German takeover law

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• German takeover law
• after the Directive

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• Final stage of implementation
• The Act on the Implementation of the Takeover
  Directive
• III. German takeover law after the Directive
  main characteristics
• IV. Control
• V. Mandatory bids (Sect. 35 to 39 of the Act)
• VI. Takeover bids (Sect. 29 to 34 of the Act)
• VII. The default rule for target company
  behaviour limited passivity
• VIII. The opt-in/opt-out regime for (target)
  companies
• IX. The right of squeeze-out
• X. Concluding remarks

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• I. Final stage of implementation
• Current takeover law (2002) as a partial
  implementation
• Act on the Acquisition of Securities and on
  Takeovers
• (the Takeover Act)
• Wertpapiererwerbs- und Übernahmegesetz (WpÜG)
• Regulation on the Contents of the Offer Document,
  the Consideration in the Case of Takeover Bids
  and Mandatory Bids and the Exemption from the
  Obligation to Publish and Make a Bid
• (the Bid Regulation)
• The Act on the Implementation of the Takeover
  Directive
• Government Draft Bill of 15 February 2006
• hearing by the Parliamentary Financial Affairs
  Committee on 10 May
• date of entry into force on 20 May or shortly
  thereafter

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• II. The Act on the Implementation of the
  Takeover Directive
• Implementation of the Directive
• minor modifications and amendments necessary
• existing rules closely modelled in line with the
  
• Common Standpoint of 2001
• modifications
• in particular, scope of application competences
  of the BaFin
• amendments
• in particular, the ideas of the High Level Group
• opt-in/opt-out rules, squeeze-out, sell-out,
  publication of takeover-relevant information
• Other amendments
• additional investigative powers of the BaFin as a
  consequence of TCI et. al. versus Deutsche Börse
  AG
• Open questions and problems are not addressed

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• III. German takeover law after the Directive
• main characteristics
• Legal Basis
• Takeover Act, Bid Regulation, Stock Corporation
  Act, Commercial Code
• Regulation of three types of bids
• mandatory bid
• takeover bid bid aimed at acquiring control
• simple bid bid not aimed at acquiring control

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• Interaction between voluntary takeover bids and
  mandatory bids
• requirements for both bids are (nearly)
  identical, e.g.,
• mandatory price rules for voluntary takeover bids
• no partial voluntary takeover bid allowed
• consequence Mandatory bid requirement shall not
  apply upon acquisition of control as a result of
  a takeover bid (Sect. 35(3) of the Act)
• Frustrating actions available to a target
  company severely limited in scope
• Squeeze out transfer of shares by court order
• Bundesanstalt für Finanzdienstleistungsaufsicht
  (BaFin) as a powerful supervisory authority

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• IV. Control
• Threshold for control 30 of the voting rights
  of the target company at a minimum (Sect. 29(2)
  of the Act)
• Unilateral attribution of voting rights to the
  offeror
• if the offeror is able to control how the voting
  rights will be exercised in a shareholder meeting
  (Sect. 30(1) of the Act)
• chain principle applies in attributing votes
• Multilateral attribution of voting rights
• voting rights owned by a third party with which
  the offeror or its subsidiaries coordinate their
  conduct in respect of the offeree company by
  virtue of an agreement or in any other manner
  agreements on the exercise of voting rights in
  individual cases are exempted (Sect. 30(2) of the
  Act)

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• coordination or not?
• formation of a voting trust
• coordination with respect to strategic or
  structural objectives
• agreement concerning the election of supervisory
  board members?
• simple parallel share purchase contested
• standstill agreement -
• ambit of coordination of conduct currently
  awaits clarification by the Federal High Court
• Frankfurt Court of Appeals ruling of 25 June
  2004
• cooperation with the aim of coordinating and
  exercising voting rights on an ongoing basis in
  order to exert sustained influence

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• Munich Court of Appeals ruling of 27 April 2005
• any single coordination related to the exercise
  of votes from shares
• aimed at exerting sustained influence on the
  management board or the supervisory board, and
• in pursuit of own interests
• e.g., agreement determining the chairman of the
  supervisory board
• acting in concert (Art. 2(1)(d) of the
  Directive)
• persons who cooperate with the offeror on the
  basis of an agreement aimed at acquiring
  control
• identical in scope to Sect. 30(2) of the Act?
• acquiring control by coordinating the exercise
  of votes?
• minimum or maximum harmonisation?

