July 22, 2008
A few days ago, the German legislature adopted the Risk Limitation Act (Risikobegrenzungsgesetz, the "Act") aimed at the limitation of perceived risks deriving from financial investors. Following the notorious "locust debate" in Germany, the new law is the result of the still ongoing discussions about the impact of foreign hedge funds and private equity investors. It provides for a number of amendments to securities law and corporate law applicable to domestic and international investors in public companies. The Act is scheduled to be formally announced later this summer or fall.
Acting in Concert
The Act will modify the existing rules on "acting in concert", i.e., the rules under which the shareholdings of investors forming a "group" must be aggregated. This is relevant in two areas, namely (i) the reporting thresholds for shareholdings in German listed companies and (ii) the rules on public offers:
When several shareholders are found to be "acting in concert", their shareholdings are mutually attributed; therefore, each of them is subject to notification and offer duties if the aggregate of their shareholdings reaches, exceeds or falls short of one of the above thresholds. Until now, the Federal Supreme Court held that only investors who coordinate their voting within the general meetings of the company were acting in concert.
The Act will broaden the scope of the rules on acting in concert. The new rules will also apply to cooperating in a way that aims at a steady and substantial change of the strategic orientation (unternehmerische Ausrichtung) of the company. Thus, the scope of application will no longer be limited to coordination with regard to the exercise of voting rights, but will also include cooperation on the level of the supervisory board or even outside any corporate bodies, provided that the investors concerned intend to steadily and substantially change the business of the company. Fortunately, the German legislature abstained from further extensions of the rules: Pursuant to initial draft bills of the Act, the mere cooperation of investors with respect to the acquisition of shares would have been considered acting in concert, too. What is more, it would have been sufficient if the coordination referred to an individual case or had an either steady or substantial influence on the business of the company. The German legislature changed its opinion after harsh criticism from legal scholars and international investors.
As a result, the impact of the changes will be limited. For example, investors will generally still be able to initiate public takeovers by agreeing on standstill agreements with shareholders or accepting irrevocable undertakings from them. Until German courts begin to interpret the new rules, however, there will be legal uncertainty for some time about what shareholders may agree on regarding the business and strategy of the company without triggering a mutual attribution of voting rights.
Aggregation of Voting Shares and other Securities giving the Right to Acquire Shares
Holders of marketable securities giving the right to acquire voting shares (e.g., marketable call options) have similar notification duties if their securities refer to a shareholding which reaches, exceeds or falls short of the above thresholds (except for the 3% threshold). Under the current rules, the positions in voting shares and other financial instruments are not aggregated. Presently, an investor who acquires (i) up to 2.99% of voting shares of the company and (ii) other securities giving the right to acquire up to 4.99% of the voting shares does not need to make any notification.
The Act provides for the aggregation of these two positions with the effect that in the above example, the investor will be obligated to report the excess of the 3% and the 5% threshold. Nonetheless, the 3% threshold will still be irrelevant for an investor who only holds marketable securities other than voting shares.
Extension of Sanctions in Case of Violation of Notification Duties
In the past, non-compliance with the aforementioned notification requirements, apart from the risk of administrative fines, has only led to a suspension of the shareholder rights (in particular, voting rights and rights to dividends) until the missing or wrongful notification was made or corrected. Hence, verifying compliance with the notification duties immediately prior to a general meeting was sufficient to avoid any impact on these rights. Under the Act, the suspension of shareholder rights would only be lifted six months after the late or corrected notification, provided the violation (i) was due to gross negligence or intent and (ii) reached a certain degree of non-compliance: If the investor did not completely fail to make a required notification and the deviation of the notified shareholding from the actual shareholding was less than 10% of the actual shareholding, the six months period will not apply.
New Disclosure Duties Relating to Significant Shareholdings
Further, the Act will implement new disclosure duties for investors holding at least 10% of the voting rights in a German listed company. Such significant shareholders will be required to disclose to the company their intentions with respect to the shares and the origin of the funds used to purchase the shares. These duties (as well as the existing notification duties) will not only apply to direct shareholders but also to investors to which the shares of third parties are attributed due to certain circumstances. Examples of such attribution are: (i) controlling influence over the direct shareholder, (ii) holding shares of a third party in trust without further instructions of the third party with regard to the exercise of voting rights, and (iii) acting in concert (see above). The new disclosure duties also apply to investors who already hold 10% or more of the voting rights in a German listed company once they reach or exceed another threshold.
These significant shareholders will be required to disclose their intentions with respect to the shares and the origin of the funds within 20 trading days unless the articles of association of the company waive such duty. Significant shareholders must also disclose all changes to their intentions.
With regard to its intentions each requested investor will be required to disclose whether:
When disclosing the origin of the funds, the investor will be obliged to indicate whether and to what extent it has used equity or debt.
The company will be required to publish (i) the information received from the investor or (ii), if applicable, non-compliance of the investor with the disclosure duties. The Act does not provide for any additional consequences in case of non-compliance and the above mentioned suspension of shareholder rights will not apply. Please note, however, that non-compliance with these duties may, under certain circumstances, violate the prohibitions on market manipulation and insider trading.
Further Amendments by the Act
The Act also stipulates that under certain circumstances, the shareholder rights attached to registered shares (Namensaktien) – irrespective of any listing – will be suspended as long as the shareholder has not yet effected its registration in the share register of the company. The registration of an agent or street holder instead of the shareholder will be subject to restrictions in the company’s articles of association. Up to now, the registration of the actual shareholder has not been enforceable and the registration of an agent has not had any adverse consequences.
Moreover, pursuant to the Act, German companies – irrespective of any listing – with more than 100 employees will be obligated to notify the employees’ representation (either the works council (Betriebsrat) or the economic committee (Wirtschaftsausschuss)) of a contemplated takeover offer by a third party.
Finally, the Act will increase the rights of borrowers with respect to the sale and assignment of credit portfolios by banks to investors. The German parliament included these changes following complaints from home owners who were confronted with (mostly Anglo-Saxon) distressed debt investors.
Most provisions of the Act will enter into force immediately following the formal announcement in the Federal Gazette; the remaining provisions will become effective approximately six months after the announcement.
Contrary to initial draft bills, the Act now contains transitional provisions. Investors who would become subject to notification duties only because of the change in the law on the effective date of the Act will not need to make any notifications. The new, tightened sanctions will apply, however, if such investors have not complied with their notification duties as in effect prior to the Act becoming effective.
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn attorney with whom you work or Philip Martinius (+49 89 189 33-121, firstname.lastname@example.org), Jan Querfurth (+49 89 189 33-121, email@example.com) or Markus Nauheim (+49 89 189 33-122, firstname.lastname@example.org) in the firm’s Munich office.
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