January 9, 2015
The past year marked the 25th anniversary of the fall of the Berlin Wall and probably the end of a European dream to continue to entertain smooth and peaceful cooperation with Russia. On the background of rising political uncertainties, the German economy lost considerable momentum in the second and third quarters of the year. The German Central Bank (Bundesbank) halved its original 2015 growth forecast to a meager one percent. Additional concerns like the tepid implementation of the Energiewende and more red-tape and regulation introduced by the grand-coalition government did not help to inspire confidence. Nonetheless, on the back of the booming economy of the last years, the 2015 federal budget for the first time in 45 years expects to be balanced, with no new debt, and with a budget surplus.Based upon preliminary information, the German domestic M&A market appears to remain on par with last year. Notably, German companies embarked on their biggest-ever acquisition spree in the U.S., as demonstrated by land-mark transactions like Siemens’s acquisition of Dresser-Rand, ZF Friedrichshafen’s acquisition of TRW, Bayer’s acquisition of Merck & Co.’s consumer care business and Merck’s acquisition of Sigma-Aldrich, just to name a few. This trend was fueled by reshaped strategies to benefit from the recovery of the U.S. market and reduced forecasts from ailing markets in Russia, Europe and elsewhere.
In the regulatory arena, Germany has finally entered the club of countries favoring minimum wages. While many would agree that the concept of a minimum wage can be a sound mechanism to stimulate domestic demand and growth, the amount of € 8.50 per hour is also perceived as unreasonably high in the specific circumstances. This concern, together with the administrative burden of proving compliance, cause many to fear that the new minimum wage regime will weaken the attractiveness of the German marketplace.
Data privacy concerns continued to capture the news headlines in the aftermath of the Snowden affair and have led to increased scrutiny by German regulators of telecommunication and online services providers. As expected by many, the EU has not agreed to modernize and realign the European approach to data privacy issues and has not passed a data privacy regulation to revamp its outdated 1995 Data Protection Directive. The European Court of Justice, however, issued a landmark ruling on the “right to be forgotten” in relation to online search engines, which clarified jurisdictional issues, the applicability of EU data protection rules to search engines and the scope of a person’s right to data protection where the information produced by a search engine is inaccurate, inadequate, irrelevant or excessive (ECJ Ruling C-131/12). Expect more to come from this side of the regulatory spectrum.
Finally, in the regulatory enforcement arena, consistent with the trend line over the past years, fines continue to increase: Whether it is the US$ 100 million settlement in the Ecclestone matter for alleged bribery in an individual prosecution or the € 1 billion plus fines called by the Federal Cartel Office (FCO – Bundeskartellamt), German enforcement agencies and courts have continued to embrace the concept of big-ticket fines to promote what they perceive as an effective deterrent to corporate and individual wrong-doing.
This Year-End German Law Update aims to update you on the major legal developments of the past year, but also to provide you with information on some future developments that German companies and investors are likely to face over the next months.
4. Insolvency and Restructuring
10. Antitrust & Merger Control
1.1. Corporate, M&A — Shareholders’ Meeting of a Stock Corporation Must Provide Consent Before the Company Can Assume a Fine Imposed upon a Member of Its Executive Board
On July 8, 2014, the German Federal Supreme Court (Bundesgerichtshof – BGH) held that the shareholders’ meeting of a stock corporation must grant its consent if the company, represented by its supervisory board, wants to assume a fine or monetary sanction imposed upon a member of its executive board when the fine or sanction is based on criminal or administrative charges and when the conduct resulting in those charges constitutes a breach of the executive’s duties toward the company. Any assumption of such payment obligation by the supervisory board on behalf of the company without the consent of the shareholders’ meeting is void.
The court argued that if the company in such a case reimburses the executive for a criminal sanction, the company will cause or intensify the damages that the executive would actually have to compensate. The harm done to the company by assuming the payment obligation goes beyond merely refraining from pursuing damage claims against an executive, which the supervisory board may only in exceptional cases be entitled to do, e.g. when trying to keep a wrongdoing confidential and avoid greater reputational damage to the company. Similar to granting a waiver, however, the assumption of a fine or monetary sanction is not just a failure to act, but constitutes an act that results in a permanent loss to the company. While the company’s assets need to be protected, it is the shareholders who are the ultimate beneficial owners of the company’s assets, not the supervisory board. Thus, before the supervisory board can validly assume a payment obligation imposed on a member of the executive board, it will have to clarify whether the executive’s conduct constitutes a breach of his or her duties toward the company. If it does, prior consent by the shareholders’ meeting will be required; if it does not, the supervisory board will be free to assume the fine on behalf of the company.
This BGH decision will have significant practical consequences and alter the way German stock corporations handle these matters. It has been common practice for German supervisory boards to help settle criminal proceedings against a company’s executive quickly and quietly by assuming the fine or monetary sanction imposed on such executive in order to avoid any negative publicity and to limit the damage to a company’s reputation. The supervisory board usually weighed the pros and cons of such a decision without involving the shareholders’ meeting. Now, the supervisory board can no longer take those decisions without first having answered the question whether the executive’s conduct constitutes a breach of his or her duties to the company. Otherwise, supervisory board members will themselves be exposed to personal liability.
In circumstances where it is not clear if the executive’s conduct constitutes a breach of his or her duties toward the company, supervisory board members will be well advised to consider one of the following three options: (a) Not assume the fine at all, (b) assume the fine only subject to the consent of the shareholders’ meeting, or (c) provide the funds necessary to pay the fines to the executive only on a preliminary basis, e.g. based on a loan to the executive that becomes repayable in case (i) the issue cannot be finally resolved despite applying reasonable means or (ii) it turns out that the executive’s conduct actually constitutes a breach of his or her duties to the company, provided, however, that the repayment of the funds is adequately safeguarded.
