January 13, 2017
Over the last eight years, the German economic recovery seemed very robust to any sort of political and financial turbulences occurring in the EU and world-wide. The economy was booming, unemployment rates were at their lowest since the Second World War, and state coffers were filled with record tax collections that allowed Germany to run debt-free current budget accounts for the third consecutive year.
The last twelve months, however, have the potential to derail this great journey. While BREXIT would at first and foremost appear to be harmful to the British economy, there have already been some negative knock-on effects on German exports to the UK. The unraveling of the Transatlantic Trade and Investment Partnership (TTIP), coupled with new protectionist tones emanating from the U.S. and many other countries, constitute an even bigger challenge to the export oriented German industry.
These risks are amplified by the threat of a gradual decomposition of the EU, in particular, if recent concerns caused by the Italian referendum to reject a constitutional reform materialize and lead to a new financial crisis of the EU’s second-largest debtor (by measure of national debt in relation to GDP).
As if this were not enough to contend with, more uncertainty lies ahead with elections in France and the Netherlands that could lead to success for anti-European and protectionist parties, further destabilizing the EU. And, finally, the elections for Germany’s parliament in the fall of 2017 may well yield results that endanger what had been dubbed as Germany’s policy of the “safe pair of hands” (Politik der ruhigen Hand), Chancellor Merkel’s highly successful and admired approach to tackling the significant challenges facing Germany in a considered and pragmatic “no-nonsense”-way.
In light of these fundamental challenges that are likely to occupy the daily news in the coming months, the changes in many laws and regulations presented in this German Law Update seem like a report from better days in the past that may soon be overtaken by events of a different magnitude that threaten to shake the fragile shell of the EU over the next few months.
As every year, we thank our clients and friends for their continued support and interest in our services. We hope that you will gain valuable insights helping you to successfully focus and steer your projects and investments in Germany in 2017 and beyond. We promise to keep you updated on any developments impacting your way of doing business in and with Germany in these exciting times.
5. Real Estate
1.1 Corporate, M&A – Audit Reform – New Challenges for Supervisory Boards & Audit Committees
The directly applicable European Regulation (EU) No 537/2014 on specific requirements regarding statutory audits of public-interest entities (Abschlussprüferverordnung – APVO) and the accompanying German Audit Reform Act (Abschlussprüferreformgesetz – AReG) took effect on June 17, 2016.
The key change they introduced is the principle of rotation after 10 years for the statutory auditor of so-called public interest entities, meaning the statutory auditor of public interest entities must change after 10 years, although the 10-year period can be extended to 20 years as long as the entity puts in place a procurement process by which it solicits bids from other auditors.
Correspondingly, the responsibilities of the supervisory board and its audit committee in connection with the auditing procedure have been further specified more precisely, in particular with a view to (i) the appointment procedure and (ii) the monitoring of the independence of the auditor regarding (a) audit fees and (b) prohibited non-audit services (section 5 APVO). Non-compliance with these requirements may be sanctioned as an administrative offence and, under certain circumstances, even as a criminal offence.
In the course of the reform, the requirements for the composition of the supervisory board and its audit committee were amended to the effect that (i) the required financial expert no longer needs to be independent (which, however, in practice will rarely make a difference because the German Corporate Governance Codex (DCGK) continues to require the chairman of the audit committee to be independent and a financial expert) and (ii) sector competence is required for the supervisory board and the audit committee, that means that these bodies in their entirety are now required in the same sector in which the company operates.
Members of supervisory boards and audit committees should therefore make sure that (i) they are aware of, and comply with, their new responsibilities in relation to the appointment and monitoring of the auditor, (ii) the rules of procedure of the respective bodies are amended in line with the new requirements and (iii) the rules for the composition of the respective bodies are complied with.
1.2 Corporate, M&A – Direct Communication between Supervisory Board and Investors
Over the last few years, supervisory boards of many German public companies have increasingly faced requests by investors for direct interaction. This is not, however, provided for under German statutory law for the typical two-tier board structure. The prevailing view used to be that any communication with investors was a matter of managing the company (rather than supervising it) and was therefore the responsibility of the management board and not of the supervisory board. A more flexible view deemed communication between investors and the chairman of the supervisory board permissible if such approach was aligned with the management board (“one voice policy”).
On July 5, 2016, a prominent working group issued “Guiding Principles for Dialogue between Investor and Supervisory Board,” which aimed at providing practical guidance on such communications and, in particular, stipulated that the chairman of the supervisory board may enter into discussions with investors on topics in the sole responsibility of the supervisory board as long as this was generally aligned with the management. This initiative intensified the ongoing discussion, and was followed by a proposal of the governmental commission (Regierungskommission) in October 2016 to amend the German Corporate Governance Codex accordingly and to recommend that the chairman of the supervisory board should be prepared, within an appropriate framework, to discuss with investors topics relevant to the supervisory board.
The discussion is still ongoing. While practitioners welcome the proposal as it is said to meet the respective needs in practice and already reflects common practice, some scholars warn that these proposals are not in line with currently applicable law. For the time being, supervisory board members are thus well advised to communicate with investors only if they are aligned with the management board.
1.3 The Future of German Co-Determination: The Battle Goes On
The application of German co-determination laws to foreign employees of German corporations remains one of the most volatile battlegrounds in the German courts as they contend with traditional German local doctrine, on the one hand, and potential implications of European Union law and the freedom of establishment (Niederlassungsfreiheit), as laid down by the Treaty on the Functioning of the European Union (TFEU), on the other hand (please see in this regard our 2015 Year-End Alert, section 1.5). Under German law, the Co-Determination Act (Mitbestimmungsgesetz), which necessitates equal employee representation on the supervisory board, applies to corporations with more than 2,000 employees. More than 500 employees trigger the application of the so-called German One-Third Participation Act (Drittelbeteiligungsgesetz), which requires one third of the supervisory board to be constituted of employee representatives. In the past the by far prevailing assumption was that only employees of the relevant German domiciled group companies have the right to vote and be elected to the supervisory board. Extending the application of co-determination laws to employees outside of Germany for purposes of the calculation of the threshold number of employees, and also granting foreign employees the right to vote and to be elected to the supervisory board would have considerable effects not only on German corporations but also on their foreign subsidiaries.
Almost two years after a surprise decision by the District Court of Frankfurt am Main (Landgericht Frankfurt am Main) in February 2015 that held that non-German employees employed by foreign subsidiaries of a German corporation (Deutsche Börse AG) would also need to be counted towards the above thresholds and were entitled to vote for and be voted onto the supervisory board as employee representatives, the legal situation remains uncertain. The above decision is still on appeal and there are currently three other similar cases that are either pending before, or have been finally decided by, other regional courts in Bavaria (BayWa), Berlin (TUI) and Rhineland-Palatine (Hornbach) that have reached different conclusions (for a more detailed analysis, see the article by Lutz Englisch and Mark Zimmer in the Business Law Magazine).
