Civil Liability of the Company and Its Directors for False Financial Statements Under German Law

in: Issues and Challenges in Corporate and Capital Market Law: Germany and East Asia, edited by Holger Fleischer, Hideki Kanda, Kon Sik Kim and Peter Mülbert, Tübingen 2018 (Mohr Siebeck), pp. 131-162

30 Pages Posted: 21 Aug 2017 Last revised: 6 Jul 2022

See all articles by Klaus Ulrich Schmolke

Klaus Ulrich Schmolke

Johannes Gutenberg University Mainz - Faculty of Law and Economics

Date Written: 2017

Abstract

Imagine the CEO of a German bank which is organized in the form of a stock corporation issues a press release which states that "the recent uncertainties with regard to the US subprime mortgage market has practically no impact on our international investment portfolio." The press release is intended to calm the markets and to fight rumors which assumed a significant exposure of the bank and, thus, led to a decline of the price of its shares and bonds. As a matter of fact, however, the bank is heavily invested in the subprime mortgage market and is therefore exposed to considerable default risks. Soon after the press release the truth comes to light and the share price of the bank plunges. An investor who bought shares of the bank right after the press release wants to recover his losses. Does he have a claim against the bank and/or the CEO?

The text at hand addresses these questions and more. It provides an overview – albeit inevitably rough and sketchy – of the civil liability of the company and its directors for false financial statements under German law. However, before going into medias res, some preliminary remarks on the scope of this contribution are in order: At least for a German corporate lawyer the meaning of the term "financial statements" is not totally clear. Understood narrowly financial statements solely capture the annual or otherwise periodical financial statements which give an overview of the overall financial situation of the respective enterprise. German law provides for the disclosure of such statements in its law on accounting and financial reporting. These provisions are complemented by disclosure requirements under German capital markets law where listed companies (issuers) are concerned. In a wider sense, financial statements are not limited to such periodical reports but comprise each and every statement on financial or financially relevant ("material") information. Understanding financial statements in this wider sense, this overview also focuses on the liability of issuers and their directors for the infringement of continuous disclosure duties under German capital markets law as well as their liability for voluntary statements that contain false or misleading information. Beyond the scope of this article, however, is the liability for false or deficient disclosure of corporate social responsibility (CSR) information, since such information relates to non-financial (!) issues.

The term "company", on the other hand, is typically understood by German corporate lawyers as comprising the limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) as well as the stock corporation (Aktiengesellschaft, AG). This contribution, however, focuses on the liability of German stock corporation and its directors. The legal situation of the GmbH is quite similar, even though not identical to the one of the AG. One major difference, though, is that the GmbH cannot be listed on a stock exchange and, therefore, the laws and regulations confined to listed companies do not apply.

The following analysis of the liability of the stock corporation and its directors for false financial statements under German law will proceed as follows: Part II presents a short primer on how civil liability of the German stock corporation and its directors works in general. Part III introduces the legal framework that requires the company to draw up and publish information about its financial situation as well as the duties of the directors towards the company which relate to these requirements. Part IV adds some short remarks on voluntary financial statements. After having thus laid the groundwork, Part V returns to the topic at hand by having a closer look at the civil liability of the stock corporation and its directors for false financial statements under German law. Part VI concludes.

Keywords: civil, civil liability, liability, disclosure, finance, capital market

JEL Classification: K22

Suggested Citation

Schmolke, Klaus Ulrich, Civil Liability of the Company and Its Directors for False Financial Statements Under German Law (2017). in: Issues and Challenges in Corporate and Capital Market Law: Germany and East Asia, edited by Holger Fleischer, Hideki Kanda, Kon Sik Kim and Peter Mülbert, Tübingen 2018 (Mohr Siebeck), pp. 131-162, Available at SSRN: https://ssrn.com/abstract=3019983

Klaus Ulrich Schmolke (Contact Author)

Johannes Gutenberg University Mainz - Faculty of Law and Economics ( email )

D-55099 Mainz, 55128
Germany

HOME PAGE: http://https://schmolke.jura.uni-mainz.de/

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