1.2. Corporate, M&A — German Federal Supreme Court Clarifies Rules on Minimum Compensation in Public Takeovers in Postbank Case
On July 29, 2014, the German Federal Supreme Court (Bundesgerichtshof – BGH) decided on the public takeover of Postbank by Deutsche Bank and clarified the rules governing the rights of minority shareholders to claim the so-called minimum compensation in cases where the offer is preceded by stock purchase / option agreements. When a takeover offer is published in Germany, minority shareholders have the right to obtain the “minimum compensation” which equals at least the higher of (i) the average stock price in the last three months before the offer is published and (ii) the compensation paid to, or agreed with, a selling shareholder in the six months before (previous purchases), during (parallel purchases) or in the twelve months after (subsequent purchases) the takeover offer occurs.
The facts of the case were as follows: In 2008, Deutsche Bank had entered into an agreement with Postbank‘s majority shareholder regarding (i) the future sale of 29.75% of the Postbank shares and (ii) put- and call options for 18.00% to 20.25% of additional shares. In early 2009 and before closing, this agreement was amended so that Deutsche Bank would only directly purchase 22.9%, and another 12.1% were subject to put-/call-options. In addition, a bond (mandatorily) exchangeable into 27.4% of new Postbank shares was issued to Deutsche Bank. Deutsche Bank then acquired the 22.9% and the bond exchangeable into 27.4%, but waited until late 2010 (i.e. for more than six months) when it launched a takeover offer at a much lower price (because the Postbank stock price had fallen). Minority shareholders then sued Deutsche Bank for the price difference. The BGH held that minority shareholders were eligible to bring a direct claim against the bidder for additional compensation, but only if the compensation offered was indeed too low. In the Postbank case, the preliminary agreements had not been signed within six months before the offer and hence there was no “previous purchase” and Deutsche Bank was not held liable.
The Postbank decision provides important guidance on the minimum price rules as well as the rights of minority shareholders. It defines a safe haven for parties who intend to enter into share purchase or option agreements before a takeover offer is launched. However, the last word has not been spoken in this landmark case, as the BGH referred the matter back to the lower court as some important evidence had not been taken into account by the trial judges.
1.3. Corporate, M&A — How to Get Rid of an Unpopular Shareholder
Under German corporate law, it is heavily disputed how and under which circumstances a shareholder can be excluded from a company without his or her consent. German courts have recently issued two decisions in that context, one of such decisions dealing with the question whether – in case shares are redeemed – compensation payments may be excluded or reduced due to a gross breach of duty by the relevant shareholder, and the other decision dealing with the question whether so-called Russian roulette or shoot-out clauses are generally void.
In its decision dated April 29, 2014, the German Federal Supreme Court (Bundesgerichtshof – BGH) had to decide whether the articles of association of a German private limited liability company (GmbH) may provide for an exclusion or reduction of compensation payments in case the shares are redeemed due to a gross breach of duty by the relevant shareholder. Under German statutory corporate law, a valid redemption of shares generally requires appropriate compensation payments. It has, however, been debated among German legal scholars whether an exclusion or reduction of the compensation payment in case of a gross breach of duty can be considered as an admissible contractual penalty in the form of a forfeiture clause. The BGH has now rejected such notion, stating that (i) a compensation payment is an essential right of each shareholder and may only be excluded in very limited cases where such exclusion is objectively justified (e.g. because the shareholder did not invest any capital or the company is only pursuing non-profit goals) and (ii) a potential exclusion of compensation payments shall, as a general rule, preserve the status quo of the company and not punish the shareholder. Contractual penalties on the other hand shall cause the contractual partner to properly fulfill its contractual obligations or serve as a lump sum compensation. In the court’s view, a total exclusion of the compensation payment is neither an appropriate lump sum compensation, because a gross breach of a shareholder’s duties does not necessarily result in any damage to the company, nor an adequate means to put pressure on the shareholders to properly fulfill their contractual obligations. Given this BGH decision, arrangements excluding or reducing compensation payments in case shares are redeemed due to a gross breach of duty should be avoided in practice, and existing articles of association should be amended accordingly.
In another important decision of December 20, 2013, the Higher Regional Court of Nuremberg (Oberlandesgericht Nürnberg – OLG Nürnberg) ruled that so-called “Russian roulette clauses” are not generally considered to be invalid. “Russian roulette clauses” are a way to resolve deadlock situations in companies with two shareholders, each of whom holds 50% of the shares. According to such a clause, each shareholder is entitled to offer its equity interest in the company to the other shareholder at a certain price. The other shareholder then either has the right to accept that offer and acquire the equity interest or is obliged to sell and transfer its equity interest to the offering shareholder at the set price. Even though the prevailing view among German legal scholars is that such clauses are admissible, concerns remained whether a court would hold such clauses to be contra bonos mores and thus invalid. The OLG Nürnberg emphasizes in its decision that such a clause may under specific circumstances be contra bonos mores but that merely the potential risk of abuse (e.g. because one shareholder is financially more powerful than the other and/or knows that a sale of shares is absolutely inconvenient for the other shareholder) does not justify rendering Russian roulette clauses invalid as such. The ruling also applies to similar clauses used to resolve deadlock situations, such as “shoot-out clauses” (where the shareholder that desires to refuse an offer is only allowed to do so by making a higher counter offer to the other shareholder), or clauses by which each of the two shareholders makes a concealed, simultaneous offer, and the shareholder making the higher offer acquires the shares of the other shareholder.
1.4. Corporate, M&A — Gender Quota: All’s Well That Ends Well?
On December 11, 2014, the German government coalition agreed on a draft statute on gender quota. The draft legislation aims at gradually increasing the number of females in the governing bodies of large German corporations and will have an impact on the selection of candidates.
The draft statute has essentially three components:
First, publicly listed corporations that directly or through controlled subsidiaries have 2,000 employees or more, and are thus subject to the Co-Determination Act (Mitbestimmungsgesetz – MitbestG), have to observe a 30% quota of the underrepresented sex (typically females) on their (non-executive) supervisory boards. The quota will apply if – as of January 2016 – a seat on the supervisory board becomes vacant. The board seat will remain vacant in case the quota is not achieved. Currently, 108 corporations are affected by this requirement of the draft legislation.