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• V. Mandatory bids (Sect. 35 to 39 of the Act)
• Persons required to make a bid
• anyone who directly or indirectly gains control
• mandatory bid to shareholders of an indirectly
  controlled company,
• e.g., a subsidiary of a target company
• BaFin may grant an exception for small
  subsidiaries
• several bidders in the case of an attribution of
  voting rights
• unilateral attribution the case of a subsidiary
• multilateral attribution all persons acting in
  concert?
• compatible with Art. 5(1) of the Directive
• exemptions available?
• statutory exemptions or exemptions granted by the
  BaFin are not available
• restrictive interpretation of the Statute? But
  see Art. 5(3) of the Directive

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• Bid price requirement dual minimum price
  threshold
• threshold 1 consideration offered must
  correspond at least to the highest consideration
  granted or agreed for the acquisition of
  shares of the target company during the six
  (new!) months prior to the publication of the
  offer
• but see Art. 5(4) of the Directive paid or
  gezahlt worden
• and
• threshold 2 Weighted average stock market price
  during the three months prior to the publication
  of the offer
• in Line with the Directive because of Art.
  3(2)(b) of the Directive?
• not available price adjustment by the BaFin (but
  see Art. 5(4) of the Directive)

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• Enforcement of the bid requirement
• offeror is barred from exercising any membership
  rights attached to his or her shares
• BaFin may impose administrative fines on the
  offeror
• shareholders may claim interest for the delay
• Shareholder claim for specific performance?

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• VI. Takeover bids (Sect. 29 to 34 of the Act)
• Full bid requirement
• Mandatory bid price requirement identical to bid
  price requirement governing mandatory bids
• in line with the Directive?
• admissible because of Art. 3(2)(b) of the
  Directive?
• but see Art. 15(5) of the Directive
• different presumptions regarding the fair
  consideration to be offered in squeeze-out
  proceedings depending on the type of the
  preceding bid

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• VII. The default rule for target company
  behaviour limited passivity
• Interplay between Sect. 33 of the Act and Sect.
  93(1) of the Stock Corporation Act
• Starting point after the publication of the
  decision to make a bid the management board of
  the target company may not take any actions that
  may frustrate the success of the bid (first
  sentence of Sect. 33(1))
• applicability to the supervisory board doubtful
• not applicable to the shareholder meeting
• General exemptions (sentence 2)
• actions taken by a prudent and diligent manager
  who does not face a bid
• search for a white knight

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• Exemptions depending on a prior approval by the
  supervisory board (sentence 2)
• decision to approve a particular frustrating
  action (supervisory board) or to engage in such
  an action (management board) must not violate the
  duty of care and the duty of loyalty
• identical standards for members of both boards
• BJR (sentence 2 of Sect. 93(1) of the Stock
  Corporation Act)
• not applicable because of a conflict of interest
  (possible job loss)
• applicable standard
• action must be in the target company's interest
• Independence as such being a company's interest?
• the company's interest must clearly outweigh the
  shareholders' interest in selling their shares

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• Exceptions depending on a shareholder meetings
  authorization obtained during the offer period.
• limited relevance for several reasons
• minimum period for calling a shareholder meeting
• offeror will challenge a resolution by filing an
  action to set aside said resolution
• Exceptions depending on a shareholder meetings
  authorization obtained before the publication of
  the decision to launch a bid (Sect. 33(2) of the
  Act)
• authorization must be expressly granted for the
  purpose of frustrating a hostile bid
• but shareholders may only authorize such actions
  that fully comply with the general requirements
  of the Stock Corporation Act