These contentious questions on the territorial and personal reach of the German co-determination laws will soon be decided by the European Court of Justice in the early part of 2017 in response to a request for a preliminary ruling from the Berlin High Court (Kammergericht Berlin).
Such a preliminary ruling would settle the differences of opinion between the various German courts and provide guidelines on an EU-conform interpretation of the German co-determination laws. In the medium-term, subject to the reaction in Germany and abroad to the European Court of Justice’s decision in the case referred, this might also lead to a more aligned European-wide approach if the European Commission decides to include this in its company law agenda going forward.
For companies potentially affected by these developments it remains key to monitor the outcome of the above litigation and carefully analyze their own factual situation and employee numbers in Germany and abroad in order to be in a position to react adequately to any future developments.
1.4 Corporate, M&A – Shareholder Activism on the Rise?
Activist shareholders in Germany have in the past generally exercised their influence offstage by (successfully) pressuring management into supporting the instalment of their representatives in the supervisory board. In the summer of 2016, however, Germany saw the first prominent proxy fight about supervisory board elections between the management of German public company STADA and the German activist shareholder AOC – Active Ownership Capital. AOC, holding approximately a 7% participation, was about to strike a deal with the supervisory board of STADA about AOC’s representation in the supervisory board which was later rejected by the company. After an extensive proxy fight during which, inter alia, STADA’s CEO resigned, AOC managed to have the chairman of the supervisory board (though no other board members) replaced during the shareholders meeting.
Earlier this year, the German capital market experienced two severe short attacks: in March, a formerly unknown research entity (Zatarra) published a research report alleging fraud and corruption at Wirecard on a newly set-up webpage without disclosing the author(s). Concurrently, massive short positions had been built up. Wirecard’s share price dropped by approximately a third on this day. The author of the Zatarra report has not yet been identified nor have the report’s allegations been proven. Wirecard’s share price has recovered in the meantime.
In April, New York-based hedge fund Muddy Waters published a report alleging a lack of transparency and indications of non-compliant behavior at German public company Stroer, in particular, in connection with related parties’ transactions. Muddy Waters, referring to a history of detecting non-compliant behavior at public companies, concurrently explained that it had acquired significant short positions since it expected the share price of Stroer to drop. Stroer’s share price dropped by approximately 30% on that day and has not recovered since.
1.5 Corporate, M&A – New European Market Abuse Regime – Extended Scope and Increased Sanctions
On July 3, 2016, the European Market Abuse Regulation (“MAR“) came into force, creating a new regulatory framework on market abuse across the European Union (EU). The parts of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) dealing with insider dealing, ad hoc disclosure, director’s dealings and market manipulation have been replaced by the provisions of the MAR. On the same day, changes to the WpHG with regard to criminal sanctions for the violation of market abuse rules came into force which implemented requirements of the European Directive on Criminal Sanctions for Market Abuse (“CRIM-MAD“). Together, the MAR and the CRIM-MAD have extended the scope of the market abuse regime and incorporated a wider range of more stringent sanctions.
Some of the key changes implemented by the MAR include:
Scope: The rules regarding ad hoc disclosure, manager’s transactions and maintenance of insider lists now also apply to issuers who have approved trading of their financial instruments on a multilateral trading facility (“MTF“) or organized trading facility (“OTF“) or have requested admission to trading of their financial instruments on an MTF. Examples of MTFs include the Euro MTF in Luxembourg and the Open Market (Freiverkehr) of the Frankfurt Stock Exchange.
Insider dealing: The use of inside information to amend or cancel an order is now considered to be insider dealing. In addition, MAR sets out certain types of “legitimate behavior” which do not constitute insider dealing. MAR clarifies that stake-building in the context of a public takeover offer by an investor who obtained inside information concerning the target does not fall under the legitimate behavior exemption.
Market sounding: MAR permits inside information to be legitimately disclosed to potential investors and shareholders for the purposes of a market sounding subject to certain prescribed and detailed steps which need to be taken by any issuer or person acting on an issuer’s behalf (e.g., brokers or investment banks) prior to conducting a market sounding. Detailed record keeping requirements are also imposed under MAR.
Delaying disclosure of inside information: As before, an issuer may delay the disclosure of inside information, provided certain conditions are satisfied. However, outstanding approval from the supervisory board may only qualify as a legitimate interest for delaying disclosure if it is not certain that the supervisory board will approve the decision. Further, if rumors with sufficiently concrete information are spreading, irrespective of whether or not the rumors originated from the issuer’s sphere, it is assumed that the information’s confidentiality can no longer be ensured and, consequently, the issuer is not justified in delaying disclosure, but must disclose the inside information to the public as soon as possible.
Manager’s transactions: The scope of the disclosure regime regarding transactions in the issuer’s shares or other financial instruments by “persons discharging managerial responsibilities” (“PDMRs“) and persons closely associated with them has broadened, and requirements as to form, timing and permitted exceptions have become stricter. Dealings in debt instruments and related financial instruments are now generally within the scope of MAR. In addition, MAR introduced so-called “closed periods” during which PDMRs are prohibited from dealings subject to certain exceptions. The duration of the prohibition is 30 calendar days prior to the “announcement” of a mandatory interim financial report or year-end report. Under certain circumstances, “announcement” can also be the publication of preliminary financial results.
Market manipulation: MAR extends market manipulation to the manipulation of certain benchmarks and indices as well as to manipulative high-frequency trading. The market manipulation offence now also covers attempted manipulation. MAR leaves it up to the national competent authorities jointly with ESMA (European Securities and Markets Authority) to establish “accepted market practices” (“AMPs“) which will not be treated as market manipulation. The German Federal Financial Supervisory Authority has not yet established any AMPs.
Sanctions: Monetary fines for the violation of the market abuse rules have been increased to up to EUR 5 million for an individual, and EUR 15 million or 15 per cent of the annual turnover for a firm. For example, fines of up to EUR 2.5 million or 2 per cent of the annual turnover can be imposed on a firm for the violation of ad hoc disclosure rules. In addition, sanctions available to the national competent authorities now also include public warnings (also known as “naming and shaming”) and temporary or permanent occupational bans of individuals.
1.6 Corporate, M&A – Balance Sheet Guarantees – New Liability Risks for Sellers
Balance sheet guarantees (representations and warranties) in share sale and purchase agreements can be considered standard. Often sellers feel comfortable to agree on such a guarantee, in particular, when the annual financial statements are audited. On the other hand, most sellers are reluctant to grant an additional undisclosed liability guarantee on “the absence of liabilities except as set forth in the most recent year-end balance sheet.”
