January 15, 2014
2013 was a remarkable year for the German stock markets, industry, employees and the state budget. It ended with an all-time high of the DAX-index, the lowest unemployment rate for decades, record tax revenue allowing an almost fully balanced budget and rock-bottom refinancing rates. Taking all the above data together, it looks like the stars are aligned for the German economy to be very bullish about its future. Alas, all of this should be taken with a grain of salt in light of the many uncertainties that are lurking on the horizon.
Germany has taken on a huge economic challenge to manage its helter-skelter exit from nuclear energy now labeled the “Energiewende” (meaning “energy change”) that will require a massive re-regulation of the German energy markets, coupled with huge investments into a new energy infrastructure and alternative energy supplies. Rising energy prices not only concern consumers (and therefore politicians), but first and foremost affect the energy hungry German industry. This has already taken a toll on the competitiveness of the German industry and led to a redirection of investments by German companies into lower energy cost locations (notably the United States).
The new grand coalition that was agreed in December between the centre-right CDU headed by long-time Chancellor Angela Merkel and the centre-left SPD headed by Sigmar Gabriel has finally put an end to weeks of uncertainty about the next German government (although there was never any doubt that any new government would be headed by Angela Merkel). However, the policy roadmap that was agreed for the next four years is a blend of bold and ambitious projects (like the Energiewende), concessions to the left-wing electorate (earlier entitlement to pensions and caps on residential rents) and more regulation in the financial sector and, generally, in the aftermath of the financial crisis.
This mixture has raised concerns in German industry circles (in particular the vibrant companies of the German “Mittelstand“) that the new grand coalition will compromise the competitive edge that has been gained in the last years due to de-regulation, austerity and open market politics in order to deliver on expensive (and unproductive) promises that have been made to the electorate by both parties.
Since the grand coalition holds the supermajority in the parliament, there is no meaningful opposition to stop any legislative initiative (and folly) that is backed by this government. This is a very bold mandate that could do either a lot of good or a lot of damage.
This Year-End German Law Update therefore pays particular attention to the plans of the grand coalition that are sufficiently granulated to allow meaningful forecasts of the likely follow-on legislation. We aim to update you on the major legal developments of the past year, but also aspire to provide you with information on some future developments that German companies and investors are likely to face over the next months.
We hope that you will gain valuable insights helping you to successfully focus and steer your projects and investments in Germany in 2014 and beyond.
1.1 Corporate, M&A – German Federal Supreme Court Tightens Disclosure Rules in Protracted Decision-Making Processes
On April 23, 2013, the German Federal Supreme Court (Bundesgerichtshof – BGH) issued an important decision where it tightened the disclosure obligations of publicly listed companies in the context of protracted decision-making processes, i.e. in cases where the circumstances relevant to the disclosure develop over time and involve several intermediate steps.
In the case at hand, a former shareholder of DaimlerChrysler AG (now Daimler AG, “Daimler“) claimed damages from Daimler alleging delayed disclosure of insider information in connection with the resignation of its former CEO in 2005.
Following a pre-ruling of the European Court of Justice (EJC) in June 2012, the BGH held that in the event of a protracted decision-making process aimed at a particular outcome, any intermediate step may in itself constitute insider information and thereby trigger a separate disclosure obligation, provided that the facts underlying the relevant intermediate step are (i) relevant for the share price, and (ii) share price specific, i.e. concern a specific information about circumstances which are not public knowledge that relates to insider securities or one of their issuers. According to the court, the relevant information must be sufficiently precise and, if publicly disclosed, likely to significantly affect the share price.
The April 23, 2013 decision is not only relevant for contemplated changes to the formation of management boards, but for any significant event in the life of a public company characterized by protracted decision-making processes, including M&A projects or capital markets transactions that also typically develop over time.
The decision will require practitioners to adapt to advanced ad-hoc publication requirements. To reduce legal uncertainty and to mitigate the corresponding liability risks in cases where a protracted decision-making process is still perceived to be in an early stage or in other cases where an early disclosure may harm the company, issuers may want to choose opting for an exemption from the disclosure requirements that is provided under statutory law.
To qualify for such an exemption the issuers must (i) have a corresponding legitimate interest (provided there is no reason to expect that the public will be misled), (ii) maintain an insider list, as well as, (iii) implement adequate internal and external procedures ensuring that the insider information remains confidential. The issuer bears the burden of proof for fulfilling those requirements.
For further details on the earlier ECJ judgment please see the Gibson Dunn Client Alert of July 9, 2012:
1.2 Corporate, M&A – Mandatory Purchase Offer
On June 11, 2013, the German Federal Supreme Court (Bundesgerichtshof – BGH) clarified that minority shareholders of a listed company cannot claim the purchase price or damages from a controlling shareholder if the latter fails to publish a so-called mandatory purchase offer.
Pursuant to the German Takeover Act (Wertpapiererwerbs- und Übernahmengesetz – WpÜG), if a shareholder acquires “control” (i.e. 30% or more of the voting rights) of a listed company, that shareholder is obliged (i) to disclose such fact, (ii) to submit a mandatory purchase offer to the German Federal Authority for Financial Services (Bundesanstalt für Finanzdienstleistungen – BaFin) for review, and (iii) to publish such purchase or exchange offer for acceptance by the other shareholders. As the Takeover Act does not specify the legal consequences if the controlling shareholder fails to comply with its obligation to publish this so-called “mandatory offer”, there was a dispute whether the minority shareholders are entitled to a direct payment claim against the controlling shareholder.
With its June 11, 2013 decision, the BGH puts an end to this discussion and confirms once again its recent tendency towards judicial self-restraint: Neither the wording nor the purpose of the Takeover Act – in the opinion of the BGH – requires that the minority shareholders obtain a direct payment claim against the controlling shareholder. Rather, the law explicitly provides that the BaFin can fine controlling shareholders that do not comply with their obligations. In addition, the violating controlling shareholders automatically lose their voting and other shareholder rights, which – in the eyes of the Supreme Court judges – is a sufficient deterrent. Also, the Takeover Act allows the controlling shareholder to pay either in cash or with listed shares, a choice that would be taken away if a direct payment claim was awarded. Therefore, a direct payment claim (whether for the purchase price, damages or interest) is not seen by the court as a remedy necessary to enforce the law.
1.3 Corporate, M&A – New Rules on Delisting from the German Stock Market
On November 12, 2013, the German Federal Supreme Court (Bundesgerichtshof – BGH) published a landmark judgment concerning the requirements for a delisting of a public company from the regulated market in Germany. In its decision the BGH overturned its own guidelines in the earlier Macrotron case by establishing that shareholders of a company withdrawing from a regulated market can no longer request a compensation offer (Abfindungsangebot) for their shares.
