January 8, 2016
By the end of 2015, Germany has provided shelter to more than one million refugees that entered the country in the past twelve months, many without any documents of identification or even totally unregistered in some cases. The formidable challenges and changes that a society faces when national and even European borders, at least for a crucial period of time, appear to become meaningless make the legal changes described in this Year-End Update look pale by comparison.
Over the last twelve months, the struggle to find a roof and provide for the basic needs of thousands of new asylum seekers became part of the daily routine in many German cities. Starting with the German Chancellor, Angela Merkel, political pragmatism combined with a "we can do" attitude took precedence over the rule of law and due process in many German minds. However, first clouds appeared on the blue sky when the true numbers and costs of this venture became clearer towards the end of the year. Germany enters a new era of uncertainty from a position of strength: The German economy is booming, unemployment has never been so low and, thanks to Mr. Draghi’s policy of flooding Europe with cash, there is currently no cost for the German Government to refinance its debt.
Taking an optimistic view, with many new immigrants, most of them young and eager to work and build career paths for themselves and their families, Germany is now also close to solving its demographic issues and is laying solid foundations for future growth and prosperity as a diverse and open-minded society. Taking the pessimistic view, you could look ahead at several years of struggle to integrate millions (there is no indication that the inflow will slow down in the next 2 or 3 years) with a patchy educational background, who face significant linguistic and cultural challenges in their new home and may threaten to become long-term dependents on the generous German social security system.
Will European integration help or harm? The European track record of success in getting its act together has not been strengthened by the last-minute bail-out of Greece that dominated the news in the first half of the year. National secession movements and protectionist politics appear to be gaining traction in light of the refugee crisis at the expense of a sense of mutual cooperation and burden-sharing. With the threat of a British exit pending, at the beginning of 2016, the EU looks like a major construction site rather than a fully functioning European home.
If we were to choose one of the changes described hereunder that is likely to affect the business with Germany and Europe the most, last year’s "winner" would be the European Court of Justice’s decision to invalidate the EU-U.S. Safe Harbor framework coupled with the new compromise wording of the EU Data Protection Regulation which is now expected to be adopted shortly by the European Council and the European Parliament. Europe is determined to establish a stricter regime relating to data privacy than the U.S., including a "right to be forgotten", right to data portability and notification obligations in case of data breaches, coupled with fines of up to 4% of a company’s annual revenue. Whether this European initiative will gain many plaudits or will only widen the digital and economical gap between the U.S. and Europe remains to be seen.
With these more philosophic thoughts in the back of our mind, we want to update our clients and friends with our customary annual alert for Germany on the specific legal developments that will likely affect corporate and finance transactions and regulatory proceedings in the years to come. Wishing that your business will prosper from the opportunities created rather than suffer from the costs, we hope you enjoy reading this update.
5. Real Estate
1.1 Corporate, M&A – Delisting 4.0 – Delisting Only Against Cash Compensation
November 26, 2015 marks another milestone in the toing and froing of delisting rules in Germany. On that day, an amendment to the German Stock Exchange Act (Börsengesetz) came into force that provides for changes in the requirements under which the public listing of an issuer’s securities on the regulated market in Germany can be revoked upon the issuer’s request. Under the new rules, a delisting generally requires the publication of an offer document and the payment of cash compensation.
The new rules are the result of a highly controversial debate that has been going on for more than ten years and that was fueled by various landmark decisions by the German Federal Supreme Court (Bundesgerichtshof – BGH) in 2002 (Macrotron) and 2013 (Frosta – see "Delisting Reloaded – German Supreme Court Abandons Cumbersome Restrictions") as well as the German Federal Constitutional Court (Bundesverfassungsgericht) in 2012 (see "Back to Square One? German Constitutional Court Rewrites Delisting Rules"). The latest BGH decision which ruled that a delisting neither requires a resolution by the general shareholders’ meeting nor a compensation that would be challengeable in a special court proceeding (Spruchverfahren) resulted in a large number of delistings over the past two years and just as much criticism. As a consequence, the legislature felt a need to change the law in an attempt to provide further protection to shareholders.
Under the new statutory rules, the application by an issuer to have the public listing of its securities revoked may only be approved if at the time of the application an offer to acquire all affected securities in accordance with the provisions of the German Securities Purchase and Takeover Act (Wertpapiererwerbs- und Übernahmegesetz – WpÜG) was published. Such offer will not be required if the securities continue to be listed on another domestic stock exchange for trade in the regulated market or in another Member State of the European Union or another contract state of the European Economic Area for trade on an organized market where equivalent delisting rules apply.
The offer, which cannot be conditional, must provide for cash compensation denominated in Euro and be accompanied by a financing commitment. In principle, the compensation must be at least equal to the weighted average domestic stock price of the securities over the past six months preceding the publication of the offer document. If, however, an issuer violated the applicable ad hoc disclosure requirements or the rules on market manipulation over the relevant six-month period and the calculated average stock price was affected thereby more than negligibly, this valuation method would not apply. In such a case, the compensation must be determined by evaluating the issuer. This would also apply if the stock price was established on fewer than one third of the trading days during the relevant six-month period and several stock prices successively established deviate from each other by more than five percentage points.
It is difficult to comprehend why a continuous second listing at another well-established market outside the EU and EEA, such as on the NYSE or Nasdaq, is not deemed equivalent and does not enable the issuer to delist in Germany without having to publish an offer document and pay a compensation. Given the increased costs and complexities caused by the new statutory rules, issuers will only consider and go through with a delisting if they expect significant economic and commercial advantages from such measure in the medium to long run.