Second, the draft statute introduces a so-called mandatory flexi-quota for corporations that are either publicly listed or subject to the Co-Determination Act. Already from 2015 onwards, these companies must set their own targets and timeline for appropriate gender representation not only in (non-executive) supervisory boards but also in (executive) management boards, and on the top management level(s) below board level. To the extent the underrepresented sex has not yet achieved a quota of 30%, the target may not fall short of the actual status. These requirements apply to approximately 3,500 companies.
Third, the draft affects corporations in which a governmental authority holds a stake. To the extent three or more seats in supervisory functions are reserved for government, a gender quota of 30% applies as of 2016. The quota is increased to 50% as of 2018.
The draft statute still needs to be approved by parliament. Considering that the governing parties hold a comfortable majority in parliament, it is expected that the statute will be formally enacted in early 2015. After several years of highly controversial debate, the future gender quota law has the potential for real impact: First of all, it also applies to entities in the legal form of a Société Européenne (Societas Europaea – SE) into which a number of large German corporations converted. And second, the remedy of a vacant seat in case of non-compliance with the quota is a sharp sword as shareholder representatives will risk losing control in supervisory boards if a seat of the shareholder representatives remains empty and the chairman may therefore — in the absence of a tie — no longer have a casting vote.
2.1. Tax — Cooperation and Automatic Information Exchange
Cooperation and automatic information exchange between tax administrations are essential in the fight against tax evasion. An important milestone for the automatic exchange of information is the Foreign Account Tax Compliance Act (FATCA) Agreement entered into between Germany and the United States of America on May 31, 2013. The FATCA Agreement provides, among other things, for the automatic exchange of information between Germany and the United States of America on U.S. account holders who have existing, or open new, accounts with German financial institutions.
On July 29, 2014, Germany has finally implemented FATCA into German law. The FATCA Implementation Ordinance stipulates, among other things, the registration requirements for German financial institutions, the identification and due diligence obligations, the collection and transmission of data, and rules on fines if institutions do not comply with the due diligence requirements. A further administrative guideline on the implementation of FATCA and the automatic information exchange is expected to be published at the beginning of 2015.
Germany is also an “early adopter” of the Common Reporting and Due Diligence Standard (CRS) that seeks to establish a worldwide, automatic exchange of financial account information between participating jurisdictions. The CRS has been developed by the OECD, working with G20 countries and in close co-operation with the EU. While the CRS draws extensively on the intergovernmental approach to implementing FATCA, the main differences between CRS and FATCA are driven by the multilateral nature of the CRS system and other U.S. specific aspects, in particular the concept of taxation on the basis of citizenship and the presence of a significant and comprehensive FATCA withholding tax. As with FATCA, the comprehensive reporting regime covers not only banks but also other financial institutions such as brokers, certain collective investment vehicles and certain insurance companies. Germany envisages a first reporting of relevant financial account information under CRS for September 2017.
2.2. Tax — Adoption of Final Regulations on the Attribution of Profits to Permanent Establishments
On October 10, 2014, the German parliament adopted final regulations on the cross-border profit attribution of permanent establishments, i.e., the profit allocation between a German enterprise and its foreign permanent establishment or a German permanent establishment of a foreign enterprise.
The final regulations apply for fiscal years beginning after December 31, 2014 and provide detailed guidance on the application of the Authorized OECD Approach (AOA), which was implemented into German tax law on June 26, 2013. Under the AOA, permanent establishments are treated as independent and separate legal entities with the consequence that the arm’s length principle applies to assumed contractual relationships (internal dealings) between the permanent establishment and other members of the same group. The final regulations now determine in more detail, among other things, the calculation of the income of the permanent establishment and documentation requirements, the allocation of assets, opportunities, risks and capital to permanent establishments, the method by which internal dealings are recognized and further specifications for banks and insurance, construction and exploration companies. Foreign taxpayers with a German permanent establishment should carefully review the German permanent establishment´s tax status and analyze whether the asset and capital allocation as well as the assumed contractual relationship with the German permanent establishment corresponds with the final provisions of the AOA.
2.3. Tax — Decree on Tax Loss Limitation Rules
In April 2014, the German tax authorities issued a draft decree on the corporate tax loss limitation rules. The final decree is expected to be issued in early 2015. The new decree will replace the existing decree of July 2008. The draft decree provides, among other things, important guidance on the exemption rules for intragroup restructuring and built-in gains and deals with the mid-year change in ownership.
Under the current tax loss limitation rules, tax loss carry forwards of a corporation will be forfeited on a pro rata basis if within a period of five years, more than 25%, but not more than 50%, of the shares in the loss making entity are transferred to the acquirer. If more than 50% are transferred, the loss carry forwards will be forfeited in total.
According to the new draft decree, the exemption from the tax loss limitation rules for intragroup restructurings will only apply if the “same person” directly or indirectly owns 100% of the transferring and the acquiring entity of the shares in the loss making company. The exemption will not apply if the ultimate owner of the entities consists of several shareholders, for example in publicly traded companies or in partnership structures.
Losses will not be forfeited, either, to the extent these losses do not exceed built-in gains of domestic assets of the loss making entity. However, according to the draft decree, built-in gains of a controlled company in a consolidated group will not prevent the losses from being forfeited if the shares of the ultimate owner of the consolidated group are sold.
If the change in ownership occurs during a fiscal year, profits generated until the change in ownership may be offset against losses not yet used, provided the overall result of the fiscal year in which the change in ownership occurs is positive. The profits are allocated by way of an interim financial statement or, if no statement is prepared, the allocation of profits will be estimated.
Due to the unusual long period between the issuance of the draft decree and its finalization in early 2015, further amendments on the tax loss carry forward provisions are expected in the final decree.