A ruling of the Higher District Court of Frankfurt am Main (Oberlandesgericht Frankfurt am Main) of May 2015 which was only published in 2016 appears to have rendered the distinction between a balance sheet guarantee and a guarantee on the absence of liabilities obsolete in certain cases.
In the case before the court, the seller seems to have agreed on a clause comparable to the following clause:
“The audited financial statements of XY-GmbH have been prepared with the care of a prudent business person (mit der Sorgfalt eines ordentlichen Kaufmanns) in accordance with German local generally accepted accounting principles (“GAAP”), including valuation principles (Bewertungsgrundsätze), consistent with past accounting and valuation practices, and present a true and fair view of the assets and liabilities (Vermögenslage), financial position (Finanzlage) and earnings position (Ertragslage) of XY-GmbH.”
The Higher District Court of Frankfurt am Main held that clauses of the aforementioned type amount to a hard or objective balance sheet guarantee. As a consequence, the seller was held to be in breach even though the seller was not and could not have been aware of the liability in question when the annual financials were drawn up and even though the relevant accounts were, thus, in all respects in line with applicable accounting principles and were audited accordingly. Effectively, the ruling has the potential to turn balance sheet guarantees into a catch-all clause in cases where the requirements of other more specific guarantees are not met.
The Frankfurt court went on to rule that the loss suffered by the purchaser consisted of the difference between the purchase price which was calculated on the basis of the available balance sheet and the purchase price which would have been arrived at had the additional liability been reflected therein. In contrast, the Higher District Court of Munich (Oberlandesgericht München) had some years earlier held that the loss is the amount of the relevant liability which was disregarded. Depending on the circumstances, the loss suffered by a purchaser can be higher or lower depending on which of the different calculation methods is applied. There are also cases where a purchaser would not have insisted on a lower purchase price, for example if the key decisive element for the purchaser were certain assets such as real estate or IP, which are unrelated to the disregarded liability.
As a seller is often not aware of the components and drivers of the purchaser’s price calculation, balance sheet guarantees create an unforeseeable risk for sellers on the basis of the ruling of the Frankfurt Higher District Court. In order to avoid this, first of all, sellers need to be aware of the scope of the balance sheet guarantee. Secondly, precise wording will be key and even greater care will need to be taken when drafting balance sheet guarantees. In order to avoid that a balance sheet guarantee is later construed as objective, sellers could try to negotiate knowledge qualifiers. Moreover, sellers may consider linking the “true and fair view” part of the guarantee to the applicable accounting principles. For the assessment of the liability risks, a seller should further insist on a precise provision that sets out the loss calculation methodology specifically for balance sheet guarantees.
1.7 Corporate, M&A – Sell-Side M&A Transactions and Pitfalls for Management Liability
The decision of the Higher District Court of Munich (Oberlandesgericht München) dated July 8, 2015 adds another chapter to the expanding canon of potential management liability in M&A transactions. This time, however, not on the buyer’s side – where managing directors traditionally might find themselves confronted with allegations that they did not conduct a thorough due diligence – but on the seller’s side.
In this case, the company claimed damages from its former managing director for an alleged violation of his managerial duties regarding the sale of a second-tier subsidiary in an auction process.
Under German limited liability companies law, managing directors must – in fulfilment of their duties and obligations – exercise the due care and diligence of a prudent business person and may be held liable if their conduct is found to fall below this standard of care. Regarding business decisions (unternehmerische Entscheidungen), the so-called business judgement rule constitutes a safe harbor for the managing director. He cannot be held liable for failing to meet the above duty of care if, (i) at the time of taking the decision, (ii) he or she acted free of private interests and inappropriate influences, (iii) on the basis of adequate information, and (iv) for the benefit of the company. This business judgement rule does not apply in the case of a breach of a legal duty, i.e. if the law requires a certain decision or conduct.
In the case at hand the company took the view that the insufficient information given to the shareholder of the company as regards the sale of the company’s second-tier subsidiary, in particular, caused a violation of the duties of the managing director. The question of whether or not the shareholder is sufficiently informed is a legal and not a business question. Thus, the business judgement rule does not apply. The Higher District Court of Munich, however, referred to an earlier ruling of the German Federal Supreme Court (Bundesgerichtshof, BGH) and held that the company had to prove that (i) damage was caused by the managing director and (ii) that it was caused by the managing director acting “potentially in breach of a duty”. In the present case, the court held that the managing director was not liable because the company had failed to prove that he had a duty to inform the shareholder in a certain way. The court stressed that such a high standard as regards the requirement to prove an alleged potential breach of duty by the managing director is necessary to rebut the statutory presumption that the managing director is liable once damage has been proven.
Despite the managing director ultimately not being held liable, the present case shows that M&A transactions may involve significant risks for managing directors not only on the buyer’s but also on the seller’s side: if the transaction turns out to be less successful than anticipated by the company or its shareholder, sellers may try to look for a “scapegoat.” As it is easier to prove breaches of legal duties such as the provision of insufficient information or non-compliance with reporting lines, this may be their preferred route. For managing directors, it is, thus, of utmost importance to have clear competencies and reporting lines. They have to ensure that they are in a position where they know who is to be informed when and which internal reporting and consent requirements exist in a transaction, in particular if a final transaction agreement deviates from an already approved draft of such an agreement.
Corporate: Country-by-Country reporting and obligations to prepare master and local files: On December 16, 2016, the German legislator passed a tax law that transposes a specific recommendation of the final OECD Report on Base Erosion and Profit Shifting (OECD-BEPS Report) into German tax law. The recommendation, which has now become German law, is a standardized approach to transfer pricing documentation. The new transfer pricing documentation regime requires German multinational enterprises (MNE) to provide the German tax administration with a three-item documentation package consisting of a country-by-country (CbC) report, a “master file” and a “local file.”
The CbC report has to be filed by the German head of a consolidated group with a consolidated turnover of more than EUR 750 million and, at least, one foreign consolidated subsidiary. It has to provide annually and for each tax jurisdiction, in which the group is engaged, an overview of the financial data including the aggregate allocation of income, taxes and business activities. The master file, which has to be filed by a German MNE that belongs to a group and has an annual turnover of at least EUR 100 million, has to include high-level information regarding its global business operations and transfer pricing policies. Detailed transactional transfer pricing documentations are provided in a local file that, for domestic entities, identifies materially related party transactions, the amounts involved in those transactions and the company’s analysis of the transfer pricing determination it has made with regard to those transactions. The obligation to prepare a local file is, in essence, already in existence under the current transfer pricing documentation regime and does not require a specific turnover threshold.
While the CbC report would have to be filed with the tax administration no later than 12 months after the end of each fiscal year, the master and local files need to be prepared upon request by the tax authorities in the course of a tax audit and within a 60 day period (30 days for extraordinary business transactions) after the request.
The new rules regarding master and local files apply as of January 1, 2017. The CbC reporting already applies to fiscal years beginning after December 2015.
