1. CLASS & GROUP ACTIONS IN GERMANY

The concept of class and group actions is essentially unknown and nonexistent in both the German law of civil procedure applicable before German state courts, as well as in the law applicable to arbitrations seated in Germany. Concerns deeply rooted in the fundamental principles of civil procedure have so far been considered incompatible with that concept. Such concerns relate, in particular, to the right to be heard and to the scope of the res iudicata effect of a decision on parties not involved in the proceedings. Moreover, the phenomenon of "mass claims", i.e. claims of a large number of claimants substantially based on the same or similar facts raising the same legal issues, has not been prevalent in German civil litigation practice historically, perhaps because of the absence of a type of proceeding allowing for the economic and efficient pursuit of multiple small claims. It appears though that this is changing. Inspired by US-type class actions, certain law firms in Germany have meanwhile specialized in organizing and bringing mass claims in the state courts, e.g. claims of shareholders against listed stock corporations, investors against banks, customers against insurance companies and more recently cartel damages claims. The German court system and German procedural law is not really suited to adequately deal with the challenges such mass individual claims create. I believe, therefore, that the time has now come for the German legislature to consider options for handling such cases in a fair and efficient manner, including introducing class action type procedures in German civil procedure before the German state courts. The proposals discussed and — in part — brought under way so far, however, do not seem to go further than ‘model’ proceedings designed to clarify certain issues common to mass claims, while the individual claims are suspended pending a decision in the ‘model’ case, rather than integrated class action type proceedings. 1

Class actions in arbitration clearly are not on the agenda in German arbitration practice today. But there is a niche of particular disputes. The German Federal Supreme Court in its landmark 2009 decision Arbitrability II, 2 paved the way for the concept of ‘group’ or ‘collective’ arbitration in certain type of shareholder disputes subject to certain conditions. The German Arbitration Institution (DIS) in an effort to help implementing that concept developed a special set of arbitration rules: the DIS Supplementary Rules for Corporate Law Disputes (DIS-SRCoLD) promulgated in 2009 (herein referred to as DIS Supplementary Rules). 3

S.I. Strong in 2011 published an article entitled "Germany’s Answer to Class Action: Collective Arbitration under the DIS Supplementary Rules for Corporate Law Disputes". 4 As a member of the DIS’ drafting committee developing these rules, I frankly admit that it had not been our ambition, nor had it even crossed our minds at the time that these rules might be seen as a revolutionary step to introducing the concept of class arbitration in Germany. All we had in mind was to find a solution for a problem in arbitrating a particular type of shareholder dispute under German corporate law, certainly a niche type of dispute though practically quite relevant and important in view of the preference of shareholders in closely held companies in Germany to settle shareholder disputes confidentially and expeditiously by arbitration. So, at first, I was stunned that this project raised attention even on the other side of the ocean and even more by Ms Strong’s proposition. After having read her article more carefully (and others written by her on the subject5 ), I realized that while the title of her article may have been somewhat pointed, conceptually Ms Strong’s proposition is not too farfetched.

2. THE DIS SUPPLEMENTARY RULES

The DIS Supplementary Rules have been conceived for a specific and relatively narrow purpose, namely the arbitration of disputes among shareholders of closely held limited liability companies (GmbH) over the validity of shareholder resolutions. 6 The GmbH is the most popular legal form of a limited liability company in Germany. Almost a million of them are registered in Germany. Typically, they have between one and perhaps 10 shareholders. In contrast, the legal form of an "AG" (stock corporation) is better suited for and often chosen by companies with a larger number of shareholders and the legal form required for companies listed on a stock exchange in Germany.

In order to understand the nature of shareholder disputes as discussed here, it is necessary to explain briefly certain elements of German law governing GmbHs. Typically, a GmbH is governed by two bodies (‘organs’): the Management Board and the Assembly of Shareholders. The Assembly of Shareholders in a GmbH, in contrast to an AG, has an almost allencompassing competence with regard to intra-corporation matters, including, e.g., taking decisions on the appointment or removal of managing directors, approval of important business transactions proposed by the Management Board, expulsion of shareholders, etc. The Management Board is responsible for the day-to-day management and generally the representation of the company vis-a-vis third parties. It is bound to follow instructions from the Assembly of Shareholders.

The Assembly of Shareholders takes decisions by way of shareholder resolutions. Normally, shareholders pass their resolutions by majority vote. The articles of association and/or statutory law may contain provisions protecting minority shareholders, imposing restrictions on exercising voting rights (e.g. in case of conflicts of interest) and establishing the formalities of passing shareholder resolutions (such as minimum invitation periods, formal requirements for proposing the agenda for shareholder assemblies, etc.).

Shareholder resolutions are the key instrument in the corporate governance of a GmbH. Shareholder resolutions passed in violation of statutory provisions or provisions in the articles of association may be null and void or voidable (depending on the gravity of the violation).