1.2 Corporate, M&A – Amendment to the Stock Corporation Law – Aktienrechtsnovelle 2016
On 12 November 2015, after five years of discussion, the German Parliament resolved on various amendments to the German Stock Corporation Act (Aktiengesetz – AktG) known as "Aktienrechtsnovelle 2016". The new provisions will not contain an actual reform but only amend specific aspects of the German Stock Corporation Act, in particular to allow companies more flexibility and to enhance their financial resilience. Additionally the amendments aim to improve the transparency regarding the ownership structure of non-listed companies.
The first significant amendment relates to the supervisory boards of German stock corporations. The number of the members of supervisory boards will no longer have to be generally divisible by three, but only if this is necessary for reasons of employee co-determination under the German One-Third Employee Co-Determination Act, i.e. for public and private limited companies with more than 500 but no more than 2,000 employees. The minimum number of supervisory board members will remain three.
The Aktienrechtsnovelle 2016 also affects the capital and share structure of German stock corporations: Non-listed stock corporations may in future only issue bearer shares if the shareholders are not entitled to individual share certificates and a global share certificate is deposited with a depository bank. Otherwise, non-listed companies may only issue registered shares. Those amendments intend to ensure the transparency of the ownership structure also of non-listed companies (corporate law notification obligations regarding non-listed companies only apply to stakes in excess of 25%).
To increase the flexibility of the equity structure of stock corporations the companies may now further stipulate in their articles of association that the right to subsequent payment for preference shares is excluded and that holders of preference shares receive higher than ordinary dividends instead of prioritized payments. Currently an exclusion of voting rights basically requires that the shareholder is entitled to receive the preferred dividend in the following year. The new provisions further provide for a due date for the payment of dividends. Unless a later due date is determined in the articles of association or by resolution of the general assembly, dividends will be payable on the third business day after the date of the general shareholders’ meeting resolving on the dividend. This part of the reform will only become effective on 1 January 2017.
German stock corporations may now also issue convertible bonds with a conversion right for the issuer instead of bondholders only and to create conditional capital for this purpose. The rationale for these amendments is, inter alia, to simplify the restructuring of financially distressed companies by way of debt-to-equity swaps. Simplifying restructuring measures is also the reason for stipulating an exemption from the general rule that the nominal value of conditional capital may not exceed 50% of the share capital: If the conditional capital is created for the sole purpose of enabling the company to exercise a conversion right to avoid insolvency it may exceed 50% of the share capital.
Further proposals contained in the governmental draft were not implemented in the adopted law. The Aktienrechtsnovelle 2016 does neither provide for a uniform record date for bearer and registered shares nor for a "relative time limitation for follow-up actions of nullity", pursuant to which a shareholder may only initiate a follow-up action of nullity of a resolution taken by the general shareholders’ meeting within one month from the publication of the initiation of an action for annulment.
1.3 Corporate, M&A – New Reporting Requirements and other Amendments to the German Securities Trading Act
Five years after its initial adoption, the Transparency Directive (2004/109/EG) was reviewed by the European Commission. This review resulted in the Amendment Directive to the Transparency Directive (2013/50/EU, the "Amendment Directive") which was implemented into German law as of November 26, 2015. The implementation of the Amendment Directive particularly affects the rules under the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG), namely (i) the system and substance of the reporting requirements and (ii) the scope of the sanctions for a breach of the reporting requirements.
The changes amend Secs. 21 and 22 WpHG that provide for the reporting of voting rights from shares held by or attributed to a certain person (including rights held by parties acting in concert with such person), Sec. 25 WpHG that provides for the reporting of the holding of financial instruments and Sec. 25a WpHG that now provides for a separate additional reporting of the aggregated holding and attribution of shares and holding of financial instruments. Under the new Sec. 25a WpHG, the reporting requirement is now triggered when the sum of the voting rights from the shares held and/or attributed and the financial instruments held reaches, exceeds or falls below any of the relevant thresholds under Sec 21 WpHG even if none of the reporting requirements pursuant Secs. 21, 22 and/or 25 WpHG are triggered individually.
The rules on the attribution of voting rights have been expanded so as to also include (i) voting rights agreements pursuant to which the voting rights (without the underlying shares) are transferred temporarily for consideration and (ii) voting rights from shares that are held as collateral, provided that the holder of the collateral holds the voting rights and expresses the intention to exercise such voting rights.
In addition to the above, the revised WpHG further introduces a mandatory uniform reporting form that must be used for all shares and instruments alike and for each notification. A shareholder has to disclose all of his holdings in all reportable financial instruments in every notification that he makes – regardless of the type of transaction by which the notification obligation is triggered. Under the new rules, a parent company may file a single notification for its entire group instead of each company of the group having to file separate notifications, even if the parent company is not involved in the transaction that triggers the reporting obligation and does not hold any of the relevant financial instruments itself.
The triggering event for the reporting of voting rights from shares held by or attributed to a certain person has been accelerated in that the actual transfer of the legal ownership of the shares (i.e. the settlement date which is usually T+2 for stock exchange trading) is no longer the relevant event, but rather the existence of a claim or obligation to have the shares transferred unconditionally and without any delay, i.e. on the trade date (T).
Accordingly, the time within which reportings have to be made has also been changed. While both the issuer and the Federal Financial Supervisory Authority (BaFin) still have to be notified without undue delay, but in any case within four trading days after the shareholder knew, or under the circumstances could have known, that his voting rights reached, exceeded or fell below the relevant thresholds, it is now irrefutably assumed that the shareholder has such knowledge at the latest two trading days after the voting rights reach, exceed or fall below the relevant thresholds.