For further details please see the Gibson Dunn Client Alert of November 18, 2013:
1.4 Corporate, M&A – Position of Investors in Profit Participation Certificates Strengthened
On May 28, 2013, the German Federal Supreme Court (Bundesgerichtshof – BGH) ruled that holders of profit participation certificates (Genussscheine) are entitled to their entire coupon if the independent issuer later becomes a subordinated entity under a control and profit pooling agreement, subject only to a positive profit prognosis at such time. With its decision the BGH resolved the persistent controversy regarding the appropriate protection for holders of profit participation certificates.
The terms of the original profit participation certificates provided for fixed payments subject only to the generation of balance sheet profits. In 2007, Eurohypo AG, the legal successor of the two issuers, became a subordinated entity under a control and profit pooling agreement with its majority shareholder. Such an agreement under German law has the effect of subjecting the subordinated entity to disadvantageous instructions by the controlling entity. Its annual financial statements no longer reflect profits or losses in the balance sheet as profits are directly allocated to the controlling entity and losses are compensated by the controlling entity. In such a case, the German Stock Corporation Act (Aktiengesetz – AktG) protects outside shareholders by granting them a right to sell their shares to the controlling entity or to claim a guaranteed dividend as a consequence of the loss of independence.
However, no such statutory protection exists for holders of profit participation rights and the terms and conditions of issuance typically also did not cover such a change in circumstances of the subordinated entity. This lead to a controversial discussion on how to appropriately protect holders of profit participation rights against such unforeseen changes of the corporate constitution. Possible protective measures discussed ranged from a restriction of the controlling entity’s capacity to issue disadvantageous instructions to reliance on profits at the level of the controlling shareholder. Others, like Eurohypo AG, decided to make payments only depending on the fictitious profits/losses generated under the regime of the control and profit pooling agreement.
The BGH rejected all these options and issued a ruling that is much more beneficial to investors: If at the time the control agreement is entered into it can be assumed that the entity subject to subordination will generate profits going forward, the payments owed under the coupon must be made to investors for the entire term, in the absence of specific stipulations pursuant to the terms and conditions of the profit participation certificates. The BGH thus effectively turned the profit participation certificate into a fixed interest bearing instrument.
While clarifying the handling of existing profit participation certificates already issued, issuers are now facing the resulting challenge that the profit participation capital may no longer qualify as equity due to the fixed payment irrespective of actual losses (if they occur). Going forward, the critical question for issuers will be if and to what extent the framework of the ruling allows a contractual restriction on the rights of holders of profit participation certificates at all.
1.5 Corporate, M&A – German Federal Supreme Court Specifies Rules on D&O Liability in Connection with Alleged Waste of Corporate Resources
In its June 18, 2013 decision, the German Federal Supreme Court (Bundesgerichtshof – BGH) specified the conditions under which (i) a managing director may avoid personal liability based on the business judgment rule in connection with the entering into commercial agreements, and (ii) a limited partnership (Kommanditgesellschaft – KG) may claim damages from the managing director of the limited liability company that acts as the limited partnership’s general partner (Komplementär-GmbH) for a breach of his or her fiduciary duties.
In the case at hand, the managing director of a limited liability company that acted as the general partner of a limited partnership hired external legal counsel on behalf of the limited partnership at rates that exceeded the statutory fee schedule. Further, the managing director – allegedly for no discernible good reason – waived certain rights under a production service agreement.
The court held in essence that a managing director has broad discretion under the business judgment rule when taking a managerial decision under which terms he may enter into, or waive rights under, an agreement on behalf of the company. The fact that the contractual consideration exceeds customary levels per se does not create personal liability for the managing director. However, in such a case the managing director carries the burden of proof that the measures taken, and particular the costs incurred, are acceptable. The managing director may argue but also needs to prove that the damage at hand would have occurred even if he or she had acted lawfully.
Further, the decision clarifies that the managing director of a limited liability company acting as the general partner of a limited partnership will be personally and directly liable to the limited partnership for breach of his or her fiduciary duties as managing director if the only or substantial purpose of the limited liability company is to manage the limited partnership.
The decision was well received by the business community as it is consistent with the court’s established case law pursuant to which entrepreneurial activity is unimaginable without granting a broad scope of discretion to the manager. It makes clear that the standards for the manager’s burden of proof should not be excessive. As a consequence, the decision makes a valuable contribution toward establishing more legal certainty in connection with managerial decision-making, such as the negotiation of, entering into, and amendment of, commercial agreements.
Nevertheless, managers are reminded to take precautionary measures against subsequent allegations of wasting corporate resources by documenting their managerial decision-making process in an appropriate manner.
1.6 Corporate, M&A – Liability of Directors/Board Members of Foreign Companies under German Law
On June 11, 2013, the German Federal Supreme Court (Bundesgerichtshof – BGH) issued an important decision with regard to the potential liability under German law of a director or board member of a foreign company. The court had to decide on a damage claim for alleged non-payment of social insurance contributions by a foreign entity. The responsibility for the payment of social insurance contribution withholdings for its German employees and the liability for their non-payment lies with the relevant employing entity, but the authorized directors bear joint and several liability for these payments. In the case at hand, the foreign defendant sued under this liability was the “president della direzione“, i.e. the chairman of the board of directors of a Swiss stock corporation.
Under normal circumstances, such a damage claim would only be considered successful if the individual defendant was the claimant’s employer, which was not the case here. For purposes of a damage claim against an individual not being the employer, the court held that the defendant will, nonetheless, be treated as employer (i) if he or she acts as the authorized representative body of the relevant legal entity or as a member of such representative body, or (ii) if he or she has been (a) commissioned to manage the business, in whole or in part, or (b) expressly commissioned to perform autonomous duties which are incumbent on the owner of the business and acts on the basis of such mandate.
According to the BGH, the decisive factor is the specific job profile of the individual defendant only. The fact that the relevant legal entity itself is a foreign company (if and to the extent German law applies under conflict of law principles) does not automatically lead to the exclusion of any liability. The claimant has to prove that the specific profile of the defendant allows for the latter being treated as representative body or commissioner as described above. For Swiss stock corporations the registration of the defendant with the relevant commercial register as “president della direzione” might be sufficient evidence to assume a comprehensive management authorization and, thus, the defendant’s liability. However, the BGH could not finally decide on this as further fact-finding was required and remanded the case back to the lower instance.
In essence the BGH clarified that corporate liability under German law does not necessarily apply to a German employer and/or its directors only, but does also cover foreign legal entities and their representative bodies. Members of such bodies are therefore reminded to seek out adequate local legal advice in order to manage or exclude their liability risks appropriately.
1.7 German Investment Act (KAGB) and Investment Tax Act (Investmentsteuergesetz)
a. Regulatory Regime
As widely expected, Germany has implemented the European Union Directive 2011/61/EU on Alternative Investment Fund Managers (“AIFMD“) into German law just before the implementation deadline expired. The German Investment Act (Kapitalanlagegesetzbuch – KAGB) was adopted on July 4, 2013 and went into effect on July 22, 2013.
The KAGB is not a mere transformation of the minimum AIFMD requirements into national law, but provides for a much broader, overreaching, unified codification of the entire investment law in Germany for open-end funds and, for the first time, closed-end funds and covering both undertakings for collective investment in transferable securities (UCITs) and alternative investment funds (“AIFs“).