Where shareholders have diverging interests and the atmosphere between them is not harmonious (not so rare), quite often outvoted minority shareholders challenge the validity of shareholder resolutions. An example: Majority shareholders A and B claim that minority shareholder C is engaging in competing activities in violation of his duties as a shareholder. They call an Assembly of Shareholders with the agenda point: "Expulsion of C as a shareholder". C was invited to attend the Assembly of Shareholders, but did not attend. Nevertheless, A and B by majority vote pass a resolution by which shareholder C is expelled from the company for "important reasons". C denies that he is engaging in competing activities and also invokes that the minimum invitation period for the Assembly of Shareholders had not been observed. A and B instruct the Management Board to strike C from the list of shareholders filed with the court registry.

C has the right to challenge the validity of the shareholder resolution by filing legal action — and that is perhaps a particularity of German law — against the company, not against the other shareholders (who have no legal standing in regard to this kind of action). The court will then decide in the proceedings between C and the company on the validity of the shareholder resolution. The court’s decision has res iudicata effect on all shareholders (erga omnes) 7 , because it is inconceivable that the same shareholder resolution is regarded invalid only vis-a-vis the claimant shareholder and valid vis-a-vis others. All shareholders are notwendige Streitgenossen, a concept perhaps similar to ‘compulsory joinder’ in US civil procedure. Therefore, in proceedings before the state courts all shareholders will be invited to join the proceedings as ‘intervenors’ (Nebenintervenient) on either the claimant or respondent side. They are bound by the court judgement regardless of whether they opt to join the proceedings as an intervenor or not.

Unfortunately, arbitrating this type of dispute raises a problem: the incongruence between the parties to the dispute (the claimant shareholder and the respondent company) and the compulsory res judicata effect of the arbitral award on all shareholders (erga omnes), i.e. also those who are not a party to, and accordingly have not participated in, the arbitration). This incongruence was considered by a number of courts and legal writers to be impossible to overcome, so that shareholder disputes over the validity of shareholder resolutions were regarded to be non-arbitrable. 8

Only in its landmark decision Arbitrability II rendered in 2009, 9 the German Federal Supreme Court held that shareholder disputes over the validity of shareholder resolutions are arbitrable provided that four prerequisites are fulfilled:

• All shareholders are bound by an arbitration agreement (usually contained in the articles of association).

• All shareholders must have been invited to participate in the arbitral proceedings, i.e. to join either the claimant or the respondent.

• All shareholders must have had an opportunity to participate in the constitution of the arbitral tribunal.

• All disputes regarding one and the same shareholder resolution (that is conceivable where different shareholders seek to challenge the same shareholder resolution by instituting separate legal actions against the company) must be concentrated in one arbitral proceeding in order to avoid conceivably inconsistent decisions in parallel arbitral proceedings.

The truly innovative effect of the Arbitrability II decision rendered by the Federal Supreme Court, unprecedented in German arbitration law, is that the award rendered by an arbitral tribunal in arbitral proceedings, where all these requirements have been met, has binding effect on all shareholders regardless of whether they have opted to become a party to the arbitral proceedings. Thus, for purposes of this type of dispute, all shareholders of a GmbH are regarded to form a ‘group’ that is collectively bound by the outcome of the arbitration, regardless of whether they have chosen to participate in the proceedings. This indeed appears to be a characteristic feature of a ‘class’, ‘group’ or ‘collective’ arbitration, however one wants to call it.

While prior to Arbitrability II the view had been taken that a statutory basis is required to allow for arbitrating this type of dispute, 10 the Federal Supreme Court held that the four requirements set out above can and must be addressed by appropriate provisions in the arbitration agreement. Unfortunately, drafting an arbitration agreement ensuring that these requirements are fulfilled is not at all simple. When I once made an effort drafting such a clause in the context of a mandate, I ended up with a monstrous arbitration clause extending over eight contract pages. Neither my client nor opposing counsel liked it. That triggered the idea to outsource all the indispensable complex technical provisions in a set of DIS Supplementary Rules to the standard DIS Arbitration Rules which could simply be referred to in the articles of association. So the monster was caged and placed in another room where one could not see it (unless and until necessary). It seems that the DIS Supplementary Rules become more and more accepted in corporate practice, as we see an increasing number of cases filed with the DIS under these rules.

In a nutshell, the characteristic features of the DIS Supplementary Rules are the following:

• All shareholders (other than the claimant shareholder) (in the DIS Supplementary Rules called "Concerned Others") are to be invited to join the arbitral proceeding as a party or an intervenor.

• Concerned Others so invited have the right and may choose whether to join the arbitral proceedings and, if so, on which side, within fixed time limits.