In addition to the new transfer pricing documentation regime, Germany also transposed into national law the automatic information exchange between EU Member States on tax rulings for cross border transactions and transfer pricing purposes. The new law is based on the EU Mutual Assistance Directive on Automatic Exchange of Information and Transfer Pricing Documentation as agreed between the EU Member States on December 8, 2015.
The new rules on transfer pricing documentation and information exchange are the first important measures taken by Germany to implement the OECD-BEPS Report into German law. Further legislative measures on BEPS are expected until 2018, namely with respect to the taxation of controlled foreign companies and anti-hybrid rules for outbound payments made by German entities.
Corporate: Loss limitation rules – exemption for business continuation losses: Also on December 16, 2016, a new exemption from the tax loss limitation rules for “business continuation losses” was incorporated in the Corporate Income Tax Act (Körperschaftsteuergesetz – KStG). The new law allows German companies that are undergoing a transfer in ownership, to take advantage of tax loss carryforwards they are currently precluded from using.
Under the tax loss limitation rules, tax loss carryforwards of a corporation are forfeited on a pro rata basis if within a five years’ period more than 25 % but not more than 50% of the shares in the loss making entity are transferred. If more than 50% are transferred, the loss carryforwards will be forfeited in total. Exemptions from the loss limitation rules already exist for certain internal group reorganizations and to the extent that taxable built-in gains in assets exist at the level of the loss making entity.
Under the new exemption, which targets to promote the venture capital industry, the tax loss limitation rule would not be applicable where the business operations of the loss making entity are continued and unchanged from the time of incorporation or at least during 3 years before the change in ownership, whichever is shorter. Upon application, regular tax loss carryforwards would be transformed into a “business continuation tax loss carryforward” and can still be used after a change in ownership. However, the business continuation tax loss carryforward would be forfeited, if, until the end of the year in which the share transfer took place, (i) the business operations are temporarily or finally discontinued, (ii) the purpose of the business operation is changed, (iii) additional new business operations are taken over, (iv) partnerships are acquired, (v) the corporation becomes a parent in a tax group or (vi) assets are contributed at less than the fair market value.
Criteria to be taken into account in determining whether business operations have changed or new business operations have been added are, e.g., the type of services and goods offered by the company, the supplier and customer base, any key market areas and the qualification of the employees. The contribution of capital by the shareholder does not qualify as a change in business operations.
The new rule is applicable to ownership transfers that occur after December 31, 2015 and applies for both corporate and trade tax purposes.
Real Estate: Potential abolishment of the 95% hurdle for real estate transfer tax purposes: Real estate transfer tax (RETT – Grunderwerbsteuer) is imposed on asset deals that cause a change in the ownership of German real property. The tax rate is between 3.5% and 6.5% of the purchase price depending on the location of the real property in Germany. In share deals, RETT is also triggered by an acquisition of shares in a German or non-German corporation or partnership owning German real property if, after the transfer, at least 95% of the shares are held by the acquirer, new partners of the partnership or by a group of controlled companies (e.g. members of a tax group). While the RETT cannot be avoided in asset deals, the 95% hurdle in share deals has given rise to structuring considerations in order to prevent the application of RETT. The most commonly known structure is the “94/6 %” transfer, according to which 6% of the shares remain with the seller or – in case of corporations – are transferred to third parties unrelated with the acquirer.
According to market estimates, around 65% of all German real estate deals with a volume above EUR 100 million are structured via share deals. The German Federal States (Bundesländer) are entitled to collect RETT. Several Federal States have now started an initiative to reform the RETT law and to broaden the scope of RETT for share deals. Current proposals are to lower the threshold, according to which the share deal is subject to RETT, from 95% to 75% or even abolish the threshold altogether and subject the share deal to RETT pro rata to the amount of shareholding acquired. For example, an acquisition of 35% of the shares in a real estate holding entity would then trigger RETT on 35% of the tax basis.
Until now, a draft law with proposed changes has not yet been circulated. However, it appears likely that in the course of 2017 the legislative process to amend the RETT law will be initiated. Market participants are therefore advised to closely monitor further developments and consider the impact of potential changes on existing structures and future deals.
3.1 Finance, Insolvency and Restructuring – German Federal Supreme Court Clarifies Treatment of D&O Insurance in Insolvency Proceedings
On April 14, 2016, the German Federal Supreme Court (Bundesgerichtshof, BGH) handed down an important decision regarding the treatment of D&O insurance policies in insolvency. German corporations are not obliged to enter into such D&O insurance policies in favor of their officers. If a corporation does enter into such an insurance policy and later becomes insolvent, insolvency administrators often terminate such contracts as a mutually not fully satisfied contract.
In this case, the insolvency administrator later asserted personal liability claims against management of the debtor for alleged breaches of their managerial duties. The managers lodged a counterclaim against the insolvency administrator, arguing that the termination of the D&O insurance policy in insolvency was a breach of the insolvency administrator’s duties which resulted in rendering them personally liable to the insolvent estate for damages that otherwise would have been covered under the D&O insurance policy.
The BGH dismissed the counterclaim by clearly stating that the insolvency-specific duties of the insolvency administrator are owed only to the debtor, the various groups of creditors or persons with a right to preferred satisfaction, but not to the corporate bodies of the debtor. The managers in question were not therefore owed any insolvency-specific duties by the plaintiff insolvency administrator.
The court did, however, note in an obiter dictum that the interests of the creditors (not of management) may in certain cases require the insolvency administrator to consider maintaining the D&O insurance coverage after the opening of insolvency proceedings (Insolvenzeröffnung) if it is predictable at that stage that potential insurance coverage is beneficial for the insolvent estate because management is likely unable to pay any claims raised against them personally due to the scope of such damages. In such cases, the benefits of insurance recourse outweigh the savings made on no longer paying insurance rates to the insurer.
Bearing in mind that the D&O insurance contract is entered into by the corporation with the insurer in favor of its officers, management and other beneficiaries of a D&O insurance policy might be well advised to contact the insolvency administrator early after the filing of the insolvency proceedings and before a decision on the continuation of the D&O insurance policy has been taken. At that stage, it often is possible to reach a negotiated solution on the continuation of D&O coverage, if necessary by offering to pay the insurance rates on behalf of the corporation during insolvency, thus removing the insolvency administrator’s incentive to terminate the insurance.
3.2. Finance, Insolvency and Restructuring Prompt (Re-)Action by German Legislator to Preserve Financial Stability – Netting Arrangements and the German Insolvency Code
In December 2016, the German legislator passed an amendment to Section 104 of the German Insolvency Code (InsO) thereby retroactively annulling the effects of an earlier landmark ruling of the German Federal Supreme Court (Bundesgerichtshof, BGH) which only six months earlier had held netting arrangements in derivative transactions to be void in insolvency and had caused an outcry by the financial sector.