This unusual, all-inclusive approach to implementation means that international market participants who intend to market AIFs to investors based in Germany will need to be aware of several “gold plating” provisions and national peculiarities which they would not be familiar with in the AIFMD itself and/or its implementation into national law in other jurisdictions.
With regard to the coming year 2014, it is also important to recall that certain safe havens provided in the grandfathering rules of the KAGB for existing AIFs where marketing had already started prior to the KAGB coming into effect and continued thereafter will expire on July 21, 2014. The deadline, after which existing and new German and EU AIFMs will only be able to continue operating in Germany once they have obtained a KAGB-compliant permit or registration, also lapses on this date.
b. New Investment Tax Regime
The AIFM Tax Act (AIFM-Steuer-Anpassungsgesetz) that did not pass the legislative procedure prior to the federal election in September 2013 has been approved by both German legislative bodies and entered into force on December 24, 2013. Its wording corresponds to the original draft of May 2013. Contrary to widely held expectations, the AIFM Tax Act in large parts did not apply retroactively.
With the effectiveness of the AIFM Tax Act funds organized as a corporation (e.g. German GmbH, Irish PLC) or a contractual type fund (e.g. Luxembourg FCP, French FCPR) are subject to the tax regime for corporations. However, the favorable tax rules for investments in corporations only apply if (i) a EU/EEA fund does not benefit from a tax exemption, or (ii) a fund is subject to corporate income tax of a least 15%, provided the fund resides outside the EU/EEA. The tax consequences for FCPs which have been treated as transparent in the past are uncertain.
Investment funds which do not comply with the new requirements but which have been validly established under the old rules are subject to a temporary grandfathering provision that terminates in principle on December 31, 2016.
For further details on the KAGB and the AIFM Tax Act please see the Gibson Dunn Client Alert of July 22, 2013:
2.1 Tax – New Portfolio Dividend Taxation
The Tax Bill 2013 changed the taxation of dividends received by shareholders who are subject to German corporate tax.
In October 2011, the European Court of Justice (ECJ) held that the German withholding tax levied on portfolio dividends paid to EU corporate shareholders holding less than 10% in the dividend-distributing company is not in line with European law if there is no equivalent taxation for German corporate shareholders.
Until 2012, dividends distributed to German corporate shareholders were subject to a 95% tax exemption irrespective of their percentage share in the distributing company. In the case of a German dividend distributing company German shareholders received a tax credit for German withholding tax imposed. When the annual tax return was filed, the withholding tax was effectively refunded to the respective German corporate shareholder if only dividend income was generated. On the other hand, for EU corporate shareholders not covered by the EU-Directive (i.e. with a shareholding of less than 10% in the dividend-distributing company) who did not file a tax return in Germany, the withholding tax became final (subject to refunds under an applicable Double Tax Treaty) and was therefore a real cost.
The ECJ ruled that this unequal treatment between German and EU corporate shareholders constituted a restriction of free movement of capital and could not be justified.
As of 2013, dividends paid to corporate shareholders, owning less than 10% of the shares in the distributing company, will be fully taxable regardless of whether the corporate shareholder is a German or foreign corporation. German and foreign corporations are still subject to withholding tax on their dividend income. For foreign corporations the withholding tax remains final. For German corporations the dividend received is now taxable but the withholding tax is creditable against the corporate tax to be paid by the relevant German corporation.
Shareholdings of at least 10% in the dividend-distributing company are still subject to the 95% tax exemption on dividend income. Whether the holding in the dividend-distributing company amounts to at least 10% is determined at the beginning of a calendar year. If at least 10% in the dividend-distributing company are acquired during the calendar year, the 95% tax exemption on dividend income will still be granted for the year of the share acquisition even if there was no participation at the beginning of the calendar year.
The new rule applies to dividends paid after February 28, 2013. The 95% tax exemption on capital gains (irrespective of the percentage share) is not affected by this new rule but is likely to be changed in the near future.
2.2 Tax – Elimination of RETT Blocker Structures and Extension of the RETT Exemption for Intragroup Restructurings
Germany levies a real estate transfer tax (RETT) on transfers of at least 95% of the shares in partnerships and corporations holding German real estate. The previous rules took a merely formalistic approach as to whether a transfer was taxable. This meant that a transfer was not taxable if the relevant threshold was formally below 95% not taking into account any indirect participation. Under these rules RETT blocker structures were implemented where only 94.9% of shares were transferred legally but economically almost 100% of the shares were transferred to the buyer without triggering RETT: The investor acquired up to 94.9% of the shares in a corporation holding the German real estate. The remaining shares were held by a partnership, in which the investor again held up to 94.9% and a third-party the remaining 5.1%.
In order to prevent these structures a more flexible and economic approach has now been implemented into the RETT Act. Under the new rules, the implementation of RETT blocker structures is now subject to RETT. The new rules apply if the accrued amount of the direct and indirect shareholding in the property holding company is at least 95%. An indirect shareholding will be calculated by multiplying the participations in the capital of all the entities involved. The new rules apply to any acquisitions realized after June 7, 2013.
Moreover, the RETT exemption for intragroup restructurings has been extended. According to the new rules and subject to certain conditions, not only restructurings according to the German Transformation Act (Umwandlungsgesetz – UmwG) but also the contribution of assets or other asset transfers based on a corporate act may benefit from the tax relief.
3.1 Insolvency – Shareholder Loans in M&A-Transactions
A decision by the German Federal Supreme Court (Bundesgerichtshof – BGH) dated February 21, 2013 has cast doubts on the consequences of the common practice of selling and transferring outstanding shareholder loans (whether granted individually or within a cash pool) together with the sale of a target company by way of a share deal.
Under German statutory law shareholder loans are subordinated and repayments made within one year prior to the insolvency of the subsidiary borrower can be contested by the insolvency administrator and have to be paid back into the insolvent estate.
In the past, the sale of the shareholder loans together with the target to the purchaser gave maximum flexibility to the purchaser to make use of the tax-shield provided by such shareholder loans and thereby create tax efficiencies for the target company. Due to the new ruling, the seller of the shareholder loan is now at risk of being liable for the repayment in case of the target’s insolvency within one year of the sale and transfer of the loan.
The BGH ruled that if a shareholder grants a down-stream loan to its subsidiary and then sells such shareholder loan to a third party, both the seller and the purchaser of the loan shall be jointly and severally liable under insolvency law for pre-insolvency loan repayments made by the subsidiary, even if the relevant payments were made to and received by the purchaser of the loan alone.
While in the case at hand the shareholder selling the loan did not simultaneously sell also the shares in the subsidiary, the principles set forth in the court ruling may also apply in cases of a combined sale of shares and shareholder loan, which is typically seen in the course of an M&A or private equity transaction.
