Federal Court of Justice banks must disclose that open-ended property investment companies may suspend the redemption of units
On 29 April 2014, the German Federal Court of Justice (BGH) handed down two judgments relevant to banks that have recommended open-ended property funds to their clients.1 The judgments have not yet been published; currently only the press release of the BGH is available.
In both cases, the claimants had bought units in an open-ended property funds after investment advice from a bank; the investment company subsequently suspended the redemption of units in October 2008. In both cases the bank had not advised the claimants about this possibility. The BGH found the bank principally liable for damages and the court held that banks must, without being asked, inform their clients of the risk that a property investment company may suspend the redemption of units.
The court emphasised that a major characteristic of open-ended property funds was that investors can return their units to the investment company for a regulated price. The investment company may, however, temporarily suspend this redemption of shares under certain circumstances.
The court stated that this presented a liquidity risk for the investors, which they should be informed about before they decide to buy the investment. The court held that, in light of the bank’s disclosure obligation, it was irrelevant whether a suspension of the redemption of shares was foreseeable or remote. The BGH also found that the investors’ ability to sell their units on the stock exchange was not comparable to redemption, as the sales price at the stock exchange is uncertain.
The bank had argued that a suspension of the redemption of units was in the interest of all the investors. With the suspension, the investment company intended to avoid liquidating assets in a crisis, during which assets would have to be liquidated in an economically unreasonable way. The BGH dismissed this argument, stating that a suspension was against the investors' interest in liquidity.
1. File No XI ZR 477/12 and XI ZR 130/13.