On June 9, 2016, the Bundesgerichtshof held that certain provisions of an option agreement on SAP stock entered into on the basis of the German master agreement for financial derivative transactions (“German Master Agreement“) were void due to an infringement of the mandatory provisions of Sections 104, 119 of the German Insolvency Code (InsO) which aim at preventing speculative dealings by an insolvency administrator to the detriment of the insolvent estate. The German Federal Supreme Court held that the German Master Agreement infringed Section 104 InsO to the extent that (i) the option agreement terminated automatically upon an insolvency filing, (ii) the compensation claim of the insolvent debtor was contractually restricted in the German Master Agreement, and (iii) the provisions on the calculation method of the respective parties’ claims against each other also deviated from Section 104 InsO.
The likely knock-on effects of the ruling beyond the case decided were considered momentous. Firstly, netting arrangements are rather standard not only in the German Master Agreement but in comparable standard contracts worldwide, e.g. in the ISDA (International Swaps and Derivatives Association) Master Agreement. Secondly, subject to certain exceptions, the ruling applied whenever German insolvency proceedings were opened (eröffnet) in respect of one of the contracting parties to such an agreement. Thirdly, potential regulatory effects were also deemed likely. There was a risk that, in view of the limitations imposed by Section 104 InsO, netting arrangements may no longer be recognizable under the Capital Requirements Regulation (“CRR”, EU No. 575/2013 of the European Parliament and Council), and could potentially lead to increased collateral requirements under the European Market Infrastructure Regulation (“EMIR”, EU No. 648/2012 of the European Parliament and Council).
In view of the potential effects on the financial markets, the German Federal Government already announced on the day of the ruling that it would take the required action to ensure that standard master agreements would continue to be recognized in the market and by regulatory authorities. Also, on the very same day the German Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) issued a decree (Allgemeinverfügung) to counteract the effects of the ruling for certain market participants in the interim period until December 31, 2016 (General Administrative Act by the Federal Financial Supervisory Authority of June 9, 2016) to ensure legal certainty for netting agreements also within the scope of German insolvency law.
On December 16, 2016, the Federal Council (Bundesrat, the second chamber of the German legislative body) voted in favor of granting derivative transactions a preferential treatment for purposes of Section 104 InsO. The amended version of this provision will preserve the netting option with the result of a single claim of one of the parties, and market participants will be given the necessary flexibility in the calculation of close-out amounts and the date on which the respective derivative transactions are terminated in case of an insolvency of a contract partner thereto, as long as the basic principles of the underlying statutory provisions are respected. The preferential handling of derivative transactions will likely enter into force in January 2017 and will apply retroactively to all insolvency applications filed on or after July 10, 2016.
Thus, the German legislator took the opportunity to respond promptly to the requirements of the (German) financial markets in a case where real risks for the financial stability of (mostly German) market participants loomed on the horizon. The amended version of Section 104 InsO also assists in safeguarding the international competitiveness of German market participants.
4.1 Labor and Employment – Tightened Rules for Hiring Temporary Workers
As of April 1, 2017, a new law comes into effect which intends to put an end to what the government perceives as an abuse of temporary workers (“Temps“). The most important new rules are the following:
While these new rules will indeed make the handling of Temps more burdensome, there will still be (legal) work-arounds, e.g. limiting the working period of a particular Temp to six or nine months. In any case, particular care should be given to the requirements set out in the agreement between the Temp agency and the customer that the person being supplied to the customer needs to meet.
4.2 Labor and Employment – Transparency Rules to Avoid Gender Pay Gap
In its quest for equal pay between the genders, the German Family Ministry has proposed legislation to enhance transparency regarding compensation. According to the ministry’s draft, companies (in Germany) with over 200 employees would be subject to provide certain information upon request by employees. Each individual employee could ask the company to disclose:
With regard to the second bullet point, the employer would have to determine the median of the compensation paid to all (!) opposite-sex colleagues doing the same or equivalent job as the claimant. Obviously, this could be quite a burdensome undertaking for employers. Yet, it is unclear, whether the intended goal of closing the gender pay gap would be reached by this complicated mechanism. In this context, it should be borne in mind that class actions are not established in Germany, so every employee feeling disadvantaged would have to individually claim said disclosure by the company. Whilst employers should be aware of the new legislation and monitor its legislative progress, such claims are not expected to be widespread: the ministry itself reckons that only 1% of eligible employees will make use of this right.
4.3 Labor and Employment – Plans to Reform the Company Pensions Act
The German government intends to limit companies’ liability with regard to occupational pension schemes by allowing defined contribution in addition to defined benefit schemes. So far only the latter are acknowledged as company pension schemes. Due to this fact and strict investment restrictions for pension plan managers, German companies are currently struggling to meet the defined benefit goals in light of the current extremely low interest rates. In order to relieve such pressure and to make company pension plans more attractive for employers, the government now wants to allow plans without a certain benefit guarantee, which would initially open the door to pure defined contribution schemes. However, according to the current plan, such defined contribution schemes will only be possible on the basis of a collective bargaining agreement with the union.
It has yet to be determined whether and how these plans will become law. The reactions from several lobby groups were not particularly welcoming. Even if the law is enacted in the remaining six months of this parliamentary period, it would not take effect before January 2018.
5.1 Real Estate – Transfer of Lease by Operation of Law
Pursuant to Section 566 of the German Civil Code (Bürgerliches Gesetzbuch – BGB), real estate lease agreements automatically transfer to an acquirer of the underlying real property by operation of law if the transferor is both the landlord and the owner of the property. The transfer of the lease takes effect, once the acquirer has been registered in the land register as the new owner of the property.
In its decision of April 5, 2016, the German Federal Supreme Court (Bundesgerichtshof, BGH) confirmed that lease agreements only transfer to the acquirer of the property by operation of law if the lease is still effective and the tenant is (still) in possession of the leased premises at the time when the acquirer is registered as the new owner of the property in the land register which could take several weeks or even months.
The tenant may hold the original landlord liable for damages if the lease agreement is not transferred to the acquirer of the property as new landlord and the tenant is, consequently, no longer entitled to use the leased premises. Therefore, the original landlord and the transferor should procure that the lease agreement is expressly and contractually (rather than by operation of law only) transferred to the acquirer and/or the acquirer, at least, assumes the obligations under the lease agreement.
5.2 Real Estate — Disclosure Obligations and Liability of the Property Seller
According to the statutory warranty regime in Section 433 et seq. of the German Civil Code (Bürgerliches Gesetzbuch – BGB), the seller of real property located in Germany shall transfer the property to the purchaser free from any defects in quality and/or in title. If the sold property is not free from such defects, the purchaser may request remediation of such defects, rescind the purchase agreement, reduce the purchase price and/or claim damages.
