New analysis: legal risks for DAX companies

• 29 of DAX 30 companies are affected by regulatory and litigation risks.
• Regulation is a significant risk factor for business.
• The majority of the companies are affected by competition, corruption and product quality risks.
• Risk reporting is guided by the standards of international accountancy. Four companies provide concrete quantitative data on risks.

The increasing burden on companies due to legal risks is reflected in the report of the DAX 30 companies. That is shown in a new study of the law firm Noerr in cooperation with Baetge Analyse GmbH. The reports for the financial year 2012 were examined. The companies over all sectors – there are companies of the eight super sectors represented in the DAX 30 – report in particular regulatory risks and litigation risks – (29 of 30 companies in each case). Over all sectors, companies are also confronted with risks in connection with competition and cartel law (26 companies) and corruption and fraud (25 companies). A majority of the companies is also affected by risks in connection with product defects (22 companies).

Other risks are significant for specific sectors. Six sectors are particularly affected by environmental risks (consumer goods, raw materials, industry, health and pharmaceuticals, IT, telecommunication); three sectors are disproportionally affected by patent risks (consumer goods, health and pharmaceuticals, telecommunication). Health and pharmaceutical DAX companies report tax risks.

Regulatory risks to the fore

Apart from litigation risks, regulatory risks are mainly to the fore. “Over all sectors, states and the EU increasingly intervene in the market by regulation and control”, reported Dr Oliver Sieg, who with Michael Molitoris heads Noerr’s Litigation Department. Finance companies are affected by increased equity capital and liquidity regulations (Basel III), insurance companies by the Solvency II rules. The regulatory range is even greater for utility suppliers and goes from national rules on final disposal of highly radioactive waste to risks from the regulation of energy trading transactions at European level. “Regulation is shown to be the main risk factor for business” emphasises Oliver Sieg. Michael Molitoris adds: “The extent to which regulatory risks are referred to in the reports of the DAX companies is causing concern. Since the financial crisis, we observe an ever-increasing trend to regulation. This has to a great extent led to defective regulation and overregulation which ultimately disproportionately restricts companies in their business, reduces competitiveness and risks in the end growth and sustainability.”

For Dr Holger Schmitz, co-head of the Regulatory & Governmental Affairs Department of the law firm Noerr, it is clear that: “The results of the study clearly show that companies in highly regulated markets must do more than merely monitor the legal situation. In order to achieve long-term investment security, they must adopt an active advisory role at national and European levels. The regulatory questions are meanwhile too complex for the representation of business interests to be left to their associations alone.”

Processing the past

Corruption and fraud risks and competition and cartel law risks are reported in the majority of reports over all sectors. “All DAX 30 companies meanwhile have sophisticated concepts to reduce risks from their business and functioning compliance management systems”, said Michael Molitoris. “Some companies are still fully occupied in investigating breaches in the past.” This will also be reflected in the reports in the coming years.

Risks due to defects in the products of companies arise in addition, this includes warranty, product safety, product liability risks. The reports refer in individual cases to considerable liabilities sometimes in high hundreds of millions. “The possible losses are enormous since product liability cases increasingly frequently have international dimensions”, explained Michael Molitoris.

Reporting is guided by the standards of international accountancy

Quantifying and qualitatively classifying the risks raised fundamental problems. “In writing annual reports, transparency as a protection of creditors and investors and shareholders must be observed equally with the possible interests of a company in not adversely affecting its legal position by the publication”, described Michael Molitoris the dilemma in which companies are placed. The overwhelming majority of DAX 30 companies are therefore guided in their risk reporting by the standards of international accountancy (IFRS) relevant to reserves and legal risks. According thereto, under certain circumstances, no visible data on obligations in connection with litigation have to be provided.

Concrete quantitative data on risks are found only in four financial and insurance companies listed in the DAX 30. They are statutorily obliged to provide operational risks data. Four other DAX companies provide qualitative data on legal risks. Data on the probabilities and the amount of damages or possible effects of the legal risks are found in the reports.

“Overall, the investigation shows that the DAX 30 companies are considerably affected by legal risks.”, said Oliver Sieg. “Since the financial crisis, regulatory risks play a decisive role therein.”