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• e.g., in case of authorized capital shareholders
  may empower the board to exclude pre-emptive
  rights in order to frustrate a hostile bid, but
  are barred from authorizing the board to issue
  the new shares below their intrinsic value
• e.g., a sale of substantive assets may be
  authorized but not at a below-market price

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• VIII. The opt-in/opt-out regime for (target)
  companies
• opt-in in the articles of association
• opt-in with respect to
• board passivity (Art. 9 of the Directive)
• or/and
• break-through rule (Art. 11 of the Directive)
• opt-out with respect to a bidder if the bidder or
  a controlling enterprise does not face
  comparable restrictions other than those chosen
  by the bidder
• bidders or controlling enterprises
  (Unternehmen)
• broader than Art. 12(3) of the Directive
  (companies) since Unternehmen do not have to
  be organized in a corporate form
• shareholder resolution

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• IX. The right of squeeze-out
• (mostly) uniform rules regardless of the type of
  preceding bid
• Two squeeze-out mechanisms in the form of
  exclusive alternatives available
• Sect. 39a et seq. of the Act
• and
• Sect. 327a et seq. of the Stock Corporation Act
• Fair Consideration
• offer price to be presumed fair where, through
  acceptance of the bid, the offeror has acquired
  at least 90 of the voting rights comprised in
  the bid (irrefutable presumption)
• extension of the 90 threshold to mandatory bids
  in line with Art. 15(5) of the Directive?

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• irrefutability of the presumption
• in line with Art. 15(5) of the Directive?
• Squeeze-out following a mandatory bid in line
  with European guarantee of fundamental rights?
• Squeeze-out following a takeover bid
• general standard for shareholder compensation
  established by the German Federal Constitutional
  Court
• dual minimum compensation requirement, i.e.,
  capitalised earnings value or current stock
  market price (if higher)
• consequence constitutionality is questionable

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• Squeeze-out by a decision of a Frankfurt civil
  court procedural aspects
• bidder has to file a motion before the Frankfurt
  civil court of first instance
• problem several bidders (acting in concert!)
• bidder must hold 95 of the voting rights in the
  target company (Art. 15(2)(a) of the Directive)
• non-implementation of Art. 15(2)(b) of the
  Directive despite less strict preconditions for
  exercising the squeeze-out right?
• 95 requirement must only be fulfilled at the
  time of the final oral hearing before the court,
  not at the time of filing the motion
• bidder can file a motion for a squeeze-out even
  in the case of a conditional offer (e.g., pending
  approval by cartel authorities)

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• transfer of shares only upon the court decision's
  becoming final
• court decision also determines the fair
  consideration to be paid to shareholders
  potential for considerable delay!
• contrary to squeeze-out pursuant to Sect. 327a et
  seq. of the Stock Corporation Act
• implementation in line with Art. 15 of the
  Directive (effet utile)?
• squeeze-out right with respect to preferred
  non-voting stock available

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• X. Concluding remarks
• German takeover law, in the main, complies with
  the Takeover Directive (possible) deviations
  often reflect well-founded uncertainty regarding
  the content of the Directive
• German takeover law, in implementing the
  Directive, does not create new barriers for
  cross-border takeovers, in particular.
• However, non-discriminating barriers for
  takeovers may result from
• the minimum bid price requirement pertaining to
  takeover bids
• the bidder-unfriendly squeeze-out procedure
• German target companies, on the other hand, still
  lack effective defensive mechanisms compared with
  companies in other European countries

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• To sum up, German takeover law may well act more
  to deter institutional investors from playing a
  more active role in corporate governance (a kind
  of reverse acting in concert-threat) than to
  deter potential bidders from launching an offer
  for German companies