Keeping in mind this ruling, each seller needs to seek adequate protection against the risk of being held liable in case of the target’s insolvency after the transfer of the shareholder loan. Possible safeguards to address this issue could be a purchaser indemnity to the seller (ideally backed by a bank guarantee), or, as a structural alternative, the contribution of the shareholder loan into the capital reserve of the target prior to the share transfer.
3.2. Insolvency – Invalidity of Termination Rights Triggered by Insolvency
On November 15, 2012, the German Federal Supreme Court (Bundesgerichtshof – BGH) ruled that a widely used clause that uses insolvency as a trigger event for contract termination rights was invalid. The court held that clauses using the insolvency as a trigger event for a contractual termination right circumvented the insolvency administrator’s statutory rights under the German Insolvency Code (Insolvenzordnung – InsO). Under the InsO the insolvency administrator is entitled to elect to either maintain or terminate during insolvency proceedings partially unfulfilled mutual agreements.
The case at hand concerned a long-term supply agreement with an energy supplier. While it is not clear to which other contract types the court would apply a similar logic, the judgment is undeniably of great importance for the drafting of termination rights in German commercial contracts. The clause now invalidated by the BGH was one that could be typically found in many German (and international) contracts.
Going forward, attorneys and in-house counsels may be well advised to review the wording in their standard contracts (and individually negotiated contracts) and consider to no longer linking termination rights to the insolvency as such. If the right to terminate a contract is linked to other criteria that indicate the beginning of financial distress rather than the actual insolvency itself, a violation or circumvention of the statutory rights of the insolvency administrator may be prevented.
3.3 Insolvency – Licenses in Insolvency Scenarios
An analysis of the court ruling on Qimonda concerning the protection of licenses in insolvency of the licensor can be found in Section 6.1 of this 2013 Year-End Update.
4.1 Labor Law – Minimum Wage and Other Changes to Labor Market
The new German government has announced several changes to regulations of the labor market. These proposed changes include: (i) the introduction of a statutory minimum wage of EUR 8.50 per hour as of 2015, (ii) curbing de-facto employment, and (iii) a limitation on the term for leasing out personnel to 18 months.
In its policy roadmap (Koalitionsvertrag), the newly-elected grand coalition intends to address perceived negative developments in the labor market. Answering to a growing number of very low-wage workers, the government wishes to grant them the ability to sustain themselves and to pay sufficient pension contributions. To this end, and for the first time in German history, the government plans to establish a statutory minimum wage of EUR 8.50 per hour as of 2015. Certain tariff agreements with the unions can provide for lower wages.
As a further change, the period for leasing out a temporary employee (“temp“) shall be limited to 18 months. Afterwards, the temp could be automatically employed by the operational company. This change is a response to the enormous growth in the personnel leasing sector during the past years which was used to gain flexibility in light of the strict dismissal protection law in Germany. This development has led to a split in the workforce working in the same production line of a company, with temps earning considerably less than their colleagues who enjoy direct employment by the operational company. For a similar reason, the misuse of de-facto employment relationships shall be curbed by stronger investigation activities of the authorities and by an increase of works council rights. The latter is a response to recent cases of misusing free-lance schemes by many companies.
For employers, the changes somewhat restrict the flexibility to adapt the number of its workforce to market demands. Additionally, the modifications will bring about the need for an increased awareness in HR processes, in order to pay closer attention to the handling of free-lancers and temps in the future.
4.2 Labor Law – Gender Equality on Boards – Revisited
The policy roadmap (Koalitionsvertrag) of the new grand coalition provides for the prompt enactment of German domestic legislation prescribing a fixed 30% gender quota in supervisory boards. The future legislation shall apply to listed corporations and to companies subject to employee co-determination and will cover vacant board positions as of 2016. Most importantly, if the quota is not met, the relevant seat on the supervisory board shall remain vacant. In addition, the fixed quota shall be supported by complimentary measures such as the obligation on companies to determine and publish targets for the increase of female representatives not only on supervisory boards but also in management boards and the management tier below and to report on progress.
Parallel to German domestic announcements of forthcoming legislation, draft EU gender equality legislation also progressed in 2013. In November 2012, the European Commission proposed a directive on a target gender quota of 40% of non-executive directors by 2020. The quota is not directly binding, but puts a strong focus on procedural safeguards to tackle the glass ceiling in the appointment process. On November 20, 2013, the draft directive was approved by an overwhelming majority in the European Parliament. It is now up to the European Council of Ministers to enact the directive in 2014.
However, neither German domestic legislation nor the EU directive will apply to the numerous small- and medium-sized companies that are the economy’s key drivers throughout Europe and employ the vast majority of the workforce. Still, these entities may feel incentivized to follow suit in order to remain equally attractive employers when compared to large international groups of companies.
Companies which are directly affected by the forthcoming legislation should timely (i) review the appointment procedures for vacant supervisory board positions in their constitutional documents as well as the practical handling of nominations for supervisory board membership, and (ii) consider appropriate and realistic target quotas to be at the forefront of board gender diversity.
4.3 Labor Law – General Meeting to Determine Board Compensation
The grand coalition has announced its intention to change the governance for determining the compensation of managing board members of a German stock corporation (Aktiengesellschaft, or AG). Currently, the supervisory board (Aufsichtsrat) is in charge of negotiating all the contractual terms with these managers. In order to enhance transparency, the general meeting of shareholders (Hauptversammlung) shall now decide the managers’ contractual compensation on the supervisory board’s suggestion.
For those multinational groups whose German subsidiary is structured as an AG, this new legislation will change their corporate governance – and possibly also their public affairs. Many other groups, however, will not be affected, as their German subsidiaries are limited liability companies (GmbH), where the shareholder is competent in any event.
5.1 Real Estate – Scope of Necessary Disclosure for the Seller of Real Property
On February 1, 2013 the German Federal Supreme Court (Bundesgerichtshof – BGH) decided that the seller of real property must clarify distorting information regarding the factual rental income derived from the property if (i) such information is of recognizable importance to the purchaser’s decision to acquire the real property, and (ii) the purchaser was right to assume that such information would be disclosed according to the principles of good faith and trust or if such duty of disclosure results from the parties’ agreement.
In the case at hand, the purchase price for the real property was based on a multiplier of the annual rent payable by the main tenant under a long-term lease agreement even though the actual rental income realized by the main tenant under a sub-lease was considerably lower. The BGH held that under the principles of good faith and trust each contract party could pre-contractually be obliged to disclose any information and circumstances that might put the purpose of such contract at risk and/or that are of substantial importance for the decision of the other party. A significant difference between the rental income as stipulated in the lease agreement (and thus in the purchase agreement) and the factual rent paid by the subtenants could in principle qualify as such relevant information.
The BGH further held that even though the principles of good faith and trust might not require such pre-contractual disclosure in a particular case, the parties could provide for contractual obligations to disclose such information in the purchase agreement. According to the purchase agreement in the case at hand, the seller was obliged to disclose to the purchaser all lease agreements including any amendments, additional agreements as well as any correspondence with the tenants. However, the seller did not disclose any correspondence related to the sublease and the substantially lower rental income. This led the court to conclude that the seller had neglected its contractual disclosure obligations which may result in a damages claim for the purchaser.