1.4 Corporate, M&A – The Pitfalls of Failing to Meet the Purchaser’s Duty of Care in an M&A Transaction
On March 13, 2015, the District Court of Hamburg (Landgericht Hamburg) decided on the duty of care incumbent on the purchaser under a share purchase agreement ("SPA") in one of the very rare court decisions on M&A transactions. Following a brief due diligence phase, the plaintiff (as purchaser) and the defendant (as seller) entered into a SPA regarding the shares in a German limited liability company which was active in the field of digital satellite and TV supplies. After closing, the purchaser detected that the production and sale of the target’s main products violated third party-IP rights and claimed damages in the amount of EUR 25 million, which corresponded to the settlement amount the plaintiff had agreed upon with the actual owners of the relevant IP rights.
The District Court held that the defendant neither violated the contractual provisions under the SPA nor statutory law. In the view of the court, the seller did not breach its representations under the SPA due to the specifics of the case. The representation on permits was held to be limited to public permits only and the representation on IP only covered trademarks but not patents or licenses.
Further, the court denied statutory damage claims of the purchaser ruling that the plaintiff was grossly negligent to not be aware of the missing licenses and therefore barred from successfully asserting claims against the seller pursuant to section 442 para. 1 2nd sentence of the German Civil Code (Bürgerliches Gesetzbuch – BGB). Gross negligence generally requires the applicable duty of care being disregarded in a particularly manifest way, e.g. by failing to consider what would be evident for a standard buyer in the respective case. In the court’s view, as an experienced M&A actor that was aware of the general risks in connection with the acquisition of a company, the plaintiff had to deduct from the information provided by the seller in the course of the due diligence as well as from the analysis of the disclosure schedules to the SPA that the patent situation of the target was bound to be problematic. In addition, the purchaser represented in the SPA that "it has been provided with sufficient and satisfactory documentation and information in relation to the transaction contemplated herein".
The decision of the District Court of Hamburg illustrates the importance of both conducting a thorough due diligence and carefully wording the SPA. In view of the indications apparent during the due diligence regarding potential issues related to the IP situation of the main products of the target, the purchaser should have requested further clarifications as well as a specific representation or indemnity in this regard (rather than agreeing to a purchaser representation that sufficient information had been provided).
In order to avoid any uncertainty regarding the ability to raise potential claims under a SPA (or an asset purchase agreement, as the case may be), a purchaser should try to insist on a clause that contractually excludes the applicability of section 442 para. 1 2nd BGB. Whether or not this can be achieved in practice clearly depends on the bargaining power of the parties in each relevant case. From a seller’s perspective, it is important to exclude any statutory liability exposure beyond the contractually agreed liability regime of the negotiated representations and warranties, indemnities and covenants. Such exclusion is generally permissible under German law unless a potential claim of the purchaser to be excluded is based on a willful act or a fraudulent misrepresentation of the seller.
1.5 Corporate, M&A – Export of German Employee Co-Determination?
Under the German corporate governance regime, limited liability companies ("GmbH") and stock corporations ("AG") with more than 2,000 employees have to establish a supervisory board whose members consist of 50% of employee representatives. In case the number of employees does not exceed 2,000 but is in excess of 500 employees, a supervisory board with one third of employee representatives has to be established. The requirement of employee co-determination on supervisory boards is unique to Germany and is often viewed with suspicion by foreign investors.
In February 2015 the District Court of Frankfurt am Main (Landgericht Frankfurt am Main) issued a ruling, which – if upheld on appeal – would considerably increase the number of German companies subject to employee co-determination. Contrary to past prevailing opinion the Frankfurt District Court held that employees working at sites abroad and even employees of controlled affiliates in other EU Member States need to be taken into account for the calculation of the relevant number of employees. The Frankfurt District Court argued that disregarding EU employees in the context of co-determination thresholds infringes European law, in particular non-discrimination principles.
Effectively, this ruling means that a GmbH or an AG with 100 German-based staff members which currently does not have to establish a co-determined supervisory board, would require an employee co-determined supervisory board in the future if the company in question has one or more subsidiaries in EU Member States with 400 (or more) employees.
This ruling came as a big surprise but the matter is not finally settled yet. Just six months after the ruling of the Frankfurt District Court, the District Court of Munich (Landgericht München I) issued a conflicting ruling in August 2015. The Munich District Court argued that excluding employees of a GmbH or AG who are working abroad or employed at a subsidiary in another EU Member State from the election of employee representatives to the supervisory board does not contradict the European Union principle of free movement of labor or general anti-discrimination laws.
Subsequently, in October 2015, the Berlin High Court (Kammergericht Berlin) ordered a stay of proceedings in a comparable case and submitted the key question regarding a potential breach of the principle of free movement of labor or anti-discrimination laws to the European Court of Justice (ECJ) for an advance ruling on this specific issue.
Thus, despite the ruling of the Frankfurt District Court, immediate corporate restructuring activity to limit the effects of the Frankfurt ruling appears premature at this stage. However, the future developments should be closely monitored. The ultimate outcome of the pending proceedings is difficult to predict. If the Frankfurt ruling is upheld on appeal and/or if the ECJ concurs that the exclusion of employees of subsidiaries in other EU Member States from the calculation of the German-law co-determination employee thresholds breaches EU anti-discrimination law, management boards of companies potentially concerned would have to reexamine the requirement for and/or the composition of (existing) supervisory boards. Management boards may in particular have to initiate so called status proceedings (Statusverfahren) on the determination of the applicable supervisory board regime.
Corporate restructuring measures to limit the effects of such court rulings could also be considered, but would have to focus beyond the Member States of the European Union to minimize the consequences of such a ruling. Finally, consequential questions and potential disputes on the enforcement of German employee co-determination laws in other EU Member States may well be on the horizon. Ultimately, the ripple effects of these co-determination issues could likely only be resolved by coordinated EU legislation which currently appears to be not on the agenda.