3.1. Regulatory — Alternative Investment Funds
a. German Investment Act Brought in Line with EU Regulation
Even though the German Investment Act (Kapitalanlagegesetzbuch – KAGB) implementing the European Union Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD) was only adopted in July 2013, it has already undergone a number of amendments. Most notably, the Law on the Adaption of Financial Market Laws (Gesetz zur Anpassung von Gesetzen auf dem Gebiet des Finanzmarktes) which was adopted in July 2014, among other things, amended the distinctive criteria for the classification as an open-ended fund. While the KAGB in its initial version defined open-ended funds as all funds where the investors or shareholders have the right to return their interests or shares at least “once per year”, the definition of open-ended funds in the amended version of the KAGB now refers to the Delegated Regulation of the European Commission 694/2014 supplementing AIFMD dated December 17, 2013 (Delegated Regulation AIFMD). As the AIFMD itself did not expressly define open-ended funds, the Delegated Regulation AIFMD bridges this gap and provides for a uniform definition at EU level. The Delegated Regulation AIFMD defines open-ended funds as all funds where the shareholders or unitholders have the right to return their shares or units at least “prior to the commencement of its liquidation phase or wind-down”. This change in definition has significantly increased the number of open-ended funds. Managers of alternative investment funds are well advised to take this new understanding of open-ended funds into account when structuring funds in Germany.
For further details on the KAGB, please see the 2013 Gibson Dunn Year-End German Law Update, and our publication Germany Adopts Capital Investment Act (KAGB) to Implement the European AIFM Directive.
b. Modified Investment Criteria for German Insurances on the Horizon?
The German Investment Ordinance (Anlageverordnung – AnlV) which, among other things, contains investment guidelines and eligible asset class quotas for German insurance companies, stands to be amended in 2015 to re-align the German Investment Ordinance with recent changes of the regulatory framework of German investment law (including the KAGB). The legislative process for these amendments is still in its infancy but experts expect the amended text to come into effect in the course of 2015. Managers of investment funds aiming to market their investment products to German insurance companies are therefore well-advised to monitor closely how the legislative procedure unfolds because the German Investment Ordinance directly limits the extent to which German insurance companies may, for instance, invest in alternative investments or other asset classes.
3.2. Regulatory — Banking: European Central Bank Assumes Role as Watchdog in Eurozone
As a reaction to the Eurozone crisis and with a view to establishing a consistent framework for the Eurozone’s financial markets, on November 4, 2014, the European Central Bank (ECB) assumed the supervisory responsibility for significant financial institutions (as defined below) in the Eurozone. According to figures released by the ECB, the bank currently supervises approximately 120 significant financial institutions that account for 82% of the total banking assets in the Eurozone.
In this function, the ECB is the leading institution within the so-called Single Supervisory Mechanism (SSM) that was established by two EU regulations adopted in the fall of 2013. Along with the ECB, the SSM also consists of the national supervisory authorities which are supporting the ECB as part of joint supervisory teams set up for each bank. Outside of the framework of the SSM, the national authorities (e.g. Germany’s Federal Financial Supervisory Authority (BaFin)) continue to supervise those smaller domestic banks that are not supervised by the ECB, as these banks do not meet the criteria needed to qualify as “significant financial institutions”.
A bank will be considered a “significant” financial institution that falls under ECB’s supervision if it meets one of the following five criteria: (i) its asset value exceeds € 30 billion, (ii) its asset value exceeds both € 5 billion and 20% of the respective member state’s GDP, (iii) the bank is among the three most significant banks of the country in which it is located, (iv) the bank has large cross-border activities, or (v) the bank receives, or has applied for, assistance from the Eurozone bailout fund ESM (European Stability Mechanism).
In its new role within the SSM, the ECB has far-reaching supervisory and investigative powers. Among other things, it has exclusive responsibility for granting or withdrawing authorizations of any credit institution under EU law. It monitors capital and liquidity requirements, or may even impose stricter capital requirements. Finally, it can levy fines or intervene, if credit institutions are not compliant with regulatory requirements.
4.1. Insolvency and Restructuring – Liability of the Shareholder in Case of Repayment of Revolving Credit Facilities by Group Companies
In the context of group financings, typically the question of how to deal with shareholder loans and collateral arises. German law stipulates a tripartite approach in case a borrowing group company becomes distressed: First, shareholder loans are subordinated in case of an insolvency of the borrower, and the shareholder is liable towards an insolvency administrator for shareholder loan repayments made within one year prior to the filing for insolvency. Second, any collateral furnished by a borrower for the benefit of the shareholder in order to secure a shareholder loan within ten years prior to the filing may be challenged and avoided by an insolvency administrator. Third, a shareholder will be liable to the insolvent estate for loan repayments made by the borrowing company to a lender (including an unrelated third party lender) within one year prior to insolvency of the borrowing company, if the shareholder had furnished collateral for such debt for the benefit of the lender.
On February 20, 2014, the German Federal Supreme Court (Bundesgerichtshof – BGH) issued an important ruling with respect to revolving credit facilities of group companies secured by shareholder collateral: The court held that in case of a revolving credit line, a (securing) shareholder is liable for the repayment of an amount equal to the difference between the highest utilization amount of the revolving credit line within one year prior to the filing for insolvency and the relevant amount at the point in time when insolvency proceedings are finally opened. According to the BGH, this shall apply even in cases where the revolving credit line was not repaid by the borrower (i.e. the group company) itself, but by a preliminary insolvency administrator appointed at the time of the group company’s filing for insolvency unless the insolvency court issued an order on the prohibition of dispositions by the insolvent debtor. In addition, the BGH stated that prior to insolvency, the shareholder was required to indemnify the group company against repayment claims of the bank, due to the collateral furnished by the shareholder for the benefit of the lender.
This ruling is in line with the BGH’s growing tendency in recent years to prohibit evasions of the statutory subordination applicable to shareholder loans. Against this background, any shareholder should continuously assess the relevant insolvency risk of its group companies, being aware of the strict consequences under German insolvency law.
4.2. Insolvency and Restructuring — Bankruptcy of Licensor
An analysis of recent developments regarding the insolvency administrator’s right to terminate licenses can be found in Section 7.1 of this 2014 Year End Update.
5.1. Labor and Employment –Minimum Wage of € 8.50 per Hour
For the first time in history, Germany will have a general minimum wage. Starting from January 2015, every employer will have to pay a minimum wage of € 8.50 per hour (gross). The law is supposed to address a growing number of very low-wage workers (e.g. food delivery personnel working for less than € 2.00 per hour). The government’s goal is to enable all employees to provide for themselves and make sufficient pension contributions.
