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Volkswagen settles with US authorities and diesel car owners

German car manufacturer Volkswagen (VW), which last year admitted to falsifying emissions data in its diesel cars around the world, has reached a $10.03 billion settlement with US authorities and former and current diesel car owners.

If approved by US regulators, VW has agreed to buy back cars, terminate lease deals or modify cars for free. It estimates there are around 460,000 Volkswagen and 15,000 Audi vehicles currently in use which would be eligible under the scheme. The settlement program is subject to the approval of Judge Charles R. Breyer of the United States District Court for the Northern District of California, who presides over the federal Multi-District Litigation (MDL) proceedings relating to the diesel scandal.

VW also announced that it has agreed with the attorneys general of 44 U.S. states, the District of Columbia and Puerto Rico to resolve existing and potential state consumer protection claims related to the diesel matter for a total settlement amount of approximately $603 million. In addition it has agreed to pay $2.7 billion over three years into an environmental trust, managed by a trustee appointed by the Court, to remediate excess nitrogen oxide (NOx) emissions from 2.0L TDI vehicles and invest $2 billion over 10 years in zero emissions vehicle (ZEV) infrastructure, access and awareness initiatives.

Volkswagen said it will begin the settlement program as soon as the Court grants final approval to the settlement agreements.  Approval will occur in this autumn at the earliest.

There are separate ongoing class actions by US and European investors also seeking a settlement with VW due to the drop in the company’s share price following its statement in September last year admitting the falsification of diesel emissions data. The investors believe their investment has been severely damaged with millions of Volkswagen cars globally impacted by the scandal, which led to the departure of its chief executive Martin Winterkorn and the suspensions of several high-level executives and engineers.   In addition to having legal settlements to reach costing billions of dollars VW has also been banned from selling diesel cars in several important markets.

At the recent VW AGM (22nd )  investors also criticised its corporate governance with suggestions that this may have contributed to the emissions scandal. Investment management company, Hermes EOS said it had initiated a request for a special audit to investigate the acts and potential breaches of duty by the two boards and supported the extension of the meeting agenda proposed on behalf of a group of shareholders by Brussels-based corporate governance advisor, Deminor with a similar request. Hermes EOS also recommended its clients to vote against the election of the candidates proposed for election or re-election to the supervisory board, but support the only independent non-executive director among its members.

Deminor reported that unsurprisingly Volkswagen’s controlling shareholders – the Porsche family, the state of Lower Saxony and the state of Qatar – rejected the motion put forward by Deminor to have a “special investigator” appointed. However, the voting results showed, Deminor said, that just over 50% of the free-float investors with voting rights represented at the shareholders’ meeting voted in favour of its motion. “This is a strong signal to the management that the investors’ community wants nothing but the full truth about what went wrong at Volkswagen AG. If shareholders were misled, they are entitled to know,” Deminor said. It is now advising its clients to request the court of Hannover to appoint a special investigator.

Dr Hans-Christoph Hirt, co-Head of Hermes EOS and Erik Bomans a partner at Deminor attended the meeting to voice their concerns about corporate governance and the lack of transparency surrounding the scandal. Bomans spoke in support of it shareholder proposal. Bomans complained about Volkwagen’s refusal to disclose the preliminary results of the  investigation into the emissions scandal by law firm US law firm Jones Day.

Speaking at the meeting Bomans said, “Our message to you is very simple: we want the full truth to be disclosed, and not only those facts that are favourable to the company’s management. Furthermore, we want a truly independent investigation, with the broadest possible mandate, and without any possibility for the company’s management to act as a “filter”.

“If the company’s management or supervisory board bear responsibility for the diesel emissions scandal – and there are serious indications that this is indeed the case – let it be known to the shareholders. If shareholders were misled, they are entitled to know. Sweeping the problems under the carpet will not work and will only lead to a further erosion of all stakeholders’ trust. ”

Meanwhile Hermes’ Hirt commented that, “The company’s continuous disregard of fundamental corporate governance principles may have contributed to the emissions scandal. It has undoubtedly tarnished the reputation of the German two-tier board system and employee representation among foreign institutional investors, resulting in collateral damage to the German economy.”

Prior to the scandal Hermes had engaged with Volkswagen in effort to improve its corporate governance , including interventions at its AGMs in 2006 and 2007 and the EGM in 2009, and a public letter to the chairman of the supervisory board ahead of the AGM in 2012. Of particular concern to Hermes has been the composition of the supervisory board believing that there is not enough people with the relevant experience, skills and independence from the key shareholders, which would enable it to function as an effective control and advisory body. “Given the size and global presence of Volkswagen, we do not believe its current supervisory board can adequately protect the interests of all stakeholders, including those of investors.,” Hirt said.

Hermes also criticised the appointment of Hans Pötsch who was chief financial officer of Volkswagen 2003 until 2015 to the supervisory board as its chairman – Volkswagen confirmed his election following the AGM. Hermes said this went against normal German corporate governance principles and it was struggling to see how he could discharge his duties as a member of the supervisory board, which would for the foreseeable future include dealing with the causes and aftermath of the emissions scandal, in particular determining whether Volkswagen has a claim for damages against its (former) executives and deciding whether to pursue this claim. Volkswagen said the resolution on the formal approval of the actions of the members of the board of management and the supervisory board for fiscal year 2015 was passed by 93.7% of the ordinary shareholders represented at the AGM.

The AGM followed news that German prosecutors were launching legal proceedings against Winterkorn over alleged market manipulation for not disclosing the scandal earlier.

What do you think?