1.6 Corporate, M&A – Gender Quota Enacted
In March 2015, the German Parliament passed the Act on Equal Participation of Women and Men in Executive Positions in the Private Economy and the Public Sector (the "Gender Quota Act"). For further details on the Gender Quota Act, please see the article "Germany’s new hammer to glass ceilings").
Despite the introduction of this legislation, recent statistical data shows that a significant number of listed corporations will likely miss the 30% quota for female members in supervisory boards which applies as of January 1, 2016. It is expected, however, that this aspect of the Gender Quota Act will play a far more prominent role in any re-election process once an existing seat in the supervisory board becomes vacant after January 1, 2016. In such a scenario, the legal consequence that the seat shall remain vacant if gender quotas are not complied with appears to be a strong incentive for compliance with the quota as the shareholder representatives who would "lose" a supervisory board member could also miss out on the benefit of the casting vote in case of a tied supervisory board vote especially in co-determined supervisory boards where they could become outnumbered by employee representatives on the supervisory board.
The second feature of the Gender Quota Act already applies since September 30, 2015, but has not yet measured up to expectations. The target thresholds for female representation in (i) the management boards, (ii) the two management levels below the management board and (iii) the supervisory board to be fixed by companies since September 30, 2015 are rather moderate in current practice. Many of the affected companies provide for minimal (or no) female target quota at all. The reluctance to fix reasonable target quotas may well trigger future legislation on sanctions in case of non-compliance, unless public perception issues cause affected corporations to reconsider their approach in the short to medium term.
The Tax Amendment Act 2015 (Steueränderungsgesetz 2015), which was adopted by the German Parliament on October 16, 2015, provides for some important changes for German corporate and real estate transactions. While these changes generally apply for the tax year 2016, there are some amendments which affect transactions already executed in prior years.
Corporate: Loss limitation rules – extended group definition: Under the current tax loss limitation rules, tax loss carry forwards of a corporation are forfeited on a pro rata basis if within a five year period more than 25%, but not more than 50% of the shares in the loss making entity are sold to the acquirer. If more than 50% are transferred, the losses carried forward will be forfeited in their entirety. The new law now provides for further exemptions on intra group restructurings. The definition of intra group restructurings is extended and permits acquisitions or transfers by the parent of the group that would not have been covered by the present wording of the intra group exemption rules. Moreover, sole proprietorships as well as partnerships can now qualify as parents in intra group restructurings. The new rule applies retroactively for share transfers after December 31, 2009.
Corporate: Limitation on considerations paid for tax exempt contributions: Business units and shares granting a majority in a corporation can be contributed tax-neutral to another entity at cost (i.e. book value) in exchange for shares in the absorbing entity. Under current law, in addition to the newly issued shares by the absorbing entity the transferor may receive a consideration in cash or kind of no more than the book value of the assets contributed. Back in 2012, Volkswagen and Porsche used this rule to contribute Porsche into Volkswagen in exchange for one share in Volkswagen and an additional consideration in cash of EUR 4.5 billion without triggering any taxes. According to the new law the additional consideration is limited to 25% of the book value of the assets contributed or to an overall amount of EUR 500,000, but not more than the book value contributed. If the fair market value of the consideration exceeds one of these thresholds the hidden reserves of the contributed business unit are taxed proportionally. The new law applies retroactively to all contributions made after December 31, 2014.
Real Estate: RETT on indirect change in a real-estate holding partnership: An indirect change in a real-estate holding partnership may trigger real estate transfer tax (RETT). RETT is due if within a five-year period at least 95% of the interest in a partnership is transferred directly or indirectly to new partners. In case a corporation is the partner in a partnership, the Highest German Tax Court (Bundesfinanzgerichtshof) ruled that – contrary to the view of the tax authorities – an indirect transfer is only deemed to exist if there is a transfer of 100% of the shares in that corporation. The opposing view of the tax authorities has now caused the tax legislator to legally define an indirect change of partners in a real-estate holding partnership. The indirect change of the interest in a partnership shall be determined based on the respective participating interest and by taking into account the legal form of the companies involved. If a corporation is partner of a partnership a relevant indirect change is assumed if at least 95% of the ownership in the corporation changes hands either directly or indirectly. In case of multi-tier corporations the 95%-threshold must be determined separately on each level. If the threshold is met, the indirect shareholding must be fully taken into account. In case of multi-tier partnerships as partners in a real estate holding partnership an indirect transfer is calculated on a pro rata basis for each indirect shareholding; the 95% threshold does not have be met on each upper-tier partnership level.
Real Estate: RETT – Re-assessing the tax base for transfer of shares in real-estate holding companies: RETT is calculated as a percentage of the remuneration paid for the transfer of the real estate. In certain scenarios where there is no direct remuneration for the transfer of real estate (i.e. where a consideration does not exist, in a reorganization or share transfer of real-estate holding entities) the tax was based on a certain statutory formula. As a rule of thumb, the value based on the statutory formula was always around 60-80% of the market value of the underlying real estate. The calculation methodology of different tax bases for RETT purposes – depending on whether real estate is transferred directly or indirectly – has caused the German Federal Constitutional Court (Bundesverfassungsgericht) to hold this system of value calculation as being unconstitutional. The tax legislator has now implemented differing rules while adhering to the calculation based on valuation principles already applied for inheritance tax purposes and which more likely reflect the fair market value. The amendments are to be applied retroactively from January 1, 2009. However, a change of existing tax assessments to the disadvantage of the taxpayer is not possible if the assessment was issued prior to the announcement of the Tax Amendment Act 2015.
