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Other Disclosures

34. Litigation and Compensation Claims

Continental AG and its subsidiaries are involved in several lawsuits and regulatory investigations and proceedings worldwide. Such lawsuits, investigations and proceedings may also be initiated or claims asserted in other ways in the future.

Product liability
 In particular, Continental is constantly subject to product liability lawsuits and other proceedings in which the company may be accused of the alleged infringement of its duty of care, violations against warranty obligations or defects of material or workmanship, as well as to claims from alleged breaches of contract or product recalls and government fines. The pending claims include lawsuits in the U.S.A. for property damage, personal injury, and death caused by alleged defects in our products. Claims for material and immaterial damages, and in some cases punitive damages, are being asserted. The outcome of individual proceedings, which are generally decided by a jury in a court of first instance, cannot be predicted with certainty. No assurance can be given that Continental will not incur substantial expenses as a result of the final judgments or settlements in some of these cases, or that these amounts will not exceed any provisions set up for these claims. Some subsidiaries in the U.S.A. are exposed to relatively limited claims for damages from purported health injuries allegedly caused by products containing asbestos. The total costs for dealing with all such claims and proceedings have amounted to less than €50 million per year since 2006.

Proceedings relating to ContiTech AG
The proceedings regarding rescission and nullification by Phoenix AG shareholders brought against the resolutions adopted at the Shareholders' Meeting of the company held on December 28, 2004, for approval of a management and profit and loss pooling agreement and the merger agreement with ContiTech AG and for confirmatory resolutions by the Annual Shareholders' Meeting of Phoenix AG on May 19, 2005, have been substantively concluded since 2009. On September 16, 2011, the Hamburg Regional Court (Landgericht) ruled on the judicial review proceedings on the appropriateness of compensation and settlement under the management and profit and loss pooling agreement and the conversion ratio established in the merger agreement, ordering ContiTech AG to make additional payments. Continental is still of the opinion that the 2004 valuation of Phoenix AG and ContiTech AG was appropriate and that the compensation and settlement under the management and profit and loss pooling agreement as well as the conversion ratio in the merger agreement were established correctly. Appeals have therefore been filed. However, an increase in the amounts paid to the minority shareholders after the end of these proceedings cannot be ruled out.

The actions of rescission and nullification by shareholders of ContiTech AG against resolutions adopted at the Annual Shareholders' Meeting of the company on August 22, 2007, regarding the approval of the conclusion of a management and profit transfer agreement between this company as the controlled company and ContiTech-Universe Verwaltungs-GmbH as the controlling company and regarding the squeeze-out of minority shareholders were concluded in 2009 by a dismissal which is final. Proceedings regarding the appropriateness of the settlement and compensation payment under the management and profit and loss pooling agreement and the settlement for the squeeze-out are pending at the Hanover Regional Court (Landgericht).

Claims against resolutions adopted at the Annual Shareholders' Meeting of Continental AG
Several shareholders had brought actions for rescission and nullification against the resolutions adopted at the Annual Shareholders' Meeting of Continental AG on April 23, 2009, under agenda item 5 (election of the Supervisory Board) regarding the election of certain Supervisory Board members. In its ruling on March 17, 2010, the Hanover Regional Court had declared the resolution by which Rolf Koerfer was elected as a member of the Supervisory Board void and dismissed the other claims. The company had filed an appeal against this ruling.

One shareholder had also brought an action for rescission and nullification against the resolution adopted on April 28, 2010, under agenda item 8 of the Annual Shareholders' Meeting of Continental AG regarding the approval of the resolution of the Annual Shareholders' Meeting on April 23, 2009, to elect Rolf Koerfer as a member of the Supervisory Board. In March 2011, both these proceedings and those concerning the resolutions of the Annual Shareholders' Meeting on April 23, 2009 were concluded by way of concurrent declarations of settlement issued by way of all parties declaring the matters moot – while maintaining their respective legal positions. The conclusion of the agreements relating to this in accordance with Sections 248a, 149 (2) of the German Stock Corporation Act (Aktiengesetz – AktG) was announced on March 16, 2011.