The BGH confirmed that sellers of real property do not generally have the obligation to disclose any and all information and circumstances relating to the real property to be sold. Based on the principles of good faith and trust, however, sellers may be obliged to disclose information that is of recognizable importance for the purchaser’s decision to acquire the real property.
5.2 Real Estate – Consequences of the Termination of a Lease Agreement by the Insolvency Administrator for the other Contract Parties
The German Federal Supreme Court (Bundesgerichtshof – BGH) decided on March 13, 2013 that the termination of a commercial lease agreement by the insolvency administrator on behalf of the insolvent tenant simultaneously terminates the lease agreement vis-à-vis the landlord and the non-insolvent co-tenant, i.e. with effect for all contract parties.
Before this ruling, the consequences of the termination of a commercial multi-party lease agreement by the insolvency administrator for the other contract parties were debated controversially in the German legal literature. Some argued that the termination of the lease on behalf of the insolvent tenant did not affect the co-tenant and the lease subsisted in the relationship between the other parties.
The BGH held, however, that the termination by the insolvency administrator terminates the lease with effect for all parties but stated that the co-tenant and the landlord are free to conclude a new lease agreement in such cases.
This decision should be kept in mind when concluding future commercial lease agreements with more than one tenant. It might be advisable to include a provision in the commercial lease agreement that the lease remains in force for the other contract parties in case of a termination of the lease agreement by the insolvency administrator of one party.
5.3 Real Estate – Policy Roadmap of the new German Government for Residential Leases
The grand coalition has announced various changes to the residential lease market in Germany. The two major proposed changes are: (i) a cap on rent increase for residential leases (Mietpreisbremse), and (ii) the facilitation of energy efficient constructions and restorations.
a. Cap on Rent Increase
According to its policy roadmap (Koalitionsvertrag), the grand coalition intends to limit permissible rent increases to secure “affordable living” in Germany. Thus, the policy roadmap would entitle the German states to limit potential rent increases in connection with a re-letting of residential properties to new tenants in areas where a competitive housing market exists to 10% above the respective comparative local rent. This does not, however, apply to rents that have already been above the comparative local rent before the re-letting. Thus, this cap on rent increases does not result in mandatory rent decreases in these cases.
With regard to the increase of rent under existing lease agreements (Bestandsmieten) the policy roadmap sticks to the rule that, in certain areas as defined by the German states, existing rents may only be increased by 15% within every three years but only up to the comparative local rent.
b. Energy Efficiency
The policy roadmap of the new grand coalition further states that energy efficient constructions and restorations shall be facilitated. As part of these energy efficiency efforts, the new German government plans to support new energy saving technologies. “Compulsory modernizations” (Zwangssanierungen), however, are not part of this energy efficiency program. The rationale behind this energy efficiency program is to support Germany’s efforts to replace nuclear power (Energiewende) by way of reducing energy consumption through more energy efficient construction and reconstruction of buildings.
In July 2013, the Higher Regional Court of Munich (Oberlandesgericht München) rendered an important judgment concerning the protection of licensees in the case of insolvency of their licensors. Under German law it is presently uncertain whether non-exclusive licenses can be terminated by an insolvency administrator in case of the insolvency of the licensor as executory contract (i.e. a contract that has not yet fully been performed) under Section 103 of the German Insolvency Code (Insolvenzordnung – InsO).
The present case concerned various non-exclusive patent licenses that were granted by Qimonda to Infineon when Qimonda was spun-off from Infineon and went public. When Qimonda went bankrupt, the patent portfolio constituted its most valuable remaining asset. Qimonda’s insolvency administrator had terminated these licenses based on the German Insolvency Code to protect the interests of the estate and Qimonda’s debtors. The Munich Court now found that the irrevocable, perpetual, fully paid-up, non-exclusive patent licenses granted to Infineon did not constitute executory contracts which had not yet been fully performed and were thus not subject to the administrator’s termination right for ongoing contractual obligations.
Interestingly, the decision of the Higher Regional Court of Munich is widely in line with a December 2013 decision by the US Court of Appeals for the Fourth Circuit which ruled that Section 365(n) of the US Bankruptcy Code also prevented a termination of the US patent licenses in foreign main insolvency proceedings by Qimonda’s insolvency administrator as a violation of the United States’ public policy and its promotion of technological innovation because the licensee’s interests outweighed the interests of Qimonda’s debtors as represented by the insolvency administrator.
These proceedings are highly relevant to the entire semiconductor industry (due to the various cross-licensing arrangements in that industry) and all patent licensees generally. The underlying question whether non-exclusive licenses may be terminated when the licensor becomes insolvent remains highly important and, so far, open: On the one hand, the Munich Court decision has been appealed to the German Federal Supreme Court (Bundesgerichtshof – BGH) and, on the other hand, the Munich Court decision itself left ample room for individual assessments and thus did not bring the hoped-for clarity and guidance for the drafting of insolvency-safe patent licenses. Hopefully the decision of the BGH will provide more clarity in this regard.
6.2 Intellectual Property – Proposed New Block Exemption on Technology Transfers
Licensing arrangements and other technology transfer arrangements are likely to undergo some significant changes following an EU Commission proposal for a revised block exemption regulation and revised accompanying guidelines for the assessment of transfer of technology agreements under EU competition rules.
The proposed regulations and guidelines include a number of substantive changes that affect many aspects of the current “safe harbor” regime applicable to technology transfer agreements including, inter alia: (i) clarifying the scope of application of the regulation and safe harbor, (ii) providing additional guidance on the method of calculating market shares in the context of technology licensing agreements, (iii) re-defining certain “hard-core” (i.e. virtually “per se” rules) and exclusivity restrictions, and (iv) the provision of more extensive guidance regarding the compatibility of technology pools with EU antitrust rules. The finalized legal instruments are likely to enter into force by April 30, 2014, upon expiry of the current regime.
For further details please see the Gibson Dunn Client Alert of April 1, 2013:
7.1 Data Protection – More Certainty Regarding Email Reviews
On May 27, 2013 the Administrative Court of Karlsruhe (Verwaltungsgericht Karlsruhe) issued an important judgment that brings more certainty into the review process of emails, e.g. during an internal investigation.
Under German law it has been heavily disputed whether an employer is allowed to review its employees’ emails, if the employer has permitted employees to use its email infrastructure also for private emails. One opinion would classify employers as providers of telecommunications services in the meaning of the German Act for Telecommunications Services (Telekommunikationsgesetz – TKG) in such cases. Thus, employers who review employees’ emails that are saved on an employer’s server risk violating the telecommunications secret of the relevant employees which is sanctioned under the German Criminal Code (Strafgesetzbuch – StGB). It is important to note that pursuant to a decision of the German Federal Supreme Court (Bundesgerichtshof – BGH), emails – which have already been read by an employee but not been removed from the provider’s server – remain within the scope of the telecommunications secret.