3.1 Finance, Insolvency and Restructuring – Potential Changes to Contestation Rights in Insolvency
On September 29, 2015, the German government introduced a legislative draft proposal to reform certain aspects of the special contestation rights vested in an insolvent company’s insolvency administrator. The current German Insolvency Code (Insolvenzordnung, InsO) gives the insolvency administrator relatively far reaching contestation rights to set aside pre-insolvency transactions between the insolvent entity and its creditors to re-claim funds or other assets to the insolvent estate to be shared among the creditors at large.
In the context of recent insolvency law reforms in Germany geared towards prioritizing the restructuring of ailing companies over their liquidation, several influential interest groups have lobbied for changes of the insolvency contestation regime. Both the very long potential contestation periods of up to ten years prior to insolvency and the case law on the burden of proof regarding when a creditor trading with an entity that later becomes insolvent is deemed to have indications of an impending insolvency were felt to be excessive. Such far-reaching contestation rights were argued, on the one hand, to create difficult to manage retro-active risks for any company dealing with business partners that are potentially in distress. On the other hand, it is claimed that business partners who have to be justifiably wary of having to surrender exchanged goods or funds to the insolvency administrator in the future will tend to act in ways that run counter to recent trends towards restructuring ailing businesses rather than taking them off the market because they will withdraw their backing even earlier.
The government legislative proposal addresses these two points by reducing the contestation period in certain cases from 10 to 4 years and by modifying the court rules on the burden of proof in such a way that a business partner has to be aware of an actual insolvency and not just an impending insolvency.
Other changes involve the point in time from which monetary reimbursement claims of the insolvent estate arising from contested transactions bear interest. The intention here is to encourage insolvency administrator to exercise their contestation rights earlier in the insolvency proceedings rather than wait, safe in the knowledge that their potential claims bear healthy interest already from the opening of insolvency proceedings irrespective of when the actual contestation is asserted.
The initial reaction to the governmental proposal in legal and lobbying circles has been mixed but cautiously positive.
It is expected that the details of the current draft may yet change as the proposal makes its way through the German law-making process and interested actors point out perceived shortcomings or lobby for amendments. Most commentators do, however, expect the proposal to become law at some stage in 2016 due to the broad economic consensus that the contestation rules in their current form have become somewhat over-reaching and very difficult to predict for companies and business in general.
3.2. Finance, Insolvency and Restructuring – New EU Insolvency Regulation (EU) 2015/848
In June 2015, Regulation (EU) 2015/848 on cross border insolvency proceedings (the "Regulation") came into force. It will be applicable to insolvency proceedings which commence as of June 26, 2017 and will replace Regulation (EC) No. 1346/2000. The new Regulation has direct effect in the Member States and is aimed at rendering cross-border insolvency proceedings more efficient.
In a nutshell, the most significant changes include:
In summary, the Regulation would to a large extent appear to implement into binding law current coordination efforts introduced in practice by certain insolvency practitioners. Ultimately, the success of the new Regulation depends on the willingness of insolvency administrators and courts to cooperate in practice. In an insolvency scenario, time is often of the essence and appeal proceedings in cases where the necessary cooperation and coordination is lacking might endanger the stated purpose of the new Regulation, i.e. to render cross-border insolvencies more efficient.
4.1 Labor and Employment – The Majority Union Gets the Stake
The German legislator has limited the circle of eligible unions which are bargaining for the employees of one company to only one union, namely the union with the most members in that plant. This law was passed in order to avoid (i) a compensation patchwork pattern within one and the same company and (ii) that small, skilled groups of professionals like doctors, pilots or train conductors gain enormous leverage to pursue their group interest and claims.
The new law provides for a "One Plant–One Tariff" rule with an escalating process. First, any union can pursue its interests as it pleases. Only if a conflict with other unions arises in a particular company, this conflict should be solved by a poll among the company’s employees. Legal and HR practitioners have sharply criticized this law for being unconstitutional and not practical. So far, no field experiences have surfaced. From a company’s perspective, this law makes lifer easier, as dealing with several unions can lead to significant administrative challenges.
4.2 Labor and Employment – Stricter Rules for Hiring Interim Specialists?
The growing number of interim (esp. IT) specialists being hired as free-lancers has led to contentious court rulings and legislative endeavors. The main question is whether such a scenario can lead to a de-facto employment with the workplace company if the free-lancer is subject to detailed work instructions by the company regarding e.g. place, time and specifics of the work. The most contested issue revolves around regular temp agencies that also hire out free-lancers. According to current statutory law, a de-facto employment cannot be assumed if the temp agency possesses a valid personnel leasing license.
This situation is viewed as an unintended loop-hole, which the current government coalition has agreed to close. In November 2015, the Social-Democratic labor minister Andrea Nahles has tabled a draft proposal to tackle this situation. However, influential employers’ lobbyists and the Christian-Democratic senior partner in the government coalition have voiced strong reservations regarding this draft, so it looks unlikely to be enacted in the near future. Nevertheless, companies are advised to exercise caution when hiring free-lancers.
5.1 Real Estate – Increase of Residential Rents in Berlin Capped
Recent years have seen a strong increase of residential rents in German metropolitan areas and especially in Berlin. As a consequence, several new measures have been added to the German Civil Code (Bürgerliches Gesetzbuch – BGB) designed to soften this upward trend.
One of these measures allows the federal state governments to designate by ordinance specific areas in which the regular increase of residential rents is limited to 15% in a period of three years if the supply of the general public with apartments rentable under reasonable conditions is endangered. These ordinances have a maximum term of five years but can be renewed (Section 558 para 3 BGB).
In its 2013 ordinance, Berlin designated the entire city as such a specific area effective until May 10, 2018. Since then it has been highly disputed whether this ordinance was effective based on the argument that it also includes areas in which apartments can still be rented under reasonable conditions.