German property sale agreements almost always restrict this statutory warranty regime or replace it with a regime agreed upon by the parties of the sale agreement. Pursuant to Section 444 BGB, the seller, however, is not entitled to invoke any agreed upon restriction and/or waiver of the statutory warranty regime, to the extent that the seller fraudulently concealed (arglistig verschwiegen) the defect and/or gave a corresponding guarantee; consequently, the broad statutory warranty regime applies in such a case.
On July 8, 2016, the German Federal Supreme Court (Bundesgerichtshof – BGH) ruled that a sold property generally exhibits a defect if the prior use of this property poses the risk of significant pollution. The seller fraudulently conceals such a defect if the seller knows or suspects that the defect exists and, at the same time, knows or expects and accepts (damit rechnen und billigend in Kauf nehmen) that the purchaser is not aware of this defect.
The seller of German property is therefore compelled to disclose to the purchaser any suspected previous use of the sold property that may pose a risk of significant pollution to avoid liability under the broad statutory warranty regime.
6.1 Data Protection – EU Data Protection Regulation
In May 2018, the European General Data Protection Regulation (“GDPR“) will come into force. Although European regulations have direct effect in Member States, the GDPR provides for an unusually high number of opening clauses granting Member States the liberty to address certain data protection issues which the GDPR does not explicitly regulate.
As the German legislator is planning to make use of several of these opening clauses and to ensure that the German Federal Data Protection Act (“FDPA“) complies with the GDPR and the new Data Protection Directive ((EU) 2016/680), it is currently preparing a comprehensive reform of the FDPA.
After the Government’s first draft of September 5, 2016 was withdrawn due to extensive criticism, a new draft has been submitted by the Federal Ministry of the Interior and published by the German Association for Data Protection and Data Security on November 11, 2016 (the “Draft“).
Section 24 of the Draft concerns the processing of employee data and basically corresponds to the current section 32 FDPA, but includes a legal definition of “employee” in section 24 (3) of the Draft. However, as section 24 of the Draft only concerns the admissibility of processing employee data, it seems questionable whether section 24 meets the requirements of Art. 88 (2) GDPR which stipulates that such rules shall include specific measures to safeguard certain employee interests.
Further, sections 30 – 35 of the Draft reduce the information obligations of the data controller (i.e. the body which determines the purposes and means of the data processing) provided by Art. 13 and 14 GDPR on the one hand, and on the other hand, limit the data subject’s rights as laid down in Art. 14 et. seq. GDPR. Some of these restrictions have not been envisioned by the European legislator.
It is also striking that section 40 of the Draft sets an upper limit of EUR 300.000 for administrative fines imposed on natural persons exercising their duties for the data processor or controller, although Art. 83 (1) GDPR requires “effective, proportionate and dissuasive” fines. Art. 83 (4) and (5) GDPR stipulate that, depending on which GDPR provision is infringed, the administrative fine shall either not exceed EUR 10.000.000 / EUR 20.000.000 or, in case of an undertaking, shall be calculated on the basis of 2% / 4% of the undertaking’s total worldwide annual turnover of the preceding financial year.
Although the legislator obviously intends to make data protection requirements easier for the economy, it is questionable whether this draft will achieve this goal. At the moment it is not even foreseeable if this draft will pass the German Parliament. Even if it does, the resulting law would be highly complex and will cause many uncertainties for companies which are unfamiliar with data protection law – especially in combination with the provisions of the GDPR. Especially for companies operating throughout Europe, it seems advisable to adopt measures in compliance with the GDPR until the legislative developments in Germany gain greater predictability.
6.2 Data Protection – International Data Transfers
Following the invalidation of the EU-U.S. Safe Harbor framework by the Court of Justice of the European Union (“CJEU“) in October 2015, uncertainty about the lawfulness of personal data transfers to the US existed among affected companies.
This has only changed since the adoption of the EU-U.S. Privacy Shield on July 12, 2016 by the European Commission as Safe Harbor’s succession regime. However, until the European Commission publishes new model contracts (standard contractual clauses – “SCC“), the current SCC as published by the European Commission remain a possible alternative for the transfer of personal data to third countries under the Privacy Shield regime. The extent to which the European Commission will publish new SCCs is currently unclear. It is expected that only those SCCs governed by the respective Member State laws will be amended in the near future.
Meanwhile, the data protection authority in Hamburg has imposed fines of EUR 8.000 (approximately US$ 8,500) on a US software company, EUR 9.000 (approximately US$ 9,500) on a beverage producer and of EUR 11.000 (approximately US$ 11,700) on the world’s largest producer of consumer goods for the continuing transfer of personal data based on the invalidated Safe Harbor framework instead of reverting to available legal alternatives. Although these fines are rather modest, they were the first of their kind and are intended to send a signal to other companies that German Data Protection Authorities (“DPAs“) will pursue investigations and sanction data transfers based on the Safe Harbor regime with fines and – more importantly – prohibition orders.
6.3 Data Protection – Collective Actions for Injunctions
The German legislator has adopted an act amending the German Act Governing Collective Actions for Injunctions (Unterlassungsklagengesetz – UKlaG) which entered into force in February 2016. The main achievement of this amendment is that, in addition to the federal and state DPAs, consumer organizations and the chamber of commerce and competition now have legal standing to bring collective injunction proceedings for infringements of data protection law on behalf of consumers.
7.1 Compliance – Proposed Reform of Public Recovery of Criminal Assets
On July 13, 2016, the German federal government passed a draft bill to comprehensively reform the public recovery of criminal assets (Entwurf eines Gesetzes zur Reform der strafrechtlichen Vermögensabschöpfung). The draft bill which still needs to pass both German legislative bodies (Bundestag and Bundesrat) before entering into force will implement the European Directive 2014/42/EU of April 3, 2014 into German domestic law, but exceeds the scope of the EU directive considerably.
One of the draft bill’s major changes is abolishing Section 73 Subsection 1 Sentence 2 of the German Criminal Code (Strafgesetzbuch), which provides that a victim’s right to asset recovery under civil law prevails over confiscation through a criminal court order. Under the new draft bill, any type of asset recovery would be conducted exclusively by the state authorities. Such general incorporation of asset recovery into criminal proceedings – including related civil law aspects – has been subject to severe criticism, because it deprives victims of their right to take civil legal action and thereby forces them to wait to assert further claims until the related criminal proceedings have been concluded. Moreover, under the new framework, a victim will be bound by the limitation periods set out in the German Criminal Code, which are often significantly shorter than those under civil law.
The draft bill also suggests that assets of unclear origin may be confiscated without specific evidence if a court is convinced – in particular in view of an evident discrepancy of the value of the assets and the rightful earnings of the individual – that they were obtained from an illegal activity and if the investigation relates to certain enumerated offenses (e.g., organized crime and terrorism). The draft bill’s reasons specifically reference the comparable U.S. concept of “non-conviction-based confiscation/forfeiture.”