There are several exceptions to the minimum wage: Employees below 18 years of age will not be able to claim the minimum wage if they do not complete a certified occupational training. Also, employees who have been out of a job for more than one year can be paid less than the minimum wage for up to six months. Further, newspaper delivery services will only gradually step up to € 8.50 per hour over a period of two years. Finally, certain industries can keep their (presently lower) wages due to collective bargaining agreements for a period of two years; this particularly applies to the meat processing industry and personnel leasing (temporary employee staffing agencies).
There are drastic sanctions that the government can use to enforce the law. Paying below minimum wage is an administrative offense subject to a fine of up to € 500,000. Even though many companies will not be directly affected by the minimum wage as employers, they may still be subject to vicarious liability. A general contractor who uses other companies as subcontractors is liable for the failure to pay minimum wage by such subcontractors and their subcontractors as well as any temp agency serving each of the above. Therefore, it is extremely important for a company to not only review the payroll of its own employees, but also to confirm that its contractors, subcontractors and personnel leasing agencies are paying the statutory minimum wage. To this end, it might become necessary to (i) carefully review the contractor’s offer, to confirm that a minimum wage will be paid; (ii) have contractors, subcontractors and temp agencies guarantee that they pay minimum wage; (iii) request indemnification in case a minimum wage is not paid; and/or (iv) claim security for such indemnification.
5.2. Labor and Employment — Plan to Oust Small Unions
The German government wants to limit the number of unions that may bargain on behalf of the employees of one company. Due to a Federal Labor Court decision of four years ago, it is currently possible for any union that has a bargaining agreement (“tariff”) with an employer to demand negotiations with the employer on behalf of any of its employees (and support them by strikes), even if there are several unions for one company with conflicting bargaining agreements in place. This situation may not only result in a tremendous administrative burden for the employers but may also lead to a compensation hodgepodge within the company. Furthermore, it can give small groups of skilled professionals like doctors, pilots or train conductors tremendous leverage when pursuing their group interests and claims that could have an effect on the remaining workforce as well.
To avoid an abuse of such leverage, the lawmaker plans to codify a “One Plant–One Tariff” rule. A first draft has been issued in October 2014. It calls for an escalating process: First, any union can pursue its interests as it pleases. However, if a conflict with other unions arises in a particular company, this conflict will have to be solved by a poll among the company’s employees.
5.3. Labor and Employment — In-house Lawyers Lose Right to Join Lawyers’ Pension Scheme
In a controversial judgment of April 3, 2014, the Federal Social Court (Bundessozialgericht – BSG) has deprived in-house counsel of the right to join the lawyers’ pension scheme (Versorgungswerk). This decision comes as a blow to German in-house lawyers who cherish the Versorgungswerk as a pension scheme that is much more reliable and beneficial than the obligatory statutory pension fund Deutsche Rentenversicherung (DRV). In its judgment, the court goes as far as to state that in-house lawyers are not “attorneys” (a prerequisite to be exempt from the DRV) because they allegedly do not render legal advice as independently as external counsel. The court nonetheless provides a grandfather rule for in-house lawyers who have already been exempt from the DRV, but only to a limited extent. Unfortunately, the exact scope of this grandfather rule is not sufficiently laid out. In any case, lawyers starting with (or switching to) an employer that is not a law firm after April 3, 2014, cannot expect to be exempt from the DRV.
In an attempt to remedy this unfortunate situation, in which in-house lawyers are subject to the hodgepodge of two different statutory retirement schemes, lobby organizations have called upon the lawmakers for a solution. Presently, neither the government nor any noteworthy parliamentary group has proposed a solution yet.
6.1. Real Estate — Limitation of Purchaser’s Statutory Rights in Case of Defects
Under German statutory law, the seller of a defective object of purchase is entitled to refuse to deliver a supplementary performance (i.e. to remediate the defects or deliver a replacement) if such performance entails disproportionate costs. Since the reform of the German law of obligations in 2002, there has been a dispute as to the conditions under which supplementary performance costs in German real estate transactions are considered disproportionate.
On April 4, 2014, the German Federal Supreme Court (Bundesgerichtshof – BGH) ruled that the circumstances of each individual case will determine whether supplementary performance costs are considered disproportionate. According to the BGH, there is, however, an indication for the disproportionate nature of such costs, if the supplementary performance costs exceed either (i) the fair market value of the real property without defects or (ii) 200% of the amount by which the value of the real property is reduced due to the defects. The BGH further held that if the supplementary performance costs are determined to be disproportionate, the purchaser’s claim for damages against the seller concerning the defective object of purchase would be limited to the amount by which the value of the real property was reduced due to the defects.
In order to avoid the above described statutory law restrictions, it is advisable to waive such statutory provisions in a real estate purchase agreement and to replace the statutory provisions by a defects remediation scheme, specifically stipulating the rights and obligations of the seller and the purchaser.
6.2. Real Estate — Validity of Written Form Remediation Clauses for Long-Term Lease Agreements
In its decisions of January 22, 2014 and April 30, 2014, respectively, the German Federal Supreme Court (Bundesgerichtshof – BGH) held that so-called written form remediation clauses (Schriftformheilungsklauseln) in lease agreements do not bind a real estate purchaser or a beneficiary of a usufruct who assumes the rights and obligations as landlord under a lease agreement.
The written form for lease agreements requires that all material agreements concerning the lease, in particular the lease term, description of the lease premises and the rent amount, must be made in writing. If a lease agreement that is entered into for a period of more than one year does not comply with this written form requirement, mandatory German law allows either lease party to terminate the lease agreement subject to the respective statutory notice period, irrespective of whether or not a fixed lease term was agreed upon. The statutory notice period for commercial lease agreements is six months (less three business days) prior to the end of any calendar quarter.
To avoid the risk of termination for non-compliance with the written form requirement, German commercial lease agreements regularly contain a standard written form remediation clause. Pursuant to such clause, the parties of the lease agreement undertake to remediate any defect in the written form upon request of one of the parties. Such standard written form remediation clauses were upheld in several decisions by various Higher Regional Courts (Oberlandesgerichte).