On November 4, 2015, the German Federal Supreme Court (Bundesgerichtshof – BGH) upheld this ordinance of Berlin. The decision stresses that the state government has a wide discretion as to the range of the designated areas and the term of the designation. According to the BGH, the permitted limit of discretion is only exceeded by the state government if their considerations are apparently inappropriate in view of the purpose of the law.
Although the BGH decision only refers to the ordinance of Berlin, it will impact legal proceedings related to such kind of ordinances of other federal states as well. Given the reasons of the decision by the BGH, it seems, however, rather unlikely that these other ordinances are held invalid.
5.2 Real Estate – Clarification of Written Form Requirement
In its decisions of April 22, 2015 and June 17, 2015, the German Federal Supreme Court (Bundesgerichtshof – BGH) clarified certain aspects of the written form requirement for lease agreements.
If a lease agreement that has been 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 with the statutory notice period irrespective of whether a fixed lease term was agreed. The statutory notice period for commercial lease agreements is six months (less three business days) to the end of any calendar quarter.
In its decision of April 2015, the BGH held that, contrary to previous interpretations of the BGH’s case law, the written form does not require all members of the executive board to sign a lease agreement on behalf of a German stock corporation unless the names of the board members are indicated in the lease agreement.
According to the June 2015 decision of the BGH, a lease that was concluded orally or by implied action nonetheless meets the written form requirement if the agreed terms and conditions of the lease are recorded in a written and properly signed document, irrespective of whether the recording was made before or after the conclusion of the lease.
Despite these clarifications and the ongoing tendency by the BGH to limit the scope of the written form requirement, the parties to German commercial lease agreements should ensure that the lease agreement complies with the written form requirement at all times.
6.1 Data Protection – Proposed EU Data Protection Regulation
In December 2015, a compromise wording of the proposed new EU Data Protection Regulation (the "Regulation") was finally agreed during so-called ‘trilogue’ meetings between the European Commission, the European Parliament and the Council. The upcoming Regulation will revamp the Commission’s outdated 1995 Data Protection Directive that is widely found not to adequately cover the digital era.
The Regulation intends to ensure a uniform set of data protections rules throughout the European continent. In addition, the Regulation will also implement a one-stop-shop approach. Companies will have to deal with only one regulator for all Member States. The European Commission estimated the resulting savings to amount to approx. EUR 2.3 billion per year.
However, the Regulation will also implement rules that may put additional burdens on businesses – including businesses outside the EU. First, the marketplace principle will ensure that the Regulation will also apply to companies outside the EU to the extent they offer services in the EU. Second, the Regulation will implement principles that may require costly adaptions of existing product and services offerings, e.g. stricter consent requirements, the "right to be forgotten" , a right to data portability and notification obligations in case of data breaches (see also our 2015 Data Privacy Outlook and Review). Notably, the Regulation will implement a sanctions regime where violations of the Regulation can trigger fines of up to 4% of a company’s annual turnover.
The Regulation is now expected to be formally adopted by the European Parliament and Council in early 2016. The Regulation would then enter into force two years later, i.e. in early 2018. Companies should, however, use these two years to ensure they are well prepared for its eventual entry into force.
6.2 Data Protection – Update Safe Harbor / International Data Transfers
In a landmark ruling of October 6, 2015, the European Court of Justice (ECJ) removed the assurance that personal data transferred to the US under the EU-U.S. Safe Harbor framework were automatically considered as being adequately protected as required by EU data privacy legislation. The decision originates from 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. The ECJ made that decision because in its view the ability of the US intelligence services to gain access to transferred personal data of European citizens was beyond what it considered strictly necessary and proportionate and, therefore, interfering with fundamental rights and freedoms guaranteed by the Charter Of Fundamental Rights Of The European Union. For the time being, the EU Commission Decisions on standard contractual clauses may still be relied on by companies to provide adequate protection at least during a transition period until end of January 2016 set by Article 29 EU Working Party of European data protection authorities. But the strong emphasis of the ECJ decision on fundamental rights and freedoms raises the question if additional protection must be added to standard contractual clauses as they, like the Safe Harbor rules, are not binding upon public authorities whether in the U.S. or elsewhere.
As a result, the recommendation in our 2014 year-end alert to not solely rely on Safe Harbor certifications for data transfers to the U.S. has proved to become an urgent topic for all companies that transfer customer data, HR data or other types of personal data from Europe to the US or internationally. The European Union and the United States are currently negotiating the details of a proposed successor safe harbor regime, which is hoped to be agreed in early 2016 to close the enormous gap and uncertainty that the decision of the ECJ has caused.
6.3 Data Protection – Draft Bill on Standing of Consumer Associations in Data Privacy Proceedings
As already reported in our 2014 year-end alert, the German legislator considered strengthening the enforcement of data privacy laws by allowing consumer rights associations to bring actions for injunction on behalf of consumers. Relevant changes to the German Act Governing Collective Actions for Injunction (Unterlassungsklagengesetz – UKlaG) have now been agreed by the German Parliament in December 2015. The new law is expected to increase the enforcement pressure on both large companies but also on small- and medium-size companies to comply with German data protection laws.
6.4 Data Protection – Transfer of Personal Data in M&A Asset Deals
The Bavarian Data Protection Authority has fined a seller in an M&A asset deal transaction for the illegal transfer of customer data to the acquirer of substantially all of the seller’s business (including customer data). The authority alleged that there was no sufficient consent obtained from the individuals whose personal data was transferred together with the acquired business. The regulator’s position is a strictly literal interpretation according to which consent was granted to the specific entity that originally processed the individual’s data (and not the business operated by such entity). As a consequence, parties of future M&A deals where personal data is a key business asset will have to thoroughly consider the implications of an asset deal.
