On August 19, 2008, Germany took a substantial step in dealing with the ever more volatile financial markets. After long-lasting and heated debate, the German legislature passed what is commonly referred to as the Risk Limitation Act (Riskobegrenzungsgesetz).1The Risk Limitation Act ("Act") substantially alters the disclosure requirements imposed upon investors in German corporations. The Act adopts changes to the Securities Trading Act (Wertpapierhandelsgesetz, "WpHG") and the Securities Acquisition and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz, "WpÜG") to provide an increased level of legal certainty and investor transparency. In particular, the Act amends the WpHG and WpÜG to provide for (i) the revision of existing rules concerning "acting in concert," (ii) increased disclosure obligations - particularly for shareholders acquiring or surpassing a 10 percent interest in a German corporation, and (iii) stricter regulations concerning the registration of shares. In enacting the Act, the German legislature has sought to protect the integrity and functioning of the financial markets while at the same time attempting to refrain from overburdening activities that enhance beneficial corporate and financial transactions.
Acting In Concert
The most significant feature of the Act is the expansion of the "acting in concert" provisions of the Securities Trading Act and the Securities Acquisition and Takeover Act. In general, Section 22, paragraph 2, WpHG requires that (for purposes of determining whether one of the notification thresholds of Section 21 WpHG is met) voting rights of a third-party investor be attributed to a shareholder if the shareholder and the third-party investor coordinated their conduct. Similarly, Section 30, paragraph 2, WpÜG aggregates shareholder voting rights based on coordinated conduct to determine, among other things, whether the voting rights exceed the aggregate threshold of 30 percent, in which case a mandatory public takeover offer must be made to all shareholders.
Presumably, the impetus of the amendment to these acts was the 2005 power struggle within Deutsche Börse AG (the German Stock Exchange). In 2005, a group of shareholders, led by the London-based hedge fund TCI, aggressively attempted to influence Deutsche Börse AG's board of directors to prevent a takeover of the London Stock Exchange. Ultimately, the shareholders' influence proved effective and the takeover plan was abandoned. Though there had been an obvious exertion of influence, the German authorities were unable to establish that the parties were "acting in concert" under the then-applicable laws.
Moreover, pursuant to case law of the German Federal High Court (Bundesgerichtshof),2only investors who coordinated their voting at a general meeting of German stock corporations were found to be "acting in concert." The revised provisions implemented through the Act eliminate this very narrow application and provide for the inclusion of coordinated conduct outside the general meeting in the provisions' scope of application. In particular, the new provisions view any coordinated behavior as "acting in concert" if the shareholders act with parallel interests and intend to change the company's strategic direction in a permanent and substantial manner (e.g., the fundamental change of the company's business model or the sale of an important business division). Notwithstanding the foregoing, the exemption for coordinated conduct in single cases is maintained. Accordingly, coordinated action among shareholders with respect to certain topics that are on the agenda of a general meeting or arrangements affecting the supervisory board's composition will not constitute actions in concert.
In its original draft, the Act also included within the scope of "acting in concert" the coordinated acquisition of shares; however, strong criticism from legal scholars and international investors led to the removal of this language in the enacted version.
Duty To Inform And Notify
Prior to the implementation of the Act, in determining whether a notification threshold was met, voting rights from directly held or attributed shares and voting rights of other financial instruments were not aggregated (e.g., holding a 2.99 percent shares interest and a 4.99 percent financial instruments interest did not trigger any notification requirements). The Act eliminates the segregation of share voting rights from those voting rights deriving from other financial instruments. Specifically, under the newly revised Section 25 WpHG, all voting rights held by a single shareholder are aggregated, regardless of their source. Accordingly, reporting thresholds are reached more quickly, thereby increasing the overall amount of available information. These rules will go into effect on March 1, 2009.
Additionally, influenced by French and U.S. examples, the new Section 27a WpHG forces shareholders with substantial interests to disclose additional information about their motives and the source of funds used to acquire such interests, considerably enhancing shareholder transparency for issuers and other market participants. These additional disclosure obligations take effect when a shareholder reaches or surpasses a 10 percent interest in a German-listed stock corporation. Such shareholders will be required to disclose their intentions with respect to the shares and the origin of the funds within 20 trading days unless the company's articles of association waive such obligation. In particular, each significant shareholder has to disclose whether (i) the investment was made in pursuit of a strategic goal or to gain trading profits, (ii) the shareholder plans to obtain further voting rights within the next 12 months, (iii) the shareholder intends to influence the composition of the issuer's internal corporate bodies (administrative, management or supervisory bodies), and (iv) the shareholder desires to substantially change the capital structure of the company, especially with respect to the ratio of equity financing and debt financing, as well as to the company's dividend policy. The shareholder also has to declare whether and to what extent it has used equity or debt to finance the purchase. Moreover, after the submission of its initial statement, the Act imposes a continuing obligation on the investor to update disclosed information in the event its originally stated objectives change.