The opposing view denies that the employer can be classified as a provider of telecommunications services. This view has been strengthened by a number of decisions by German labor and administrative courts, although the respective Federal High Courts have not yet ruled on this issue. One argument is that an employer usually does not provide telecommunications services to its employees on a commercial basis. Moreover, an employer provides these services not to third parties, but within its organization with the primary goal to ensure that its employees can fulfill their contractual obligations.
The recent decision of the Administrative Court of Karlsruhe backs the latter viewpoint by stating that the purpose of the German Act for Telecommunications Services is not designed to regulate the internal relationship between employers and employees, but the regulation of the relationship between telecom companies and public authorities or among telecommunications providers.
However, a non-applicability of the German Act for Telecommunications Services does not mean that an email review can be conducted without hurdles: the German Data Protection Act (Bundesdatenschutzgesetz – BDSG) stipulates that an email review is only permitted if it is necessary and proportionate, and – in cases of investigations of alleged criminal offences – concrete grounds for such suspicion must exist with regard to the specific employee whose electronic data is subject of the review.
For further details, see article by Walther/Zimmer, BB 2013, 2933 et seq. (available as pdf copy upon request).
7.2 Data Protection – Regulatory Enforcement and Developments
The German data protection authorities and courts had a very intense year. A lot of their enforcement activity and relevant case load concerned the internet and social media. Additionally, German data privacy authorities published important statements with regard to the EU-US safe harbor framework with reference to the recent disclosures on NSA surveillance. The authorities expressly announced that they would review data transfers under the safe harbor framework or other contractual basis very thoroughly and also indicated that they might eventually suspend such transfer frameworks. Below is an overview of some important data privacy decisions throughout 2013:
Good news for companies that operate so-called fanpages on Facebook: The Administrative Court of Schleswig (Verwaltungsgericht Schleswig) stopped a data privacy regulator’s attempt to prevent companies from using fanpages on Facebook because of data privacy concerns. The Court found that companies operating a fanpage cannot be considered “data controllers” for the data that Facebook obtained from its members while visiting a company fanpage and therefore are not responsible for such data. This decision is, however, still under appeal.
Facebook itself obtained an important favorable ruling in another proceeding before the Higher Administrative Court of Schleswig (Oberverwaltungsgericht Schleswig). The Court found that the European Facebook network was validly governed by Irish data privacy laws and fell under the competence of the Irish data privacy regulators – due to the specific circumstances also with respect to its German users. The Court therefore revoked data privacy orders imposed against Facebook by a German regulator who requested from Facebook the implementation of a feature through which German Facebook users could anonymously use the Facebook network.
In another important decision, the Higher Regional Court of Hamm (Oberlandesgericht Hamm) decided that YouTube did not have to remove a video clip that revealed information about a German diplomat involved in a car accident in Moscow where he was not prosecuted for immunity reasons. Back in Germany, he was sentenced by a German Court, and the Higher Regional Court found that in this case the public information interest outweighed the diplomat’s privacy interests.
The Bavarian data privacy authority fined an employee for using “open” email distribution lists. The employee had unintentionally sent mass emails to customers disclosing the recipients identity in the “To” or “cc” line of the email and thus enabling all recipients to obtain personal data (e.g. name and email address information) of other customers, which in the regulator’s view constituted a data privacy violation.
A data privacy regulator in Lower Saxony has prohibited private companies from copying personal identification cards and passports for data privacy reasons. This decision was appealed but upheld by the competent appeal court. Copying customer identification documents is a wide-spread practice in many industries and it will be interesting to see if other regulators share the very strict view of the Lower Saxony data protection authority.
7.3 Data Protection – Employee Data Privacy Protection
Since the German government withdrew its proposal for more detailed rules on employee data protection in February 2013, no further progress has been made to modernize the legislative framework for employee data privacy laws in Germany. It now remains to be seen whether the grand coalition will make a renewed attempt and resume a legislative initiative on employee data privacy protection or primarily fosters this process by supporting the enactment of an EU data privacy regulation.
8.1 Compliance – Increased Corporate Liability for Law Violations
In 2013, corporate liability for compliance violations committed by management or employees was considerably increased. Such liability occurs in cases of illegal conduct such as bribery, fraud against third parties, falsification of books and records or antitrust violations to the benefit of the corporation.
Effective June 30, 2013, the German Administrative Offences Act (Gesetz über Ordnungswidrigkeiten – OWiG) constituting corporate liability was amended as follows:
(i) A tenfold increase of corporate fines for offences committed by bodies or executives of corporations in violation of legal duties affecting the corporation, or for the failure to establish effective controls to prevent law violations, to up to EUR 10 million for intentional conduct, and up to EUR 5 million for negligent conduct, respectively;
(ii) The right of enforcement authorities to impose administrative fines on legal successors of corporations in cases of universal or partial succession under the German Transformation Act (Umwandlungsgesetz – UmwG) up to the value of the assets assumed; and
(iii) An acceleration of the authorities’ options to freeze assets of corporations that are subject to pending administrative fine proceedings, to the effect that assets can already be confiscated or seized by attachment in rem once the regulatory authority competent for the misconduct in question has issued a fine order, even if the authority’s order is later found to be illegal or excessive by the courts, which may take several months or even years.
The amendments are relevant for all German-based legal entities, German branches of foreign entities and foreign persons committing crimes or administrative offences on Germany territory. The latter amendment may become particularly relevant for foreign and international corporations doing business in Germany, as the risk that assets may be expatriated or the lack of significant domestic assets frequently provides sufficient legal reason and justification for the authorities to order confiscation or seizure.
Further, it is worth noting that the aforementioned maximum fines can be exceeded without limitation up to the benefits the corporation derived from the misconduct, e.g. including profits made under a contract that was illegally obtained by bribery. Such indirect disgorgement of profits may easily exceed the mere administrative fine amount by a multiple.
For further details please see the Gibson Dunn Client Alert of July 9, 2013:
8.2 Compliance – New Legislation regarding Criminal Liability of Corporations on the Horizon
An even more fundamental development to watch out for is the proposed adoption of a “Corporate Criminal Code” (Verbandsstrafgesetzbuch), under which – for the first time under German laws – criminal sanctions could be imposed directly against corporations. On November 14, 2013, a majority of the German states’ justice ministers resolved to introduce a bill for such a Corporate Criminal Code.
The draft bill includes profoundly aggravated liability exposure for corporations facing criminal investigations and sanctions. This includes a legal obligation of prosecutors to open investigations into allegations of corporate misconduct, limiting currently existing discretionary powers. Further, the range of possible sanctions against corporations would be widened not only to include monetary fines, but also warnings with suspended sentences, the publication of criminal convictions, a debarment from public subsidies or public tenders, and, as a last resort, the compulsory liquidation of the corporation.