7.1 Compliance – German Legislator expands Anti-Corruption Framework
Effective as of November 26, 2015, Section 299 of the German Criminal Code (Strafgesetzbuch – StGB) sanctioning commercial bribery was significantly revised and expanded.
The revised provision makes the request, acceptance of a promise for or acceptance of an advantage, a crime if this is made: (i) in return for providing an unfair advantage in a business competition, or (ii) in return for a breach of duty towards the commercial organization. Likewise, the offering, promising or granting of a benefit to an employee or an agent of a commercial organization is a crime if made: (i) in return for obtaining an unfair advantage in a business competition, or (ii) in return for a breach of duty towards the commercial organization. Prior to the revision, active and passive commercial bribery was only punishable under criminal statutes when the corrupt conduct was connected to unjustified preferential treatment in the context of a competitive transaction.
The specific interpretation of the new relevant element of the crime, the "breach of duty towards the commercial organization" is still subject to debate. There are uncertainties as to which specific acts would qualify as a breach and thus fulfil the elements of the crime. According to explanatory notes provided by the legislator, a violation of a company’s internal compliance guidelines or concealing the acceptance of a benefit received by the employee from the commercial organization by itself may not be sufficient to establish a breach of duty. Rather, the benefit provided or accepted must be specifically made in return for acts or omissions which violate duties towards that employer relating to the commercial transaction.
These modifications of the current law call for a review of corporate conduct guidelines and compliance controls as well as tailored communication to relevant and responsible employees in order to reassure and refresh awareness of risks associated with the expanded commercial bribery statutes in Germany.
7.2 Compliance – New Legislation to Fight Corruption in the Healthcare Sector
The German legislator has brought the Act to Combat Corruption in the Healthcare Sector (Gesetz zur Bekämpfung von Korruption im Gesundheitswesen) on its way in 2015 (the "Act"). The (draft) Act significantly increases the risk of criminal liability for members of the healthcare professions and persons working in the life sciences industry. The new legislation is expected to be enacted shortly by Parliament, with adoption likely as early as January 2016.
The Act closes gaps concerning the criminal prosecution of corruption in the healthcare sector. The legislative procedure was initiated in response to a 2012 German Federal Court of Justice (Bundesgerichtshof – BGH) decision where the court held that offering bribes and favors to resident medical practitioners, such as resident doctors, is not covered by the current anti-corruption legislation, as such doctors are not acting as agents of the statutory health system.
Essentially, the forthcoming act will introduce two new criminal offences penalizing active and passive corruption in the healthcare sector. The current draft act extends the applicability of the offences to not just resident doctors but all healthcare professionals whose profession requires a state-recognized vocational education. Both criminal offences are penalized with imprisonment of up to three years or a fine. Serious cases are penalized with imprisonment of between three months and five years. According to the current draft of the Act, alleged offences will not be liable to mandatory public prosecution but will only be investigated and prosecuted if a charge is filed, or if the state prosecutor considers prosecution necessary because of a special public interest, e.g. due to the number of parties or the amount of bribes involved. But the group of individuals and entities that may press a charge is rather broad under the current draft. Besides competitors, it also includes professional associations of physicians, the chamber of commerce and other institutions for fair competition, as well as private and statutory health insurance companies.
The draft Act has led to a sense of uncertainty in the healthcare sector. In particular, it is currently not clear where prosecutors and courts will draw the demarcation line between desirable cooperation between doctors and the health care industry and corruptive behavior.
In order to avoid potential exposure, companies are well advised to interpret the new Act with caution and to ensure robust internal compliance procedures.
7.3 Compliance – Legal Privilege in Investigations Strengthened
On July 21, 2015, the District Court of Braunschweig (Landgericht Braunschweig) has rendered an important decision that clarifies and strengthens the legal privilege relating to documents prepared in the course of internal investigations. The court held that documents that are prepared by legal counsel, at least partially, for the purpose of defending a company against potential future proceedings by enforcement authorities are protected against seizure under the German attorney-client privilege (Verteidigungsunterlagen, § 148 StPO).
The court decided that documents prepared by legal counsel for the purpose of defending the corporate client against potential investigation proceedings are exempt from seizure, irrespective of their place of custody (at the office of the client or its legal counsel) and irrespective of the time of their preparation (before or after investigatory proceedings have been initiated). Also, the protection against seizure does not depend upon the nature of the investigatory proceedings as criminal or administrative. In the same decision the court clarified that the legal privilege does not extend to documents that have been prepared by an organization for purposes other than the potential defense in a criminal or administrative matter. In the specific case decided, a document held to fall outside of the protected attorney-client privilege was an internal audit report.
The general approach with regard to the legal privilege for documents prepared by external counsel in internal investigations is still in flux, and the decision by the District Court of Braunschweig does not have any binding effect on other courts in Germany. However, following the recent decisions by various district courts, there is a noticeable trend towards strengthening the German legal privilege through a series of decisions. The decision of the District Court of Hamburg (October 15, 2010, 608 Qs 18/10) took a very narrow interpretation of the attorney-client-privilege and permitted the seizure of documents prepared by external counsel in their offices arguing that the attorney-client relationship between the law firm and its corporate client in the specific case was not comparable with the relationship between a criminal defense lawyer (Strafverteidiger) and his client.
The 2012 decision of the District Court of Mannheim (July 3, 2012, 24 Qs 1/12 and 2/12) referred to the newly introduced provisions in the German criminal procedural code that strengthened the position of legal counsel to corporate organizations (see § 160a StPO, Gibson Dunn’s 2012 Year-end Client Alert further analyzed this decision in light of the respective changes in the law). The District Court of Mannheim prohibited the seizure of privileged material that was in the custody of external counsel.