While the BGH decisions reject the validity of written form remediation clauses vis-à-vis purchasers or beneficiaries of a usufruct concerning the real property that assume the rights and obligations under a lease agreement as landlord, the BGH did not explicitly comment on the validity of written form remediation clauses in general. This raises the question of whether, and under which conditions, written form remediation clauses are valid in general.
In light of such uncertainty, the parties to commercial lease agreements should be obliged to procure that the lease agreements comply with the written form requirement at all time. A thorough review during the due diligence process of German lease agreements with regard to their compliance with the written form requirement will become even more important for transactions involving German real estate.
7.1. Insolvency of the Licensor and Non-Exclusive Licenses
Following the Higher Regional Court of Munich’s decision of July 2013 in the Qimonda case (for details please refer to the 2013 Year-End German Law Update), a recent decision by the District Court of Munich (Landgericht München) of August 2014 shed additional light on the protection of licensees in the event of an insolvency of the licensor.
The District Court of Munich’s decision again involved the question of whether, in a licensor’s bankruptcy, a non-exclusive license can be terminated by the insolvency administrator as a so-called executory contract (i.e. a contract that has not yet been fully performed) pursuant to Section 103 of the German Insolvency Code (Insolvenzordnung – InsO). The Munich court held that — subject to an individual assessment in the particular case — mere freedom to operate-type of licenses (as, for example, part of cross-licensing agreements) with no outstanding obligations (e.g. no ongoing royalty obligations) do not typically qualify as executory contracts and are therefore not subject to a termination right by the insolvency administrator. Although no prevailing case law has yet been created by the German Federal Supreme Court (Bundesgerichtshof – BGH) in this context, this decision provides additional guidance on how to minimize insolvency related pitfalls in license agreements.
7.2. The German Design Act
The German Design Act (Gesetz über den rechtlichen Schutz von Design / Designgesetz – DesignG) was renamed and reformed with effect as of January 1, 2014. In line with international practice, one of the most obvious changes is that the outdated term “Geschmacksmuster” (design patent) was replaced by the new term “eingetragenes Design” (registered Design) to adapt to modern and international language habits.
Among other changes introduced by the Design Act, the validity of a German design registration can now be challenged before the German Patent and Trade Mark Office (Deutsches Patent- und Markenamt – DPMA). This substitutes the past requirement of filing an expensive and time-consuming action for cancellation before German District Courts. Now, the proprietor of the registered design has to object to the cancellation within one month following the notification by the DPMA to prevent the cancellation without further examination. If the proprietor does object, the design will be examined in depth by experts at a newly formed department at the DPMA who then decide on the possible cancellation.
8.1. Update Safe Harbor / International Data Transfers
The EU–U.S. Safe Harbor Agreement concerning transatlantic data transfers came under increased scrutiny in 2014. The European Parliament urged the EU Commission to suspend the Safe Harbor Agreement, and the European Commission Directorate-General for Justice announced that it would review the Safe Harbor Agreement. The European Court of Justice received a request for a preliminary ruling from the Irish High Court on the compatibility of the Safe Harbor framework with Article 8 of the Charter of Fundamental Rights of the EU. Although the Irish court held that data protection authorities are in principle bound by the Safe Harbor Agreement as long as it is in place, a review of its compatibility with the Charter of Fundamental Rights was considered necessary by the court. Companies should, therefore, not solely rely on Safe Harbor certifications but also initiate additional measures before they transfer data to the U.S.. In this context, German data protection authorities recommend, for instance, that companies (i) check data import policies for potential conflicts with Safe Harbor principles, (ii) verify whether individuals may exercise information rights and (iii) check whether onward transfers to third parties are covered by data transfer agreements or sufficient consent requirements.
8.2. Draft Bill on Standing of Consumer Associations in Data Privacy Proceedings
The German legislator intends to strengthen enforcement of data privacy laws by allowing consumer rights associations to bring actions for injunction and demand removal of infringements on behalf of consumers (e.g. the deletion of data which has been collected in breach of data privacy laws). Relevant changes shall be included in the German Act Governing Collective Actions for Injunction (Unterlassungsklagengesetz – UKlaG). The draft has been heavily criticized for creating additional burdens for businesses and the risk of parallel decision-making as well as loss of legal certainty. From a practical perspective, the possibility that consumer associations may demand removal of infringements on behalf consumers may lead to odd results. Online service providers might, for instance, be required to delete relevant user data even though individual users do not oppose to data processing by a particular company. As of today, it remains in doubt whether and in what form the draft law will eventually be enacted and whether collective enforcement will in fact play a significant role in German data privacy law.
8.3. CCTV is Watching You
The Higher Administrative Court of Lower-Saxony (Niedersächsisches Oberverwaltungsgericht) delivered an important judgment which clarifies to a great extent the requirements for closed circuit television (CCTV) surveillance. Relevant proceedings were launched after the regional data protection authority ordered the deactivation of CCTV surveillance and deletion of relevant recordings for an office building. The court quashed the order and provided important guidance regarding the implementation of CCTV surveillance in practice. In the case at hand, the cameras would only turn on if they detected movement, were pointed at a fixed observation area, did not have a zoom function, recordings were immediately transferred into a black-box (no monitor observation) which was itself password protected and after ten days, any recordings were deleted automatically. Signs were installed indicating that CCTV was in operation. The court, which defined the term “publicly accessible rooms” broadly as all rooms that are not clearly blocked against public access, held that CCTV measures may be justified when exercising an owner’s right to undisturbed possession of the property and having a legitimate interest of preventing abstract and concrete dangers. Balancing the legitimate privacy interests of the individuals subject to CCTV surveillance, the court above all held that the CCTV in place had not severely intruded into the privacy of individuals because it had not been possible to recognize faces or generate movement profiles. Further, the court held that a storage period of up to 10 working days instead of just three days as typically requested by German data protection authorities would be reasonable in light of the objective to detect crime and given the potential absence of relevant employees due to holidays.