Monetary fines would no longer be limited to statutory maximums (as described above), but could rise to up to 10% of the average total revenue of the corporation. On the other hand, the bill proposes that the court may refrain from sanctions if the corporation has adopted or installed adequate organizational measures or resources to prevent similar corporate misconduct in the future, and (i) no significant damage has occurred or such damage has been retrieved, or (ii) the corporation has materially contributed to have the corporate misconduct uncovered by voluntary disclosure and providing evidence to the enforcement authorities, provided, however, that such voluntary disclosure was made prior to the opening of criminal proceedings.
Thus, for the first time German law would expressly acknowledge effective compliance management systems and cooperation as mitigating factors to decrease fines, or even to prevent corporate liability for employees’ misconduct.
In addition, the grand coalition in its policy roadmap (Koalitionsvertrag) committed to further legislative anti-corruption initiatives, including amendments to the German Criminal Code (Strafgesetzbuch – StGB) regarding the adoption of an extended criminal offence of “bribing members of parliament”, as well as a new criminal offence of “active and passive bribery in the healthcare business”. The latter offence is intended to close a gap resulting from a restrictive interpretation of current German laws by the courts according to which key statutory offenses of active and passive bribery do not apply to private medical practitioners because they cannot be regarded as public officials even when making decisions on medical treatments paid for by public health insurance.
In a similar vein, the (private) German Association for the Voluntary Self-Monitoring of the Pharmaceutical Industry on November 27, 2013, decided on a new Transparency Code, which among other things prohibits its members to make any gifts (including those of nominal value such as pens or writing pads) to members of the healthcare profession, and constitutes the obligation to publish all benefits of monetary value to such members. The key provisions of the Code shall come into effect after approval by the German Federal Cartel Office (“FCO“), but not before July 1, 2014.
The legal amendments and legislative initiatives described once more stress the need for corporations to conduct thorough risk assessments and take preventive measures to avoid corporate responsibility for white collar crimes and other illegal conduct. If necessary, companies should review existing compliance procedures to test whether they are sufficiently robust and effective to control such risks, and further refine such procedures where required.
8.3 Compliance – European Union responds to new Threats with stronger Anti-Money Laundering Rules
On February 5, 2013 the European Commission has adopted the 4th Anti-Money Laundering Directive to update and strengthen the existing rules on anti-money laundering and terrorist financing. The new Directive consists of two proposals which are based on recommendations of the Financial Action Task Force (FATF), the international anti-money laundering body founded at the initiative of the G7 states.
With the Directive, which emphasizes the risk based approach, the European Commission aims to extend the scope of the anti-money laundering rules and to establish consistent regulations across the Member States. The following aspects of the Directive are especially noteworthy:
(i) A tightening of the rules on customer due diligence shall ensure more transparent and effective procedures. Specifically, a clear mechanism to identify beneficial owners will be required and companies must hold accurate and adequate information on the persons who in fact stand behind the company.
(ii) The scope of the provisions dealing with politically exposed persons will be expanded.
(iii) Furthermore, the gambling sector will also be covered by the rules.
(iv) For persons dealing in goods or providing services against cash payment, the relevant threshold will be lowered to EUR 7,500 instead of EUR 15,000 as per today. Persons handling cash transactions above the designated threshold will need to carry out customer due diligence, maintain records, conduct internal controls and report suspicious transactions.
The European Parliament and the Council of Ministers will have to adopt the proposal, supposedly in the beginning of 2014. Subsequently, the Member States will get a two-year timeline to implement the Directive into national legal frameworks to comply with the requirements of the new provisions.
8.4 Compliance – Reform of Foreign Trade Regime, New Leniency Program
As of September 1, 2013, the German legislator has reformed the entire German regime of foreign trade legislation by replacing the two applicable sets of rules, the Act on Foreign Trade (Außenwirtschaftsgesetz – AWG) and the Regulation on Foreign Trade (Außenwirtschaftsverordnung – AWV).
This complete legal reform became necessary because the previous provisions had become somewhat unmanageable due to several amendments. The new set of rules is clearly structured and thereby resolves several uncertainties such as discrepancies between the lists on controlled dual use goods at the German national and the European Union (EU) levels. At the same time some material modifications have been made, the most prominent of which are a review of the penalty system, a simplification for the export within the European Economic Area (EEA) and a leniency program for minor offenses.
The changes in the penalty system for breaches of the AWG or AWV have two sides. On the one hand, willful breaches of material rules, such as the undeclared export of controlled goods or the violation of embargos, result in stricter penalties. These breaches are now all considered criminal offenses with a possible sentence of up to 15 years of imprisonment. On the other hand, minor offenses, such as incomplete information in the permit process, are all reduced to administrational offenses, not carrying the risk of jail sentences.
The newly introduced possibility to apply for a leniency program with regard to most administrative offences is available as long as a breach has not yet been detected by the authorities. A person or entity becoming aware of such an offence can now notify the offence to the authorities, which in return can exempt the offender from the fine. As in anti-trust leniency proceedings, this procedure also requires detailed information on what steps have been taken and are planned to avoid such offences in the future.
In sum, the new set of rules provides a necessary simplification of the German foreign trade legislation which also incorporated some adaptations to EU law. A practical result is the increased importance of foreign trade compliance systems, as not only the penalties for breaches have been increased but a functioning compliance program is key to benefit from the leniency program.
9.1 Antitrust – Merger Control
a. Merger Control after the 8th Amendment of the ARC
The 8th Amendment of the German Act against Restraints of Competition (ARC) entered into force in June 2013. The reform which is mainly intended to align domestic competition law with the European framework brought about several changes in the area of merger control. Most importantly, the amended ARC introduces the so-called significant impediment of effective competition (“SIEC”) test. The new test-criterion replaces the old test which was solely based on an establishment or strengthening of a dominant market position. In the amended ARC, the establishment or strengthening of a dominant market position remains relevant only as an example for a significant impediment of effective competition but is likely to continue to play a vital role due to its practical importance. In that regard, the relevant threshold for a presumption of market dominance by a single undertaking has been increased from 33% to 40% market share.
Additionally, under the new law, it will become impossible to circumvent German merger control by means of so-called “salami tactics”. Under the old regime it was technically possible to avoid a filing in Germany if the target was split in several pieces whereby none would generate a turnover exceeding EUR 5 million in Germany. Under the new ARC, transactions occurring between the same undertakings within a timeframe of two years have to be accumulated.
The amended ARC also introduces an exception from the general prohibition of closing before merger clearance has been obtained in the event of public bids or a series of transactions in securities admitted to trading on a stock exchange in order to facilitate transactions which involve publicly traded companies.