Regulatory proceedings
 In 2007, the European Commission and the U.S. Department of Justice ("DoJ") initiated their investigations into antitrust behavior in the marine hose market. The European Commission found Continental AG, ContiTech AG and Dunlop Oil & Marine Limited ("DOM") liable – among other companies – for infringements of antitrust law. The proceedings of the European Commission and the DoJ against the company were concluded in 2009. Following the initiation of the European Commission and DoJ investigations, additional investigations against the company for the infringement of national antitrust law were opened in other jurisdictions (Brazil, Japan, Australia, South Korea and Canada). After DOM reached a settlement with the Brazilian antitrust authorities in December 2011, all regulatory proceedings against DOM have now been concluded or, as was the case in Canada, are not being pursued further. DOM is still facing claims for damages from third parties due to the infringement of antitrust law as a result of the marine hose cartel. Class actions in the U.S.A. were settled. A claim brought before the British High Court was also settled. However, further claims are still threatened in the United Kingdom and other countries (e.g. Japan, South Korea, Australia and Brazil).

In May 2005, the Brazilian antitrust authorities opened investigations against Continental's Brazilian subsidiary Continental Brasil Indústria Automotiva ("CBIA"), Brazil, following a complaint by a third party of alleged anticompetitive behavior in the area of commercialization of tachographs. On August 18, 2010, the Brazilian competition authorities determined an "invitation to cartel" and imposed a fine of BRL 12 million (about €5.0 million) on CBIA. CBIA denies the accusations and has filed an appeal with the competent court. However, third parties may also claim damages from CBIA resulting from the infringement of Brazilian antitrust law.

On October 2, 2006, the South African antitrust authorities received a complaint from a third party accusing several South African tire manufacturers of alleged antitrust behavior, including Continental Tyre South Africa (Pty.) Limited ("CTSA"), a company that is 74% owned by Continental. On August 31, 2010, the South African antitrust authorities came to the conclusion that CTSA and other companies had violated South African antitrust law and referred the matter to the competent Competition Tribunal for a decision. CTSA denies all allegations of infringements of South African antitrust law. However, the tribunal could impose a fine of up to 10% of CTSA's sales. In addition, third parties may also claim damages from CTSA resulting from the infringement of South African competition law.

On October 5, 2007, the antitrust authorities for the Basque Country, Spain, received a complaint from a third party against Continental Automotive Spain, S. A. ("CAS") due to alleged anticompetitive behavior in tachograph business. After investigation by the antitrust authorities, the Basque antitrust court sentenced CAS to a fine of €700,000 on January 20, 2010. On appeal by CAS, the Basque High Court reduced the fine to €150,000 on December 20, 2011. Claims for damages by third parties cannot be ruled out.

On February 24, 2010, the European Commission conducted searches at several companies that manufacture wiring harnesses for automotive purposes, including S-Y Systems Technologies Europe GmbH ("S-Y"), Regensburg, Germany. S-Y is a company in which Continental and Japanese company Yazaki, a wiring harness manufacturer, each own 50%. The European Commission announced that it has indications that the companies in question have violated EU antitrust law. However, it is not clear whether the European Commission will impose fines against S-Y or Continental. Searches are a preliminary step in investigations into antitrust behavior and are not indicative of the outcome.

Proceedings against the end of tire production at the plant in Clairoix, France
A large number of employees at Continental France SNC, Sarreguemines, France, have filed claims at industrial tribunals in Compiègne and Soissons, France, against this group company and, in some cases, against Continental AG as well. The plaintiffs seek damages in connection with the cessation of passenger tire production at the plant in Clairoix, France. Continental considers these actions unfounded but cannot rule out that a court will award the plaintiffs damages.