8.4. Facebook Fanpages
The Higher Administrative Court of Schleswig-Holstein (Schleswig-Holsteinisches Oberverwaltungsgericht) held that operators of Facebook fanpages are not responsible for user data being further processed by Facebook. The judgment was delivered upon appeal by the regional data protection authority in Schleswig-Holstein which had initially ordered a local chamber of commerce to deactivate its Facebook fanpage. The Higher Administrative Court rejected the notion that the Facebook fanpage operator had data control due to the fact that the fanpage operator had no influence on the technical and legal aspects of the data processing by Facebook itself. Data control may not be derived from the fact that Facebook provides statistical information to operators of fanpages. As a result, the data protection authority did not have the authority to order the fanpage operator to deactivate the fanpage.
9.1. Compliance — Increase of Criminal Sanctions for Corruption
The German legislator has taken additional steps to tighten its legal framework to fight bribery: Effective September 1, 2014, Germany amended Section 108e of the German Criminal Code (Strafgesetzbuch – StGB) to provide that bribing of members of parliamentary assemblies is punishable by imprisonment of up to five years or monetary fines. Prior to the amendment, bribery of members of legislative bodies (on the domestic federal, state, or municipal level, or the European Parliament) was only punishable when a vote for a ballot or election made in these bodies was bought or sold. The renamed and extensively revised new statutory offense of the “Passive and Active Bribery of Members of Legislative Bodies” extends the scope of the prohibited conduct to immaterial benefits and also covers benefits provided indirectly through a third party. Furthermore, it widens the scope to all members of legislative bodies in Germany on both the federal (Bundestag) and the state level (Landtage), as well as regional authorities (to the extent elected), the European Parliament, legislative assemblies of NGOs, and legislative bodies of foreign states. However, to be qualified as the granting of a benefit and thus as a punishable crime, the intent to achieve a specific action by the representative is required. Accordingly, benefits granted retroactively or in furtherance of the general goodwill are not covered by the punishable conduct. It should be noted, however, that benefits of any kind provided (i) to a foreign (non-German) member of a legislative body, or (ii) to a domestic or foreign government official acting in executive rather than legislative powers are not affected by the amended laws, and remain punishable under the general bribery laws.
The amendment enabled Germany to ratify the United Nations Convention against Corruption on November 14, 2014, eleven years after its signing. This brings Germany back in line with the other 140 signatory states that had already ratified the Convention in past years. The amendments call for a review of corporate conduct guidelines and compliance controls to mitigate risks that current practices in lobbying and other political relations in Germany violate the new laws.
9.2. Compliance — Regulatory Action Affecting Corporations and the Healthcare Industry
The governing political parties in their Coalition Policy Roadmap (Koalitionsvertrag) have agreed on additional legislation that will impact corporations in general and the healthcare industry in particular.
First, the proposed adoption of a Corporate Criminal Code (Verbandsstrafgesetzbuch – VerbStrG) is still on the agenda. While the Coalition Policy Roadmap limited such initiatives to multinational enterprises, the draft bill covers all types of corporations active in Germany, regardless of origin and size. The code for the first time would hold corporations criminally liable for misconduct of their employees, and mandate the authorities to investigate against corporations in case of probable allegations. Sanctions would include monetary fines, warnings, publications of convictions, debarments, and – as a last resort – compulsory liquidation. Fines could be avoided or reduced by implementing adequate compliance procedures, or making voluntary disclosures. While the next formal step in the legislation process was scheduled for the end of 2014, the draft is still under discussion. As yet, it is unclear whether and when the legislative process will move forward.
Second, in November 2014, the Bavarian Department of Justice presented a bill to introduce to the conference of state ministers of justice a new criminal offense of “Passive and Active Bribery in the Healthcare Business”. The draft proposes the implementation of a new commercial bribery offense. The offense prohibits medical professionals from requesting benefits, and individuals making such benefits to medical professionals, with the intent to achieve a favorable treatment in domestic or foreign competition, or other undue influence on decisions to acquire, prescribe, or release medical products or on the assignment of patients. Contrary to current criminal laws, the new offense will also cover private medical practitioners that are not considered public officials by the courts, even when making decisions on medical treatments paid for by public health insurance. While there is general consensus among political parties on the bill, its enactment is still unclear.
The regulatory burden on the healthcare industry active in Germany is further increased by new rules of the (private) German Association for the Self-Monitoring of the Pharmaceutical Industry that came into effect in May 2014 for its members, thereby setting industry standards. These rules include the new Transparency Code, as well as significant amendments to the Cooperation Code with Members of the Healthcare Profession. New provisions include the requirement to publish all benefits of monetary value to members of the healthcare profession. Also, since July 1, 2014, any gifts to such members including those of only nominal value (such as pens or writing pads) are prohibited.
9.3. Compliance — Landmark Enforcements in Corporate Compliance and Corruption
Two landmark decisions by the District Court of Munich (Landgericht München I) against individuals opened new chapters in German law enforcement:
First, the District Court of Munich handed the former Siemens CFO Heinz-Joachim Neubürger a US$ 20 million judgment for causing civil damages to Siemens by violating his organizational duty as a board member to ensure legal conduct by the company. Notably, the court held, among other things, that: (i) in cases of relevant risk, a board can discharge of its obligation to duly organize the company only by installing an effective compliance system focusing on the prevention of misconduct and risk control, and (ii) all board members are jointly and severally liable for damages resulting from a violation of this obligation. After Mr. Neubürger had launched an appeal against the judgment, Siemens on December 3, 2014, announced that it had reached a final settlement with Mr. Neubürger for an undisclosed settlement amount, thereby abandoning the appeal.
Second, on August 5, 2014, a criminal chamber of the District Court of Munich dropped bribery charges against the Formula One (F1) CEO Bernie Ecclestone subject to the payment of a record breaking US$ 100 million in form of a monetary sanction by Ecclestone. Ecclestone had been charged with bribing the former chief risk officer and board member of the state-owned Bavarian State Bank (Bayern LB) Gerhard Gribkowsky in April 2006, by paying US$ 44 million in cash to Gribkowsky to facilitate the sale of the F1 shares held by BayernLB to a purchaser of Ecclestone’s preference. While Gribkowsky in separate proceedings had admitted receipt of the money and was sentenced to eight years imprisonment for passive bribery and tax evasion, Ecclestone denied knowledge about Gribkowsky’s status as a public official, and the prosecution and trial court faced difficulties in demonstrating evidence to the contrary sufficient for Ecclestone’s conviction.