• If a Concerned Other chooses not to join, he or she remains entitled to be informed of the course of the proceedings and may still join the proceedings at a later stage, provided, however, that he or she does not object to the constitution of the arbitral tribunal and accepts the proceedings in the state they are in at the time of joinder.

• If a Concerned Other chooses to join, he or she is entitled to participate in the proceedings as a party or intervenor.

• Once it is established who the parties are on the claimant’s side and on the respondent’s side, both sides shall appoint an arbitrator each and the two party-appointed arbitrators will appoint the president. If no such agreement can be reached on either side, all three arbitrators, or the sole arbitrator, as the case may be, will be appointed by the DIS.

• Parallel proceedings initiated with the same subject matter (e.g. the same shareholder resolution) will be joined with the proceeding instituted first (in the following referred to as the "First Arbitration"). In such case, the parties to the second arbitration will have the same rights as the parties to the First Arbitration, including in regard to participating in the process of appointing the arbitrators.

• Concerned Others are bound by the arbitral award regardless of whether they have participated in the proceedings.

• The arbitral award has binding effect on all shareholders.

The ultimate purpose of the mechanism established by the DIS Supplementary Rules is to force shareholders to either join the arbitral proceedings as a party (or intervenor) or else accept to be bound by their outcome, i.e. an extension of the res judicata effect of an arbitral award to non-parties to the arbitration. If more than two parties participate in the arbitral proceedings, they will have to be conducted substantially like a multi-party arbitration.

As is probably true for any multi-party arbitration, it may become procedurally and technically unmanageable if the number of parties (or Concerned Others within the meaning of the DIS Supplementary Rules) is too large. It seems to me that generally conducting arbitral proceedings under the DIS Supplementary Rules with more than 15 to 20 parties will become very difficult, if not impossible. Therefore, they would probably not work for shareholder disputes in listed stock corporations with a large number of shareholders, unless additional class action-like organizational structures were to be integrated into the process. Moreover, the traditional view in Germany has been that disputes in stock corporations (AG) are not arbitrable, at all, due to statutory restrictions. That view, however, has received more criticism recently and after Arbitrability II may no longer accurately reflect the position of the German courts. 11 Theoretically, then collective arbitration under the DIS Supplementary Rules (conceivably combined with class action type organizational structures) could work in large stock corporations, as well. But that is science fiction, for the time being. I do not see that in Germany an urgent need is perceived for implementing class action type arbitral proceedings in listed or other large stock corporations. Shareholders in closely held stock corporations, however, may prefer to settle shareholder disputes by way of arbitration using the DIS Supplementary Rules.

3. THE DIS SUPPLEMENTARY RULES IN THE SPECTRUM OF CLASS & GROUP ARBITRATION

Where are the DIS Supplementary Rules to be located in the spectrum of class & group actions discussed here?

Common features are:

• Arbitrations under the DIS Supplementary Rules are a form of collective or group arbitration, though not a ‘class’ arbitration in the ordinary sense.

• An arbitral award rendered under the DIS Supplementary Rules may have res iudicata effect upon third parties (Concerned Others) who have not become a party to the arbitral proceedings.

• Third parties (Concerned Others) have a right, but not an obligation to join the arbitral proceedings as a party (‘opt-in’).

Distinguishing features are:

• No opt-out as regards the binding effect of the arbitral award on Concerned Others.

• Apart from the concept of extending the binding effect of an arbitral award to non-parties to the arbitral proceedings, arbitrations conducted under the DIS Supplementary Rules with more than two parties are essentially multi-party arbitrations with their inherent procedural and organizational challenges.

• Because substantially in the nature of traditional multi-party arbitration, arbitrations under the DIS Supplementary Rules are not designed and not suited to resolve the procedural and organizational challenges of arbitrating mass claims.

Could the concept underlying the DIS Supplementary Rules inspire solutions beyond the very narrow purpose for which they have been designed? Perhaps. The problem the DIS Supplementary Rules seek to resolve is one arising in a procedural situation where a decision by nature inevitably has effect on a defined group of individuals. I understand that situation is addressed, e.g., in the US Federal Rules of Civil Procedure by the concept of ‘compulsory joinder of parties’. 12 Of course, conceivably that problem could be resolved by forcing a claimant to institute arbitral proceedings against all parties to be compulsorily joined. But as the shareholder situation in Germany demonstrates, that may not necessarily be appropriate, first because third parties may not be interested in participating in costly arbitral proceedings because they are indifferent as regards the outcome, and second because they may not wish to be forced into a respondent position when they in fact favor the claimant’s position. In German (GmbH) shareholder disputes, other shareholders would even lack standing to be sued (as the suit is to be brought against the company).