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Continental Value Contribution (CVC). The CVC represents the absolute amount of additional value created, and the Delta CVC represents the change in absolute value creation over the prior year. This change in the absolute contribution measured by Delta CVC allows us to monitor the extent to which management units generate value-creating growth or resources must be employed more efficiently. The CVC is measured by subtracting the weighted average cost of capital (WACC) from the ROCE and multiplying this by the average operating assets for the fiscal year. The weighted average cost of capital calculated for the Continental Corporation corresponds to the required minimum return. The cost of capital is calculated as the weighted average ratio of the cost of equity and borrowing costs.

Currency swap. Swap of principal payable or receivable in one currency into similar terms in another currency. Often used when issuing loans denominated in a currency other than that of the lender.

Defined Benefit Obligation (DBO). DBO is defined as the present value of all vested and non-vested benefits calculated on the basis of estimated salary levels at retirement. The only actuarial method that may be used to calculate the DBO is the projected unit credit method. DBO corresponds to PBO (projected benefit obligation).

Derivative financial instruments. Transactions used to manage interest rate and/or currency risks.

Dividend payout ratio. The dividend payout ratio is the ratio between the dividend for the fiscal year and the earnings per share.

EBIT. Earnings Before Interest and Taxes. EBIT represents the results of operations. Since 2002, when the amortization of goodwill was discontinued, EBITDA has been equal to EBIT.

EBITA. EBIT before scheduled goodwill amortization.

EBITDA. Earnings before interest, taxes, depreciation and amortization.

Finance lease. Under a finance lease, the lessor transfers the investment risk to the lessee. This means that the lessor bears only the credit risk and any agreed services. The lessee is the beneficial owner of the leased asset. Finance leases are characterized by a fixed basic term during which the lease may not be terminated by the lessee.

Gearing ratio. The gearing ratio represents the net indebtedness divided by total equity, expressed as a percentage.

Hedging. Securing a transaction against risks, such as fluctuations in exchange rates, by entering into an offsetting hedge transaction, typically in the form of a forward contract.

IAS. International Accounting Standards.

IASB. International Accounting Standards Board. The authority that defines the International Financial Reporting Standards.

IFRIC. International Financial Reporting Interpretations Committee. Committee that reviews and determines appropriate treatment of accounting issues within the context of IFRS and IAS.

IFRS. International Financial Reporting Standards. The accounting standards issued by the IASB.

Interest rate cap. An interest rate cap sets an upper limit for a variable interest rate in relation to a notional debt amount. To the extent that the variable interest due on the underlying debt exceeds the cap amount, the holder of the cap receives income as compensation in the amount of the difference to the cap. An up-front premium is paid as consideration for the cap.

Interest rate swap. An interest rate swap is the exchange of interest payments between two parties. For example, this allows variable interest to be exchanged for fixed interest, or vice versa.

Net indebtedness. The net amount of interest-bearing liabilities as recognized in the balance sheet, cash and cash equivalents, the positive fair values of the derivative financial instruments as well as other interest-bearing investments.

Operating assets. Operating assets are the assets less liabilities as reported in the balance sheet, without recognizing the net indebtedness, discounted trade bills, deferred tax assets, income tax receivable and payable, as well as other financial assets and debts.

Operating lease. A form of lease that is largely similar to rental. Leased assets are recognized in the lessor's balance sheet and capitalized.

PPA. Purchase Price Allocation. PPA is the process of breaking down the purchase price and assigning the values to the identified assets, liabilities, and contingent liabilities following a business combination. Subsequent adjustments to the opening balance sheet – resulting from differences between the preliminary and final fair values at the date of initial consolidation – are recognized as "PPA adjustments".

Rating. Standardized indicator for the international finance markets that assesses and classifies the creditworthiness of a debtor. The classification is the result of an economic analysis of the debtor by specialist rating companies.

ROCE. Return On Capital Employed. We define ROCE as the ratio of EBIT to average operating assets for the fiscal year.

SIC. Standing Interpretations Committee (predecessor to the IFRIC).

US GAAP. United States Generally Accepted Accounting Principles. These principles are subdivided into binding and guiding principles.

Weighted Average Cost of Capital (WACC). The WACC represents the weighted average cost of the required return on equity and net interest-bearing liabilities.