The recent decision by the District Court of Braunschweig goes above and beyond the initial two decisions since it does not require a specific criminal or administrative proceeding to be threatened or that the privileged documents must be in the physical custody of external counsel for the legal privilege to apply.
While this new decision is instructive and important to further clarify the extent of the legal privilege for documents created in the course of an internal investigation, caution should still be exercised (i) when deciding upon the place where the privileged documents are being stored, and (ii) when documenting that the materials have been prepared in light of a potential defense against criminal and administrative proceedings against the client.
7.4 Compliance – ISO 37001 – Another Compliance Standard on the Horizon
After the publication of ISO 19600 (International Standard 19600 Compliance Management Systems) at the end of 2014, the International Organization for Standardization (ISO) is currently in the final stages to prepare ISO 37001 "Anti-bribery Management Systems" (ISO 37001) which is expected to be published in the course of 2016. Unlike ISO 19600, ISO 37001 is focusing on the narrower compliance topic of anti-bribery and it is being developed as a requirements standard, making it capable of independent certification.
Critical voices of the current ISO 37001 draft who follow the work of the Project Committee closely warn that ISO 37001 needs to be more harmonized with ISO 19600 and its development should be more transparent (seeing that a draft of the current ISO 37001 is to date not publicly available). ISO plans to make the draft available through local ISO members once it reaches the public enquiry stages in early January 2016 and expects the country votes on the draft to close on April 5, 2016. If there is a majority vote in favor of publication, the publication of the standard is expected in late 2016.
According to German law, third-party standards and guidelines do not impose strict obligations upon companies. At best, standards may serve as "anticipated expert opinions" (antizipiertes Sachverständigengutachten), the elements of which are considered commonly accepted as general standards of technology and science (Allgemeiner Stand der Technik und Wissenschaft).
In order for a certain standard to be considered as general standard, a number of criteria must be met, in particular (i) the standard must reflect relevant legal requirements in Germany, (ii) the provisions of the standard must be adequately substantiated, (iii) the committee developing the standard needs to be equipped with sufficient expertise, and (iv) the development of the standard must follow a structured, transparent, well-documented approach, taking into account German public interests (Gemeinwohl) and comments from potentially affected parties ("interessierte Kreise"). Finally, the standard should reflect a commonly accepted approach, and not a "best-in-class" approach. It remains to be seen whether the further development of ISO 37001 will manage to meet these requirements.
To date, existing standards in the market (e.g. the German IDW Assurance Standard 980) have not been confirmed by German higher courts to be considered a "commonly accepted" standard. Therefore, the question whether or not a certification based on any of these standards is a helpful defense in a criminal, administrative or civil proceeding against an organization, its board members or individual function holders, will remain subject to a case-by-case analysis made by the competent prosecutor and court in each individual case.
8.1 Antitrust and Merger Control – Antitrust & Merger Control Enforcement
The German antitrust watchdog had an active year 2015, although in terms of fines imposed, it has by far fallen short of the record year 2014 when the total fines exceeded the amount of EUR 1 billion. In 2015, fines "only" reached a total of approx. EUR 190 million and covered seven cartel cases with fines imposed against 37 companies including automotive part manufacturers, mattress manufacturers, providers of container transport services and manufacturers of prefabricated garages and 24 individuals.
In addition, the Bundeskartellamt reviewed approx. 1,100 merger filings. Only 1% of these merger notifications triggered an in-depth phase two review, and only one merger was prohibited by Germany’s competition watchdog.
8.2 Antitrust and Merger Control – Internet Platforms
The Bundeskartellamt continued to be very active in reviewing online businesses and, in particular, the conditions for online sales and attempts by brand manufacturers to prevent sales through internet platforms. For this purpose, the Bundeskartellamt set up a special task force in the beginning of 2015. Prominent proceedings that were closed in 2015 included investigations into the online sales practices of brand manufacturers such as adidas and ASICS, and best price clauses used by hotel booking portal operators like HRS and Booking.com.
In addition, the Bundeskartellamt also reviewed two mergers concerning internet platforms (Immonet/Immowelt and Parship/Elitepartner). Additional investigations concerning restrictions to internet platforms and internet distribution channels are currently pending with the German competition watchdog. Therefore, the competitive arena will remain highly contentious among brand manufacturers, their distributors and the Bundeskartellamt. For example, on December 22, 2015, the Upper District Court of Frankfurt issued an appeal decision confirming that a contractual clause prohibiting the sale of certain branded rucksacks through an internet shopping platform was valid and does not infringe competition laws.
8.3 Antitrust and Merger Control – New Guidance on Bid-Rigging Agreements
In August 2015, the Bundeskartellamt published a guidance paper that intends to help contracting entities to uncover bid-rigging agreements (see Press Release, Bundeskartellamt, How to spot inadmissible bid-rigging agreements – Bundeskartellamt publishes guidance document for contracting entities (August 8, 2015), available here). The guidance resulted from indications in previous cartel proceedings (e.g. the fire-fighting vehicles cartel and the rail cartel) that certain indicators may help discover illegitimate bid-rigging agreements. By way of background, bid-rigging is the only cartel offense under German law that is subject to criminal prosecution (and thus potential imprisonment) of individuals (see Section 298 of the German Criminal Code). Other cartel infringements are enforced on the basis of (significant) administrative fines but cannot lead to imprisonment of individuals.
The following Gibson Dunn lawyers assisted in preparing this client update: Benno Schwarz, Birgit Friedl, Marcus Geiss, Peter Decker, Lutz Englisch, Daniel Gebauer, Kai Gesing, Markus Nauheim, Sebastian Lenze, Sonja Ruttmann, Katharina Saulich, Martin Schmid, Hubertus Schröder, Michael Walther, Georg Zerr and Mark Zimmer.
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