The provisions of the German Securities Trading Act (Wertpapierhandelsgesetz) have been significantly tightened
The German federal parliament (Bundestag) has passed the Act on the implementation of the Transparency Amendment Directive (Revised Transparency Directive Transposition Act (Gesetz zur Änderung der Transparenzrichtlinie-Änderungsrichtinie). The new rules came into force on 26 November 2015.
When does the notification obligation arise?
What remained unchanged is that any party whose shareholding in a listed company reaches, exceeds or falls below the thresholds of 3, 5, 10, 15, 20, 25, 30, 50 or 75 percent of voting rights is obliged to notify this, without undue delay, to the listed company and to the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht / "BaFin"). However, the notification obligation now arises earlier than before: Such obligation used to arise upon transfer of the shares to the acquiring party, now the acquiring party is obliged to make the notification as soon as its claim to transfer of the shares is unconditional and to be fulfilled without any further delay.
Moreover, the party subject to the notification obligation is irrefutably deemed to be aware of the fact that the above thresholds have been met at the latest within two trading days. Such irrefutable assumption does not apply only if the threshold has been met passively due to a change in the total of number of voting rights of the listed company (for example, in case of a capital increase).
Notification requirements regarding (financial) instruments
According to the revised provisions of the German Securities Trading Act, one needs to distinguish between:
- notification obligations for voting rights attaching to shares; and
- notification obligations for instruments either conferring a right to acquire shares or with a similar economic effect.
There is no longer any distinction between "financial instruments" and "other instruments". Nevertheless, the notification obligation still applies to both, transactions providing for a physical delivery of shares as well as transactions providing for a cash settlement only. Whether or not the new terms result in substantive changes remains to be shown in practice; the indicative list of instruments being subject to notification which has been prepared by the European Securities and Markets Authority (ESMA) may provide some guidance in this respect.
In any case, the party subject to the notification obligation shall use the mandatory and standardized notification form provided by BaFin when making the notification.
Notification obligations within the group
Until now, individual group companies had to make separate notifications. Now, the parent company is allowed to make a group notification with an exempting effect for its subsidiaries.
Loss of voting rights and dividends
Breaches of notification obligations may still result in a loss of voting rights and dividend claims. Until now, such loss only applied to shares which were owned by the party being subject to the notification obligation, its subsidiaries and third parties acting on its account (e.g. a trustee), whereas now it applies to all attribution clauses. Therefore, a shareholder which coordinates its behavior with another shareholder in respect of the listed company (so-called "acting in concert"), although acting in compliance with the notification obligations, may lose the voting and dividend rights in its shares if the other shareholder breaches the notification obligations.
As before, the listed company should consider that the shareholder resolutions adopted at its shareholders' meetings could be challenged by shareholders on the grounds of a breach of notification obligations and the resulting loss of voting rights by other shareholders.
Penalties and naming
The sanctions under administrative offence laws have also been tightened: Legal entities are now threatened with fines of up to 10 million euros or 5 percent of their total turnover in the preceding business year. Moreover, the Federal Financial Supervisory Authority immediately publishes its decisions on measures and sanctions explicitly stating the name of the breaching party on its webpage – even before its judgement becomes final and binding (so-called "naming and shaming"). Such publication may only be delayed or published anonymizing the name of the breaching person in exceptional cases.
Preparation of quarterly financial reports
The revised provisions also provide for a statutory facilitation for listed companies: There is no longer an obligation to prepare and publish quarterly financial reports. However, corresponding reporting obligations under regulations of the stock exchanges remain unaffected. Since the stock exchange rules of Frankfurt Stock Exchange provide that companies listed in the Prime Standard shall prepare and publish quarterly financial reports, these companies still have to comply with such reporting obligation.
Conclusion: Avoid breaches against notification obligations
Unfortunately, the new provisions do not facilitate the voting right notifications which are hardly comprehensible for many shareholders and investors in practice. Since the sanctions are even stricter than before owners of material shareholdings in listed companies should use utmost diligence in order to avoid breaches of the notification obligations.