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Tuesday, 02 September 2014

The fast lane

Porsche's real legal crash test is yet to come

Porsche has enjoyed a smooth ride in the courts so far. The carmaker has avoided the potholes created by its epic and unsuccessful attempt to gobble up Volkswagen. Disgruntled investors accuse the company of systematic lying during the 2008 saga, and are suing for billions of compensation. Porsche rejects all accusations. But in spite of the significant hurdles investors who feel they’ve been duped are facing in the German legal system, the group isn’t out of the woods yet.

Porsche investors may have felt reassured by the decisions of American judges so far. A New York State court recently decided that the U.S. is not the right place to sue Porsche. A Federal Court also looking into the matter may soon follow suit. In that case, suitors will have to rely on the German legal system. In September 2012, a German court already dismissed two civil lawsuits.

Small wonder that shares of Porsche Automobil Holding SE, the legal successor of the company that lost its carmaking business to Volkswagen but still owns 50.7 percent of Europe’s biggest carmaker’s voting shares, have increased by 52 percent in the last six months.

That jubilation might turn out to be premature. Porsche’s decisive legal crash test will begin on April 17, when three further civil lawsuits kick off in Braunschweig, Lower Saxony. The plaintiffs ask for a total of 4.1 billion euros in compensation. But their cases have a different structure than the previously-dismissed ones, and might rest on more solid ground.

At the heart of the cases is Porsche’s communication strategy during the bid. For several months, the company denied intentions to acquire a 75 percent majority in Volkswagen. In a dramatic about-face in late October 2008, Porsche claimed that, thanks to a complex web of option deals, it was already controlling 74.1 percent of its bigger rival. In a blink, Volkswagen’s share price quintupled to 1,005 euros. Hedge funds who traded on Porsche’s denials and shortened Volkswagen rushed to cover their positions, lost billions, and then flocked to the courts.

Suitors claim Porsche deliberately issued wrong statements to disguise its intentions to take over Volkswagen. This view is shared by criminal prosecutors in Stuttgart. After four years of investigation, they are convinced that Porsche had decided on taking full control of Volkswagen and prepared that move while officially denying any such intentions. A few weeks ago, the law enforcement authorities decided to charge Porsche’s former top management with market manipulation. The courts will probably accept the case in the near future but it will be many months before the actual trial kicks off.

Some claimants also take issue with Porsche’s late October 2008 statement that turned Volkswagen’s share price topsy-turvy. They are convinced that the claim to control 74.1 percent of the bigger rival was a blatant bluff, because Porsche lacked the financial clout to execute its call options. Furthermore, the company was threatened by Volkswagen’s previously declining share price.

This analysis seems also to be partly backed by evidence collected by the criminal prosecutors. They assert that a falling Volkswagen share price would have caused financial obligations for Porsche many times larger than its ability to pay.

The open question is whether Porsche deliberately issued a wrong statement with the sole intention to boost Volkswagen’s share price, out of desperation. This allegation will be hard to prove. Criminal prosecutors are not convinced, and aren’t charging the company on that count.

Even if the courts decide that Porsche is guilty of market manipulation in either case, this does not automatically imply victims can hope for compensation. Under German law, deliberately issuing wrong information on securities is a criminal offence, but it doesn’t create civil liability. Victims can only get compensated if they were duped in a “particularly immoral” way. On top of that, they must prove that the phony information was indisputably the cause for their losses.

Those hurdles are high, but not insurmountable. With the benefit of hindsight, Porsche’s communication in 2008 was questionable, to say the least. So far, Porsche has only made provisions for the legal costs associated with the lawsuits but not for possible compensation payments. That might be overly optimistic.

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Morgan Stanley on Jan. 8 lifted its target for shares of Porsche Holding SE from 65 to 75 euros, citing positive legal developments as one reason. Porsche currently trades above 61 euros, 52 percent more than six months ago.

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