Interconnected gears and magnifying glasses symbolize corporate transparency and accountability.

Navigating Corporate Accountability: Understanding Flawed Ad-Hoc Publicity and the Rise of Informal Special Audits

Reese Marlowe in Law & Justice August 2025 • 5 min read.

"A Comprehensive Guide to Liability Structures, Informal Audits, and European Co-determination"

In today's rapidly evolving corporate landscape, accountability and transparency are paramount. Companies face increasing scrutiny from investors, regulators, and the public, making robust governance mechanisms essential. This article delves into two critical areas of corporate oversight: the challenges posed by flawed ad-hoc publicity and the growing trend of informal special audits. Additionally, we will explore the complexities surrounding co-determination within European multinational corporations.

Flawed ad-hoc publicity can lead to significant legal and reputational risks. The legal frameworks governing corporate disclosures, such as §§ 37b and 37c of the German Securities Trading Act (WpHG), aim to ensure that investors receive timely and accurate information. However, the interpretation and enforcement of these regulations can be complex, particularly when assessing liability for damages resulting from misinformation.

In response to the increasing demand for accountability, a new type of audit has emerged: the informal special audit. These audits, conducted outside the formal framework of statutory special audits, offer companies a flexible and discreet way to address concerns and improve governance. We will examine the benefits and limitations of these informal audits, as well as the key considerations for structuring effective agreements with shareholders and auditors.

The Labyrinth of Flawed Ad-Hoc Publicity: Untangling Liability and Claims

Interconnected gears and magnifying glasses symbolize corporate transparency and accountability.

The German Securities Trading Act (WpHG), particularly §§ 37b and 37c, seeks to protect investors by ensuring timely and accurate disclosure of information that could affect stock prices. This is often referred to as ad-hoc publicity. However, the practical application of these regulations can be fraught with challenges, especially when determining who is entitled to compensation for losses incurred due to flawed or misleading information.

A central issue in the interpretation of §§ 37b and 37c WpHG is the so-called “transaction requirement.” The prevailing view is that the right to claim damages hinges on the nature of the underlying contractual agreements. In other words, the focus is on the obligations arising from the transaction rather than the proprietary rights associated with the securities. This distinction can have significant implications for determining who can claim damages when trades are executed based on incorrect information.

The Prevailing View: The consensus is that the legitimacy of claims under §§ 37b and 37c WpHG depends on the contractual nature of the transactions, sidelining considerations of proprietary rights.
The Limits of the Standard Interpretation: Traditional interpretations face difficulties when applied to scenarios such as securities lending, highlighting the need for a more nuanced approach to compensatory mechanisms.
The Issue of Securities Lending: The prevailing view struggles to provide clear guidance in cases involving securities lending, where the legal ownership and control of the securities are temporarily separated. This raises questions about who should be entitled to compensation if misleading information affects the price of the securities during the lending period.

To illustrate the complexities, consider a scenario where securities are lent out, and during the lending period, misleading information is released that negatively impacts the stock price. Under the prevailing view, it may be unclear whether the lender or the borrower is entitled to claim damages. The lender retains legal ownership of the securities but has temporarily transferred control to the borrower. The borrower, on the other hand, has control over the securities but does not have legal ownership. This ambiguity can create significant challenges in determining who has the right to claim damages under §§ 37b and 37c WpHG.

The Future of Corporate Governance: Balancing Formal and Informal Mechanisms

As the corporate landscape continues to evolve, the need for robust and adaptable governance mechanisms will only increase. Companies must navigate a complex web of legal requirements, stakeholder expectations, and ethical considerations. By understanding the nuances of ad-hoc publicity regulations, embracing the potential of informal special audits, and adapting to the pluralistic landscape of European co-determination, companies can build a foundation for sustainable success and long-term value creation.

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Everything You Need To Know

What is the primary goal of §§ 37b and 37c of the German Securities Trading Act (WpHG), and why is it significant?

The primary goal of §§ 37b and 37c of the German Securities Trading Act (WpHG) is to ensure investors receive timely and accurate information. This is critical because it directly impacts the decisions investors make, especially concerning stock prices. Accurate information helps prevent losses due to misinformation and maintains trust in the market. These sections of the WpHG are vital because they set the legal framework for corporate disclosure, ensuring that companies are transparent about information that could affect stock values. The potential liability for damages under these regulations underscores the importance of compliance and accurate reporting, which in turn safeguards investor interests and market integrity.

How do informal special audits differ from statutory special audits, and what advantages do they offer?

Informal special audits are conducted outside the formal framework of statutory special audits. They offer companies a flexible and discreet way to address concerns and improve governance. Unlike statutory audits, which are often mandated by law and public, informal audits can be tailored to specific needs and are usually kept confidential. The main advantages include greater flexibility in scope and timing, as well as discretion, allowing companies to address sensitive issues without triggering public scrutiny. These audits help companies proactively identify and rectify issues, which can lead to improved governance and potentially prevent larger problems from arising later. Structuring effective agreements with shareholders and auditors is key to maximizing the benefits of these audits, ensuring their validity and effectiveness.

In the context of §§ 37b and 37c WpHG, what is the 'transaction requirement,' and what implications does it have on claiming damages?

The 'transaction requirement' in the context of §§ 37b and 37c WpHG refers to the prevailing view that the right to claim damages hinges on the nature of the underlying contractual agreements. The focus is on the obligations arising from the transaction, rather than the proprietary rights associated with the securities. This means that for an investor to claim damages, their claim is often tied to the specific contractual obligations they entered into, such as a purchase or sale agreement. This requirement can significantly impact who is eligible to claim damages, particularly in complex scenarios, like securities lending. It can limit claims to those directly involved in the contractual transactions, potentially excluding others who may have been indirectly affected by the misleading information.

How does the 'prevailing view' on the 'transaction requirement' create difficulties in cases of securities lending, and what are the implications?

The prevailing view, which emphasizes the contractual nature of transactions under §§ 37b and 37c WpHG, faces challenges when applied to securities lending. In securities lending, the legal ownership of the securities is separated from their control. The lender retains legal ownership but transfers control to the borrower. If misleading information affects the stock price during the lending period, it becomes unclear whether the lender or the borrower is entitled to claim damages. The lender has ownership, but the borrower made the transaction and controlled the securities during the price fluctuation. This ambiguity creates a complex legal gray area, making it difficult to determine who should be compensated. This highlights the need for a more nuanced approach to compensatory mechanisms, one that considers the specific circumstances and contractual arrangements involved in securities lending.

What key elements are essential for building a foundation for sustainable success and long-term value creation according to this overview?

To build a foundation for sustainable success and long-term value creation, companies must understand and navigate a complex web of factors. These include a deep understanding of ad-hoc publicity regulations, particularly §§ 37b and 37c of the German Securities Trading Act (WpHG), to avoid legal and reputational risks. Secondly, companies should embrace the potential of informal special audits to proactively address concerns and improve governance. These audits offer flexibility and discretion, allowing companies to identify and rectify issues discreetly. Finally, businesses need to adapt to the pluralistic landscape of European co-determination, which involves understanding and incorporating the perspectives of various stakeholders. By focusing on these areas, businesses can improve transparency, strengthen governance, and foster a culture of accountability, which in turn leads to increased investor trust and sustainable success.