The draft bill also contains guidance for calculating illegal profits in the context of insider trading activities. Specifically, it provides that those convicted of insider trading cannot deduct the original purchase price of stock subject to confiscation (draft of revised Section 73d Subsection 1 Sentence 2 of the German Criminal Code). This approach suggests that the recovery of assets is no longer a mere administrative measure but also includes a penalizing element.
7.2 Compliance – Court Ruling on Seizure of Documents from Law Firms
On March 16, 2016, the District Court of Bochum handed down a noteworthy decision regarding the seizure of documents from a law firm (Landgericht Bochum, Order from March 16, 2016, file reference 6 Qs 1/16). According to Section 97 Subsection 1 Number 3 German Code of Criminal Procedure (Strafprozessordnung), objects are, among other things, not subject to seizure if they are covered by an attorney’s right to refuse to testify. This right only applies to information that was entrusted to or became known to the attorney in his capacity as an attorney. The Bochum court ruled that this legal provision applies exclusively to the trusted relationship between a criminally accused person and someone who is granted the right to refuse to testify, meaning that it does not protect the relationship between someone who is not accused of a crime and any custodian of professional secrets, such as an attorney.
The case relates to a public prosecutor’s investigation of a managing director suspected of having received kick-backs. According to the complaint, the company’s ombudswoman, an external attorney, had received relevant information from a whistleblower, but did not disclose it to the investigators. Upon final seizure of the documentation by the public prosecutor, the ombudswoman filed an appeal claiming a violation of the respective statutory restrictions arising from her capacity as an attorney and the whistleblower’s trust in her professional confidentiality obligation. In addition to the court’s finding that the law did not protect the relationship between the non-accused, anonymous whistleblower and the attorney, the court noted that the attorney was acting on behalf of the company in her capacity as ombudswoman, which prevented the establishment of a privileged relationship between her and the whistleblower.
Companies often designate external attorneys as ombudspersons to ensure that allegations conveyed to an ombudsperson are fully privileged and thus protected from access by state authorities. The Bochum decision now calls into question whether this approach is sound for Germany. Companies affected by this ruling will have to assess what additional protective measures they can provide to potential whistleblowers.
7.3 Compliance – German Federal Constitutional Court on Extradition to the United States
A recent decision by the German Federal Constitutional Court (Bundesverfassungsgericht) may be of crucial importance for future extraditions between Germany and the United States in multi-jurisdictional matters.
In March 2016, the German Federal Constitutional Court remitted a 2015 ruling by the Higher District Court of Frankfurt am Main (Oberlandesgericht Frankfurt am Main) which in the constitutional court’s view disregarded applicable key principles of the German Constitution and as a consequence stopped the deportation of a Swiss national from Germany to the United States. The Federal Constitutional Court’s ruling took issue with a 2015 decision by the U.S. Court of Appeals for the Second Circuit in United States v. Suarez regarding the contours of the Principle of Specialty under international law. For the sake of international comity, the Principle of Specialty generally requires a country seeking extradition to adhere to any limitations placed on prosecution by the surrendering country. In interpreting this principle, the US court in the Suarez case had held that an extradited person lacks standing to challenge the requesting nation’s adherence to the doctrine absent an official protest by the extraditing nation. Because German law requires courts to assess whether a requesting nation adheres to the Principle of Specialty before extraditing a person in German custody to that nation, the Federal Constitutional Court noted its disapproval with the Suarez decision in holding that the complainant could not be extradited to the United States. Specifically, it held that the mere reference to the opportunity of requesting the extraditing nation to raise an official protest generally violates fundamental rights of the German Constitution (Grundgesetz, GG), namely the right to personal freedom (Article 2 subsection 2) and, in any case, violates the guarantee of general freedom of action (Article 2 subsection 1 of the German Constitution).
8.1 Merger Control
8.1.1 Adjustment to Thresholds in German Merger Control Cases
On September 28, 2016, the German government adopted a draft bill for the ninth amendment to the German Act Against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen -“GWB”). The draft bill provides in respect of Section 35 GWB for additional thresholds for German merger control proceedings before the Bundeskartellamt. If the draft is adopted in its current form, mergers which cumulatively meet the following requirements are subject to notification and additionally may require approval by the Bundeskartellamt:
(i) At least one of the merging parties generated a domestic turnover of more than EUR 25 million in the last business year, but no other merging party generated a domestic turnover of more than EUR 5 million;
(ii) the consideration for the merger is more than EUR 400 million; and
(iii) the activities of the company being acquired in the domestic market are substantial in the sense laid out in (i).
8.1.2 Tengelmann Merger
The Edeka/Kaiser´s Tengelmann merger was finalized at the beginning of December 2016. For more details on this merger please refer to our 2016 Antitrust Merger Enforcement Update and Outlook.
Just a few days after the Minister for Economic Affairs Sigmar Gabriel had granted his ministerial approval (Ministererlaubnis) to the merger, the major competitors of the merging parties, REWE, Markant and Norma, appealed against this decision. On July 12, 2016 the Higher District Court of Düsseldorf (Oberlandesgericht Düsseldorf) held the Ministererlaubnis to be unlawful and therefore suspended it by way of an interim injunction. One of the reasons given by the court was bias by the Minister of Economic Affairs. Subsequently, Edeka challenged the Higher District Court’s decision not to allow an appeal. After several weeks of negotiations, Markant and Norma declared their agreement to the merger by withdrawing their appeals. After some mediation talks led by former German chancellor Gerhard Schröder, REWE and Edeka finally reached an agreement on the merger.
Since its introduction in 1973, only eight mergers have been approved by a Ministererlaubnis. Since then the Ministererlaubnis has been subject to ample controversy in legal literature, in particular because the grant decision is not based on competition law considerations and may potentially interfere with the Bundeskartellamt’s work. The Edeka/Kaiser’s Tengelmann merger has fueled the discussion anew due to the fact that the Minister’s main reasoning was to secure jobs at Kaiser’s Tengelmann which is arguably not a very strong consideration for granting a Ministererlaubnis. However, as is shown by the ninth amendment to the GWB, the German regulator has no intention of reforming or abandoning the concept of the Ministererlaubnis.
8.2 Antitrust and Merger Control – Private Antitrust Litigation
8.2.1 Legislative Reform
The ninth amendment to the GWB will also implement the European Damages Directive. Some of the implementing provisions were already mentioned in our 2016 Mid-Year Criminal Antitrust and Competition Law Update.
Apart from this, the amendment also includes provisions on the availability of the passing-on defense which allows defendants to prove that the claimant did not suffer any damages because he was able to pass on the cartel overcharge to his own customers (indirect customers). The passing-on of cartel overcharges is refutably presumed if (i) the defendant infringed section 1 / 19 GWB or Art. 101 / 102 TFEU, (ii) such infringement resulted in an overcharge for the defendant’s direct customers, and (iii) the indirect customer has purchased goods or services that were the object of the infringement, or that derived from or contained goods or services which were the object of the infringement.
