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Germany is likely to be the primary focus of shareholders' directors and officers liability litigation against Volkswagen A.G. over software in its diesel cars allegedly designed to curb pollution only during emissions testing.
While at least one D&O suit has been filed in the United States in addition to dozens of proposed class actions filed on behalf of consumers, experts say the U.S. Supreme Court's 2010 ruling in Robert Morrison et al. v. National Australia Bank Ltd. would restrict U.S. investor litigation to those who bought VW's American depository receipt shares.
ADRs are certificates issued by a U.S. bank representing a share of a foreign stock it holds in trust but is traded on a U.S. exchange. ADRs reportedly account for only a small portion of VW's total shares.
San Diego-based plaintiff law firm Robbins Geller Rudman & Dowd L.L.P. filed suit Friday on behalf of some VW ADR shareholders in Alexandria, Virginia, federal court. City of St. Clair Police & Fire Retirement System v. Volkswagen A.G. et al. alleges violations of the Securities Exchange Act of 1934, charging defendants with making “numerous false and misleading statements and omissions to investors regarding the company's operations and its business and financial results and outlook.”
Some 11 million VW and Audi diesel cars are affected. VW, which U.S. officials have said could face up to $18 billion in fines, set aside e6.5 billion ($7.35 billion) for “necessary service measures and other efforts to win back the trust of our customers,” according to a statement.
Meanwhile, the automaker that touted the cars as being green with great gas mileage faces numerous inquiries sparked by the U.S. Environmental Protection Agency's Sept. 18 announcement that VW used a “defeat device” to evade U.S. Clean Air Act standards. There was speculation VW may need a bailout from the German government to survive.
The crisis sparked the resignation of CEO Martin Winterkorn, who was replaced Friday by Porsche A.G. executive Matthias Mueller.
For ADR litigation filed in the U.S., the Supreme Court's decision Morrison will govern such suits. In that case, Melbourne, Australia-based National Australia Bank bought Jacksonville, Florida-based HomeSide Lending Inc. in February 1998. It then wrote down HomeSide's assets by $2.2 billion in 2001, sparking shareholder suits against both companies and their executives.
The Supreme Court held unanimously that antifraud provisions of the U.S. securities law “reach the use of manipulative or deceptive device or contrivance only in connection with the purchase or sale of as a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.”
While the ruling disallows suits by those who purchased shares outside the United States, those who bought ADR shares in the U.S. “have all the rights that any shareholder has to pursue claims” against VW, said Kevin LaCroix, executive vice president of RT ProExec, a division of R-T Specialty L.L.C. in Beachwood, Ohio.
Because ADR shares typically are only a small percentage of total shares, “the actual amount of recovery is going to be much smaller than it would have been” before Morrison. “It's a more manageable risk in light of the Morrison decision,” said Todd G. Cosenza, a partner at Willkie Farr & Gallagher L.L.P. in New York.
Unlike the United States, Mr. LaCroix said, Germany has dual board structure, with a management board of senior managers and a supervisory board that includes representatives of unions, pension funds and other stakeholders. The expectation is the supervisory board would sue the management board, he said.
Thomas O. Gorman, a partner at Dorsey & Whitney L.L.P. in Washington, said senior VW officials likely would be covered under VW's D&O insurance.
D&O policies typically pay legal fees and portions of settlements once retentions are met, Mr. Gorman said. “They may also cover some regulatory investigations, depending on the type of coverage they have.”
Mr. LaCroix said that under typical D&O wording, any policy exclusion based on conduct would take effect after a final adjudication. “Even then, if there were to be an individual admission by the company or by former or present employees ... that would not preclude coverage of others.”