The information received from the shareholder or the fact that the shareholder failed to provide such information must be published by the issuer. Nonetheless, the Act does not provide for specific sanctions for shareholder noncompliance, such as the suspension of shareholder rights (the sanctions provided for in Section 28 WpHG, explained below, are not applicable). It remains to be seen whether issuers will use their first general meeting after the implementation of the Act to add a provision in their articles of association waiving these disclosure requirements.
Suspension Of Shareholder Rights
Before the enactment of the Act, noncompliance with the notification requirements of Section 21, paragraphs 1 or 1a, WpHG caused a suspension of shareholder rights (specifically, voting and dividend rights) until the breach was cured. A shareholder therefore could prevent any ramifications with respect to its rights if the shareholder complied with the notification requirements immediately prior to a general meeting.
In contrast, under the newly revised Section 28 WpHG, an intentional or grossly negligent noncompliance with the notification requirements may cause the suspension of voting rights for a period of at least six months following compliance. However, the suspension of shareholder rights will not affect the right to receive dividends. In addition and contrary to the draft bill, the Act now includes a de minimis exemption: voting rights will not be suspended if the actual number of voting rights held differs by less than 10 percent from the number previously stated, unless any of the thresholds set forth in Section 21 WpHG are met.
In Germany, information about registered shares is collected in share registers which store the identities of the bearers and allow for communication between the company and its shareholders. The Act also provides for broad amendments to Section 67 of the German Stock Corporation Act (Aktiengesetz) which are intended to reinstate the significance of the share register and to guarantee transparency with respect to shareholders and their holdings. Share registers frequently show only a small percentage of the beneficial shareholders because many shareholders, especially foreign investors, make use of "nominee registrations" where a depositary bank or trustee is registered in the share register, thereby concealing the identity of the true owner.
This practice still remains possible under the Act, but issuers may now limit such practice in their articles of association. In particular, the issuer may limit the number of shares that can be held by nominee shareholders. Moreover, companies have the right to request that nominees disclose the identity of the beneficial owner of the shares. Refusal to disclose the identity of the ultimate investor results in the suspension of voting rights until the company has received such information. The aforementioned changes do not apply to German or foreign investment funds established under the German Investment Act, as well as depositary banks which are temporarily entered into the share register in connection with a share transfer.
The Act adopts changes to the Works Constitution Act (Betriebsverfassungsgesetz), requiring management to notify either the works council or the economic committee of any proposed takeover by a third party.
The Act also modifies certain provisions of the Civil Code (Bürgerliches Gesetzbuch), the Commercial Code (Handelsgesetzbuch) and the Code of Civil Procedure (Zivilprozessordnung) to strengthen the rights and protections of borrowers with respect to sales and assignments of loans.
The Act significantly expands the reporting obligations imposed upon investors in German corporations. By increasing the amount of information available to companies and investors, the Act is a positive step towards improving investor transparency. However, allowing issuers to expressly opt-in to, or opt-out of, certain key provisions of the Act may reduce its impact. Accordingly, it remains to be seen whether those issuers who do not opt-in to, or opt-out of, certain provisions of the Act will be regarded as more attractive to investors. Therefore, investors interested in acquiring an interest in German stock corporations should keep a close eye on German corporate actions in the Act's wake. 1 The German text of the Act is available at http://www.bgblportal.de/BGBL/bgbl1f/bgbl108s1666.pdf
2BGH, NZG 2006, 945.
Brian DiBenedetto is a Senior Associate in the Corporate Department of the New York Office of Gibbons P.C., a law firm with offices in New York City, Newark, Philadelphia, Trenton and Wilmington. Myriam Rastaetter is an Associate in the Corporate Department of the New York Office of Gibbons P.C. Mr. DiBenedetto and Ms. Rastaetter would like to thank Piet Weinreich, a Referendar with Gibbons P.C. (while in the process of taking the German Bar Examination) at the time this article was authored, for his assistance with preparing this article. The views expressed in this article are those of the authors and not of Gibbons P.C.