Further, the draft stipulates certain exceptions to the principle of joint and several liability of cartelists for cartel damages in relation to (i) internal regress, (ii) leniency applicants, and (iii) settlements between cartelists and claimants. In the latter case, non-settling cartelists may not recover contribution for the remaining claim from settling cartelists.
The draft also foresees a rather broad section on the disclosure of evidence which is foreign to principles of German civil procedure. As a rule, pursuant to the German Code of Civil Procedure (Zivilprozessordnung, ZPO), the party relying on a fact has to produce the relevant evidence. Only sections 142 and 422 ZPO relate to the other party’s obligation to produce evidence – in both cases limited to specific, and precisely identified or identifiable documents. Section 33g GWB of the draft bill, however, broadens this scope substantially by referring to evidence which is necessary to bring a damages action in general – not just specific documents, and by reducing the aforementioned designation requirements to the extent to which a claimant is reasonably able to identify the evidence with the information available to him. Considering that a substantial amount of evidence in damages actions for competition law infringements is usually held by the defendant, this could potentially include a large number of documents relating to the defendant’s pricing and business strategies.
The implementation of the ninth amendment is expected to substantially lessen the burden and difficulties claimants faced in past damages actions for competition law infringements.
8.2.2 Case Law
In 2016, there were a few noteworthy decisions in relation to private competition law enforcement in Germany, most of which clarified the extent of evidence a claimant has to present to the court in order to succeed with a damages claim.
For the first time since 2011 the German Federal Supreme Court (Bundesgerichtshof, BGH) ruled on some of the open questions in private competition law enforcement in its Lottoblock II decision of July 12, 2016 (BGH, KZR 25/14). In Lottoblock II the Bundesgerichtshof held:
(i) Only the operational part and reasoning on which the decision by a competition authority is based are binding on German courts pursuant to section 33 (4) GWB.
(ii) Once a concerted practice is concluded, there is a rebuttable presumption that cartelists abide by such practice, as long as it exists and the cartelists remain active on the relevant market. The presumption may be rebutted if essential economic and legal market factors change and at least one of the cartelists clearly and recognizably distances itself from the concerted practice.
(iii) The question whether the claimant provided sufficient evidence to prove that he was affected by the cartel needs to meet the standards set out in section 286 ZPO. Therefore, the claimant has to provide enough evidence to allow the judge to form a confident opinion on the facts. However, the existence of a concerted practice may constitute prima facie evidence pursuant to section 287 ZPO that the anticompetitive conduct caused damage.
On November 19, 2015 the District Court Düsseldorf (Landgericht Düsseldorf, case no.: 14 d O 4/14) ruled on damage claims brought by indirect customers of the Autoglas cartel. It held that the question whether a cartel overcharge has been passed on to indirect customers forms part of the assessment whether the claimant was affected by the cartel and thus needs to meet the standards of evidence laid out in section 286 ZPO.
On November 9, 2016 the Higher District Court Karlsruhe (Oberlandesgericht Karlsruhe, case no.: 6 U 204/15 Kart (2)) held that for cartels with significant market coverage and of a longer duration there is prima facie evidence that the cartel had an impact on market prices which were not subject to the cartel (so-called umbrella pricing) because such prices, too, will be set with respect to attainable market prices. However, where market conditions are transparent and mutual observation occurs, significant market coverage (irrespective of the duration of the cartel) is sufficient for such prima facie evidence. Furthermore, the court held that the probability of damage is not excluded by the fact that the damage has been passed on to the end consumer (so-called passing-on-defense).
On September 8, 2016 the District Court Düsseldorf (Landgericht Düsseldorf, case no.: 37 O 27/11 [Kart]) ruled on the liability of parent companies. Even if a parent company has been held jointly and severally liable for its subsidiary’s anticompetitive conduct pursuant to European competition law principles, such liability does not apply to damages claims based on German tort law. On the contrary, the separation principle, whereby a legal entity is liable only with its own assets, prevails.
8.3 Antitrust and Merger Control – Cartel Enforcement – Corporate Liability
Moreover, the aforementioned draft bill for the ninth amendment to the GWB brings a company’s liability in line with the existing European model. According to this model, parent companies can be held liable for their subsidiary’s anti-competitive conduct even if they were not party to the infringement themselves. Provided that, at the time of the infringement, the parent company and the subsidiary form a single economic unit allowing the parent company to exercise decisive influence over the conduct of its subsidiary, the parent company can be held jointly and severally liable for the administrative fine. There is a rebuttable presumption that the parent company exercises decisive influence in case of wholly owned subsidiaries, but decisive influence can also be established by other factors.
Further, the legislative gap known as the so-called “sausage gap” is being closed. This gap became apparent and was named after a decision of the Bundeskartellamt in October 2016, pursuant to which the Bundeskartellamt had to conclude its proceedings against two sausage manufacturing companies due to the fact that these companies no longer existed following internal restructuring measures (press release of October 19, 2016; available here). Thus, even though the parent corporation still existed, the fines imposed on the two subsidiaries in 2014 could no longer be enforced. The fines would have been in the amount of EUR 128 million (approximately US$ 136 million). According to the draft bill, future fines may also be imposed on the legal universal successor as well as the economic successor of the company that infringed competition law.
8.4 Antitrust and Merger Control – Cartel Prosecution
In December 2016, the Bundeskartellamt concluded its last proceedings for vertical price fixing in the retail food market (press release of December 15, 2016; available here). It imposed fines of EUR 18.3 million (approximately US$ 19,1 million) on several food retailers for fixing retail beer prices. In 2015 and 2016 the Bundeskartellamt imposed fines on one brewery and eleven retailers for vertically fixing beer prices amounting to a total of approximately EUR 112 million (approximately US$ 117 million).
The following Gibson Dunn lawyers assisted in preparing this client update: Benno Schwarz, Birgit Friedl, Marcus Geiss, Silke Beiter, Peter Decker, Lutz Englisch, Ferdinand Fromholzer, Daniel Gebauer, Kai Gesing, Johanna Hauser, Lukas Inhoffen, Julia Langer, Sebastian Lenze, Annekatrin Pelster, Wilhelm Reinhardt, Sonja Ruttmann, Martin Schmid, Michael Walther, Jutta Wiedemann, Mark Zimmer and Caroline Ziser Smith.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding the issues discussed in this update. The two German offices of Gibson Dunn in Munich and Frankfurt bring together lawyers with extensive knowledge of corporate, tax, labor, real estate, antitrust, intellectual property law and extensive compliance / white collar crime experience. The German offices are 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 German offices:
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