For further details on this case, please see the Gibson Dunn Client Alert of August 7, 2014.
Both decisions illustrate that the trend over the last several years of aggressive enforcement by authorities and courts against corruption related crimes and the ensuing civil damages continues. This is further demonstrated by the extensive and unprecedented prosecution activities against the former Federal President of Germany, Christian Wulff, for an alleged improper acceptance of hospitality benefits worth less than US$ 1,000 in the year 2012. Wulff was fully acquitted by the Hanover District Court (Landgericht Hannover) on February 27, 2014, and the prosecution office withdrew its initial appeal on June 12, 2014. However, the insistence of the prosecutor’s office to bring the trial to court and the parallel media trial held by the German press forced Wulff to resign as Federal President over the allegations back in 2012. Wulff’s mishandling of the press at the outset of the affair is also a cautionary tale of the importance of communication in addressing crises in the early stages.
10.1. Record Year in Cartel Enforcement Activities
The German antitrust watchdog, the Federal Cartel Office (FCO – Bundeskartellamt), had another record year in its antitrust enforcement and fining activities and imposed fines totaling more than € 1 billion in several large cartel investigations. As in the past, the majority of cases came to the FCO’s attention through its leniency program, which – as in much of the world – has become the FCO’s major tool for uncovering secret cartel activity. In January and April 2014, the FCO fined eleven companies, an industry association and 14 individuals at a total of € 338 million for fixing the prices of beer. In February 2014, the FCO imposed fines totaling € 280 million on three major German sugar manufacturers. In July 2014, the FCO fined 21 sausage manufacturers as well as 33 individuals a total amount of approximately € 338 million for concluding illegal price-fixing agreements. In a number of smaller proceedings, the FCO imposed fines against (i) an alleged cartel of wallpaper manufacturers, (ii) a number of service providers for heat exchangers used in power plants for alleged customer allocation, (iii) an alleged price-fixing and bid-rigging cartel of providers of specialist underground mining services, and (iv) the members of an alleged price-fixing agreement for concrete paving stones.
10.2. Extradition of Foreign Nationals to the U.S. for Cartel Participation
2014 presented also a milestone in Germany’s cooperation with U.S. antitrust enforcement agencies. In April 2014, an Italian citizen became the first foreign national to be extradited to the U.S. solely based on an antitrust violation, namely the alleged participation in the marine hose price-fixing cartel. According to the German Act on International Cooperation in Criminal Matters (Gesetz über die Internationale Rechtshilfe in Strafsachen – IRG), the principle of mutual criminal liability applies. As a result, Germany may extradite an individual only if the relevant conduct also constitutes a criminal offense in Germany. This usually applies to breaches of antitrust laws only as far as fraud or bid rigging is concerned, which was found to be the case here. It should be noted, however, that the German Constitution (Grundgesetz – GG) prevents the extradition of German citizens to non-EU countries.
10.3. Guidance on Foreign-to-Foreign Mergers
With respect to merger control in international M&A transactions, the Federal Cartel Office (FCO – Bundeskartellamt) published a revised guidance document on “Domestic Effects in Merger Control”. The guidance covers so-called foreign-to-foreign mergers, i.e. concentrations between companies which are headquartered outside of Germany, with the aim to reduce the administrative burden for M&A activities that do not meaningfully affect Germany. Mergers without sufficient domestic effects as described in these guidelines do not have to be notified to, nor reviewed by, the FCO.
For further details on the FCO’s guidance to foreign-to-foreign mergers, please see the Gibson Dunn Client Alert of October 9, 2014.
10.4. Revised Block Exemption Regulation for Technology Licensing
Effective May 1, 2014, the European Commission enacted a revised block exemption regulation, governing technology transfer and licensing agreements, that is directly applicable in Germany. Simultaneously, the European Commission issued supplementary guidelines concerning the application of the regulation.
The revised regulation and guidelines include a number of substantive changes that affect many aspects of the current “safe harbor” regime applicable to technology transfer agreements under the block exemption route, including revisions to the catalogue of “hard-core” (i.e., virtually “per se” rules) and excluded restrictions, more extensive guidance regarding the compatibility of technology pools with EU antitrust rules and guidance on settlement agreements in IP disputes.
The 2014 block exemption regulation provides for a rather short, one-year transition period, i.e. until April 30, 2015, for existing technology transfer / technology licensing agreements exempted under the prior regime from 2004, for alignment with the changes introduced by the new regime. The 2014 block exemption regulation and its accompanying guidelines can be found at the European Commission’s website.
For further details please see the Gibson Dunn Client Alert of April 30, 2014.
Gibson, Dunn & Crutcher’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The Munich office of Gibson Dunn brings together lawyers with extensive knowledge of corporate, M&A, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime experience. The Munich office is comprised of seasoned lawyers with a breadth of experience who have assisted clients in various industries and in jurisdictions around the world. Our German lawyers work closely with the firm’s practice groups in other jurisdictions to provide cutting-edge legal advice and guidance in the most complex transactions and legal matters. For further information, please contact the Gibson Dunn lawyer with whom you usually work or any of the following members of the Munich office:
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Lutz Englisch (+49 89 189 33 150), [email protected])
Philip Martinius (+49 89 189 33 121, [email protected])
Markus Nauheim (+49 89 189 33 122, [email protected])
Birgit Friedl (+49 89 189 33 110, [email protected])
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Marcus Geiss (+49 89 189 33 122, [email protected])
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Tax
Hans Martin Schmid (+49 89 189 33 110, [email protected])
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Mark Zimmer (+49 89 189 33 130, [email protected])
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Peter Decker (+49 89 189 33 115, [email protected])
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Michael Walther (+49 89 189 33 180, [email protected])
Kai Gesing (+49 89 189 33 180, [email protected])
Corporate Compliance / White Collar Matters
Benno Schwarz (+49 89 189 33 110, [email protected])
Michael Walther (+49 89 189 33 180, [email protected])
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