A situation that comes to my mind in this context is one rather frequently encountered, in particular in construction disputes, and difficult to deal with in consent-based arbitration: How can the result of an arbitration between the owner and the general contractor be made binding on a follow-up dispute between the general contractor and the sub-contractor? It seems to me that the mechanism established under the DIS Supplementary Rules, or at least elements of it, could be used to invite the sub-contractor to join the arbitration between the owner and the general contractor, or else accept to be bound by the outcome of that arbitration in the relationship between the general contractor and the subcontractor (Streitverkündung). But that is not really part of this seminar’s topic.

1
Cf. Wolf & Lange, "Wie neu ist das neue Kapitalanleger-Musterverfahrensgesetz?", 2012 NJW 3751; Axel Halfmeier, "Zur Neufassung des KapMuG und zur Verjährungshemmung bei Prospekthaftungsansprüchen", 2012 DB 2145.

2
German Federal Court of Justice (BGH), judgment of 6 April 2009, II ZR 255/08, BGHZ 180, 221.

3
See Annex I.

4
S.I. Strong, "Germany’s Answer to Class Arbitration: Collective Arbitration under the DIS Supplementary Rules for Corporate Law Disputes", TDM 2011, Vol. 8, issue 2.

5
S.I. Strong, "Arbitration of Trust Disputes: Two Bodies Collide", 45 Vand. J. Transnat’l L. 1157; S.I. Strong, "Mandatory Arbitration of Internal Trust Disputes: Improving Arbitrability and Enforceability Through Proper Procedural Choices", 28 Arb Int’l 591 (2012); S.I. Strong, "Empowering Settlors: How Proper Language Can Increase the Enforceability of a Mandatory Arbitration Provision in a Trust", 47 Real Prop. Tr. & Est. L. J. 275, (2012).

6
Christian Borris, "Arbitrability of Corporate Law Disputes in Germany", 5 Int. A.L.R. 2012, 161 et seq.; Christian Borris, "Die Schiedsfähigkeit gesellschaftsrechtlicher Streitigkeiten in der Aktiengesellschaft", 2010 NZG 481; Christian Borris, "Die "Ergänzenden Regeln für gesellschaftsrechtliche Streitigkeiten" der DIS ("DIS-ERGeS")", 2009 SchiedsVZ 299.

7
Christian Borris, "Arbitrability of Corporate Law Disputes in Germany", in C.J.M. Klaassen et. al., "Onderneming en ADR", Kluwer 2011, 55 et seq.

8
Christian Borris, "Arbitrability of Corporate Law Disputes in Germany", in C.J.M. Klaassen et. al., "Onderneming en ADR", Kluwer 2011, 55 et seq.; BGH, 1996 NJW 1753 (1755); BGH, 1979 NJW 2567 (2569); Henze, 1988 ZGR 542 et seq.

9
BGH, supra note 1.

10
BGH, 1996 NJW 1753; Schwedt/Lilja/Schaper, "Schiedsfähigkeit von Beschlussmängelstreitigkeiten: Die neuen Ergänzenden Regeln für gesellschaftsrechtliche Streitigkeiten der DIS", 2009 NZG 1281 (1282).

11
Christian Borris, "Die Schiedsfähigkeit gesellschaftsrechtlicher Streitigkeiten in der Aktiengesellschaft", 2010 NZG 481 (482 et seq.).

12
US Federal Rules of Civil Procedure, Title IV, Rule 19: Required Joinder of Parties (a) Persons Required to Be Joined if Feasible. (1) Required Party. A person who is subject to service of process and whose joinder will not deprive the court of subject-matter jurisdiction must be joined as a party if: (A) in that person’s absence, the court cannot accord complete relief among existing parties; or (B) that person claims an interest relating to the subject of the action and is so situated that disposing of the action in the person’s absence may: (i) as a practical matter impair or impede the person’s ability to protect the interest; or (ii) leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest. (2) Joinder by Court Order. If a person has not been joined as required, the court must order that the person be made a party. A person who refuses to join as a plaintiff may be made either a defendant or, in a proper case, an involuntary plaintiff. (3) Venue. If a joined party objects to venue and the joinder would make venue improper, the court must dismiss that party. (b) When Joinder Is Not Feasible. If a person who is required to be joined if feasible cannot be joined, the court must determine whether, in equity and good conscience, the action should proceed among the existing parties or should be dismissed. The factors for the court to consider include: (1) the extent to which a judgment rendered in the person’s absence might prejudice that person or the existing parties; (2) the extent to which any prejudice could be lessened or avoided by: (A) protective provisions in the judgment; (B) shaping the r elief; or (C) other measures; (3) whether a judgment rendered in the person’s absence would be adequate; and (4) whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder. (c) Pleading the Reasons for Nonjoinder. When asserting a claim for relief, a party must state: (1) the name, if known, of any person who is required to be joined if feasible but is not joined; and (2) the reasons for not joining that person. (d) Exception for Class Actions. This rule is subject to Rule 23.