use of information released in a U.K. case. Also, while fresh lawsuits can no longer be filed in Germany, there’s still a window open in the U.K.
To avoid a discovery order in London, Porsche needs to keep the suit in its home country. In Stuttgart, Porsche is seeking a declaration that it doesn’t owe investors anything. That bid was filed over the same facts as in the Pendragon claims in London, and the company could argue that the case should be heard in Stuttgart because the lawsuit was filed there first.
“If the issue is the same as in Germany, then a U.K. judge would have to throw it out, the law is clear,” said Rutherford. “It suggests to me that there must be more to it for investors to file a claim here.”
The EU rules saying which court can hear the case only apply if both parties are based in the EU. In what looks like an attempt to fulfill the requirement, Porsche filed the Stuttgart suit against Pendragon’s London fund manager as well as the Cayman Islands-based parent. The ploy to keep the case in Germany may not work.
“If the Pendragon fund is located on the Cayman Islands, and outside the EU, then the jurisdiction rules don’t apply,” Thole said. “I’m not sure this is mended by the fact that Porsche is suing a second plaintiff, the fund manager, located in the U.K.”
If Porsche can’t block the British case this way, the company may still use the German lawsuit to force the VW investors into the slow lane and buy time.
Under German rules, the Stuttgart court needs to send the complaint to the Cayman Islands, a process that may take months. Then, judges would ask the parties to exchange written arguments before finally deciding on jurisdiction. Other European lawsuits would drag to a halt during the process.
“Under EU laws, the London judge would have to stay his case until the Stuttgart court rules that it doesn’t have jurisdiction,” Thole said.
European lawyers call a similar tactic an “Italian torpedo,” referring to filing a suit in Italy before plaintiffs can do so in another country. Italian courts can take years to rule on jurisdiction, derailing the litigation, Thole said. Porsche’s strategy is similar.
“The only difference is that the Stuttgart court most likely indeed has jurisdiction, whereas some plaintiffs file cases in Italy even if courts don’t have jurisdiction, betting on the long time it takes for the judges to say that in a ruling,” Thole said.
The Stuttgart Regional Court is trying to serve the suit in the Cayman Islands, court spokeswoman Carola Wittig said in an interview today. A first attempt failed, she said. The court is looking into the jurisdiction issue and has given Porsche until Feb. 5 to submit further arguments, she said.
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