For further details on the relevant changes of German merger control stemming from the 8th ARC Amendment please see the Gibson Dunn Client Alert of June 14, 2013:
b. Merger Control: Foreign-to-Foreign Draft Guidelines
In December, the German Bundeskartellamt (Federal Cartel Office – FCO) published draft guidelines regarding its jurisdiction over foreign-to-foreign mergers for public consultation. In addition to meeting the revenue thresholds, appreciable domestic effects are a further prerequisite for triggering a merger filing requirement in Germany. While the publication provides important guidance that facilitates the assessment whether a transaction fulfills the domestic effects test, the final determination if a transaction has effects on the German market still requires a careful case-by-case analysis. In fact, for the sake of legal certainty and in order to avoid the invalidity of a transaction, the FCO in its draft guidelines concludes that businesses should notify a transaction in case of doubt.
c. Fine for Incomplete Merger Filing
From an enforcement perspective, the FCO seems to put a focus on and stress the formalities of merger control filings. Most significantly, in late 2013, the FCO imposed a fine of EUR 90,000 (approximately USD 120,000) on an individual for submitting incomplete information during a merger notification. The notification failed to contain complete information regarding other shareholdings of the lead shareholder of the acquiring group. In addition to the acquiring group, the individual also held share participations in a major competitor by way of a trustee relationship. This link between the acquiring group and the competitor was not initially disclosed to the FCO but subsequently found relevant for the FCO’s market assessment.
9.2 Antitrust – Anti Cartel Enforcement Update
The year 2013 marked another year with very high fines resulting from the FCO’s antitrust enforcement activities, with reported fines totaling approximately EUR 240 million (approximately USD 314 million). The FCO’s activity in 2013 concentrated on the manufacturing of railways, confectionaries, and consumer goods as well as flour production.
The 8th Amendment of the ARC also brought about significant changes to the enforcement of German antitrust law. Of particular importance is a new obligation for businesses to report their turnover upon request of the FCO for purposes of calculating an antitrust fine. Previously, the FCO lacked the necessary competence to issue information requests for this purpose and, therefore, frequently had to launch dawn raids in order to obtain relevant data. Additionally, and following a deviating German Federal Supreme Court (Bundesgerichtshof – BGH) decision, the legislator clarified that in cases of at least partial succession in law, the FCO may impose a fine on the antitrust infringer’s successor. It should be noted that this rule is not applicable in cases where only assets have been acquired from the original infringer.
The amended ARC also provides for more enforcement tools for the FCO. The FCO may now as an ultima ratio also order structural measures such as unbundling in order to sanction cartels. Furthermore, the amended ARC allows for orders made by the FCO that cartel infringers must reimburse profits generated by means of illegal cartel activities. Therefore, in principle the FCO may already anticipate later damage awards by means of administrative orders to some extent.
In June 2013, as a consequence of a landmark ruling by the BGH in February 2013, the FCO published new fining guidelines. Under the ARC, a fine imposed on a company involved in a cartel can amount to up to 10% of its annual group turnover. The new fining guidelines now comply with the February 2013 decision of the BGH which held that the 10%-of-turnover limit for cartel fines is not a capping threshold (for a potentially otherwise higher fine), but constitutes the maximum value within the possible range of fines (assuming the worst possible antitrust infringement). Key factors for calculating fines according to the new guidelines are the company’s group turnover and the turnover that was achieved on the market in which the anti-competitive practice took place for the duration of the infringement. Compared to the old regime, the new guidelines focus more on the size of the company. Consequently, it can be expected that large conglomerate companies may face significantly higher fines in the future while fines for smaller one-product companies are likely to decrease.
A case which drew a lot of public attention but which ultimately did not result in a fining decision, concerned Amazon’s general terms for its platform Amazon Marketplace. Due to a price parity clause, sellers were prohibited from selling products they offer on Amazon Marketplace cheaper on any other internet sales channel. The prohibition applied to both other internet platforms as well as the sellers’ own online shops. The FCO’s main concern was that the restriction of the sellers’ freedom to determine their sales prices also resulted in a restriction of competition between different internet marketplaces. After the FCO started its investigation including a market survey, Amazon abandoned its price parity clauses for good.
9.3 Antitrust – Private Enforcement
The 8th ARC Amendment introduced material changes to private antitrust enforcement. One of the key changes has been that consumer associations now also enjoy standing for claims for omission and rectification. They may also bring claims whereby cartel infringers are ordered to pay damages for the benefit of the German federal budget. Such claims may be brought where damages have been inflicted on a large number of cartel victims (scatter damages). Consequently, it can be expected that consumer associations may assume a more prominent role in private antitrust enforcement in Germany.
Furthermore, the German courts delivered several judgments in 2013 which further clarified if and to what extent damages can be awarded as a consequence of illegal cartel conduct. The Higher Regional Court of Munich (Oberlandesgericht München) issued a judgment which further clarified the allocation of the burden of proof between claimant and defendant in damage proceedings. The ARC provides for so-called follow-on actions whereby civil courts in damage proceedings are bound by prior administrative or court decisions which finally determine breaches of antitrust law (e.g. a final court decision confirming an antitrust fine). The Munich Court held that this binding effect does not, however, apply to the factual basis of the damages which actually occurred and the necessary chain of causation between antitrust conduct and damage. Therefore, claimants are still required to provide a sufficient factual basis in that regard in order to prove their claim.
In this context the Higher Regional Court of Cologne (Oberlandesgericht Köln) held that economic projections and business plans invoked in order to prove damages resulting from antitrust infringements need to be sufficiently precise and based on realistic assumptions in terms of their feasibility from a business perspective. The Court decision applies a rather strict burden of proof for antitrust damages. Therefore, there remain realistic chances for defendants to tackle alleged damages in antitrust cases on factual grounds.
Efforts to bring “class action style”-claims for damages in Germany have been curtailed to some extent due to a December 2013 judgment rendered by the Higher Regional Court of Düsseldorf (Oberlandesgericht Düsseldorf). The Court dismissed a claim worth EUR 131 million (approximately USD 174 million) brought by the Cartel Damage Claims company (CDC) against six members of a cement cartel. Before launching the action for damages, CDC acquired and bundled individual claims from 36 cement purchasers. Despite the fact that the Court in 2007, by way of an interim judgment, had held that the claim was permissible from a procedural perspective, it now dismissed the action based on substantive grounds. According to the Court’s reasoning, the assignment of individual claims to CDC was partially in breach of rules against the unauthorized practice of law applicable at the time of assignment because CDC did not hold a permission to liquidate third party claims. Additionally, the Court found that the assignment of individual claims to CDC was contrary to public order because the claimant, a corporate vehicle established for the purpose of pursuing this action, would own far from sufficient funds to compensate the defendants’ statutory legal fees in case the action were dismissed and thus provided an inappropriate and unjustified risk for the defendants and inappropriate shield for the original cartel purchasers. The Court indicated, however, that a different contractual structure may have resulted in a different outcome. Hence, besides the fact that the judgment can be appealed, the judgment leaves room for interpretation and offers options how to structure such claims going forward. Defendants need to remain mindful that mass litigation is likely to remain an issue also in Germany.
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, 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 work or any of the following members of the Munich office:
General Corporate, Corporate Transactions and Capital Markets
Benno Schwarz (+49 89 189 33 110, [email protected])
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 33 151, [email protected])
Marcus Geiss (+49 89 189 33 154, [email protected])
Eike Grunert (+49 89 189 33 121, [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])
Mark Zimmer (+49 89 189 33 130, [email protected])
Eike Grunert (+49 89 189 33 121, [email protected])
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