Hedge funds and institutional investors seeking 4 billion euros ($5.2 billion) from Porsche SE over its failed takeover of Volkswagen AG may be hoping, unlike most plaintiffs, that three German civil court suits take a long time to resolve.
After U.S. judges largely rebuffed similar suits, investors will focus on Germany, where a court in Braunschweig is scheduled to hear three cases tomorrow. Drawn-out criminal probes into former executives Wendelin Wiedeking and Holger Haerter, that have spread to board members Wolfgang Porsche and his cousin Ferdinand Piech, may eventually give the plaintiffs an advantage, said Robert Heym, a lawyer at Graf von Westphalen.
“There is the danger that, the longer the civil cases take, criminal proceedings may reveal one or the other fact which may have the potential to damage Porsche or Volkswagen,” said Heym, a Munich lawyer who isn’t involved in the cases. “The plaintiffs are certainly gambling to win additional arguments from the criminal case to beef up their position.”
Ever since Porsche, the maker of the 911 sports car, disclosed on Oct. 26, 2008, it controlled 74.1 percent of Volkswagen’s common stock and was seeking another 1 percent to reach the threshold usually required for a takeover under German law, the company has battled allegations it lied about its plans and tried to manipulate the price of VW stock. The announcement, made on a Sunday, caused the shares to surge to record highs as short sellers scrambled to cover positions.
In the aftermath, Wiedeking, the chief executive officer, and Haerter, the chief financial officer, were fired and Porsche agreed to be acquired by Volkswagen after racking up more than 10 billion euros of debt during the hostile bid.
The merger between the companies was scrapped in 2011 because of uncertainty from the litigation. Volkswagen instead reduced Porsche to a holding company for 50.7 percent of VW’s common stock. The Wolfsburg, Germany-based manufacturer in August acquired the Porsche unit that assembles the sports cars.
The Stuttgart criminal probe started in 2009 after the Porsche takeover bid faltered. The homes of the former executives and offices were raided. The probe was extended in February to Porsche’s 2008 supervisory board including Wolfgang Porsche and Piech, members of the two family branches of Porsche founder Ferdinand Porsche.
“Because of the recent developments in the criminal case, the indictments and the probe against Piech, who was and still is on Volkswagen’s supervisory board, we’re still convinced about our cases,” Franz Braun, the lawyer for plaintiffs on two of the three cases in Braunschweig, said last week.
The three suits scheduled to be heard tomorrow are the biggest in Germany over the failed VW bid. One case, seeking 1.96 billion euros, was filed by seven funds, including Elliott International LP, the Liverpool Limited Partnership and Perry Partners LP.
The claims are unfounded and Porsche has responded to them in court briefs, Albrecht Bamler, a spokesman for Stuttgart-based Porsche said in an e-mailed statement last week.
Two of three hearings may be postponed after Braun told the court that he fell ill. The judges will likely reschedule the hearings originally planned for noon and 12.30 p.m., a spokeswoman for his law firm CLLB in Munich said today. The third hearing scheduled for 11 a.m. in the 1.96 billion euros suit won’t be affected as the case is technically separate.
Wiedeking and Haerter were charged with market manipulation in December, after more than three years of investigation. A Stuttgart court now has to decide whether the charges may go to trial. Haerter is also standing trial on fraud charges over the refinancing of a 10 billion-euro loan for the Volkswagen bid. All suspects have denied the allegations.
The scheduled hearings will center on two press releases Porsche issued in 2008. On March 10 of that year, the company denied it was seeking to acquire a 75 percent majority stake in VW only to reverse the message half a year later on Oct. 26.
The plaintiffs claim Porsche lied both times. In March, the company already planned to acquire VW and was building up options. In October, it had already given up the idea after the financial crisis thwarted the plan, the plaintiffs said in their lawsuits.
Investors dropped most of their U.S. litigation after the country’s Supreme Court ruled such cases can only be brought in the U.S. if the stock is listed on American exchanges or the transactions were made there. Some of the funds could refile the claims in Germany and may use this week’s hearings to gauge their odds.
While the U.S. funds may dodge jurisdiction issues in Porsche’s home country, stricter standards here may hamper their ability to recover damages.
When rejecting two smaller cases in September, the Braunschweig court said that plaintiffs must show trades were based on the contested information. In the U.S., investors don’t need to show they took notice of misleading information because courts follow the theory that in an “efficient market” publicly available information is reflected in prices, said Lars Kloehn, a corporate law professor at Munich University.
In the U.S., courts assume that “the price acts as the unpaid agent of the investor,” Kloehn said. “German courts still have the somewhat unrealistic view that even small investors are following each and every piece of information that comes via the Bloomberg ticker and then trade upon it.”
The Braunschweig judges may also follow findings favorable to Porsche from the last year’s cases. In one September ruling, the court said the March 2008 press release wasn’t wrong because it mentioned the VW takeover as one possible strategic option. In the second case, the judges didn’t determine whether the Oct. 26 release was misleading, saying the plaintiff didn’t show the release prompted the transactions.
“It’s always difficult for plaintiffs to show exactly how and why they lost money because of particular market information,” said Graf von Westphalen’s Heym. “The counter argument is, of course, that whoever speculates on the market can also suffer losses.”