New European transparency requirements have been transformed into German law.
On 27 November, Germany will implement the Amendment Directive to the Transparency Directive (2013/50/EU, the Amendment Directive). The amendment will particularly affect the German Securities Trading Act (Wertpapierhandelsgesetz, WpHG) and provide comprehensive amendments to the system of voting rights notification obligations.
The Transparency Directive (2004/109/EC) introduced a comprehensive system of notification obligations concerning voting rights in issuers for which Germany is the so-called Home Member State, or concerning certain financial instruments that may, directly or indirectly, affect the number of voting rights in such issuers (e.g., certain options and other derivatives instruments). The European Commission initiated a review of the Transparency Directive in 2013 that resulted in the Amendment Directive, which is due to be transposed into national law by the European Union (EU) member states by 26 November 2015.
The New System of Notification Obligations
Under the old law, the WpHG provided separate notification obligations for shareholdings, financial instruments that give the right to acquire shares, and certain other reportable financial instruments. Consequently, different notifications had to be filed depending on the type of instrument that triggered the notification obligation. The new law introduces a uniform notification obligation that covers all instruments. That is, regardless by which type of transaction a notification obligation is triggered, an investor will have to disclose all of its holdings in all reportable financial instruments in every notification that it makes (even if in one category, the holding is zero).
For this purpose, there will be a uniform notification form that must be used for each notification. The new form will replace the existing forms that differ from one another depending on which notification obligation they are designed to fulfill. The existing forms have often been criticized for being unclear and the source of many incorrect notifications to the Federal Financial Supervisory Authority (BaFin). With the new form, the BaFin has made an effort to simplify the notification process, which can be regarded as at least partially successful. For example, the new form no longer requires an indication of the precise subsection of the WpHG on which the attribution of voting rights has been based, which often caused correction requests by the BaFin. The new form, however, also shows some peculiarities that could give rise to uncertainties and possibly incorrect notifications. For instance, it requires the disclosure of all companies within a corporate chain that directly or indirectly hold the respective financial instruments, specifying the precise holding of the financial instruments concerned at each corporate level. The new form must be used for notifications concerning transactions that were entered into, on, or after 27 November 2015.
Optional Group Notification
The new procedure provides the possibility for a parent company to file a single notification instead of each company of a corporate group filing several single notifications. The BaFin strongly encourages investors to make use of this option because it simplifies the notification process and creates greater transparency within group structures. The option of the parent notification is also available if a parent company is not involved in the relevant transaction that triggers the notification obligation and does not hold any of the relevant financial instruments itself.
The new law will also amend the relevant reporting time. Although so far, the notification must have been made within four trading days after the transfer of ownership (i.e., the receipt of the shares in the securities account or their exit therefrom), the new law requires notification to be made within four trading days from the conclusion of an unconditional obligation to transfer the shares (i.e., an unconditional acquisition or sale on or off the exchange). This change has been introduced to unify German law with the laws of most EU member states. The change will shorten the notification periods— because usually, transferring the ownership of shares bought on the exchange takes two days from the trading day. In this context, the new law distinguishes between active and passive triggering of relevant thresholds. In cases of passive triggering the relevant threshold (e.g., in case of a capital decrease), the notification deadline starts to run when the obliged party obtains or should have obtained knowledge of the notification obligation, or at the latest, upon publication by the issuer of the respective capital change pursuant to section 26a of the WpHG.
New Sanction Regime
The new rules also allow an intensified sanction regime. The scope and amount of fines for failure to comply with the notification obligations have increased to a maximum of 10 million euros or 5% of the total group revenues calculated on a consolidated basis. The BaFin may impose an additional fine of up to double the amount of the profits gained from the failure to comply, which profits may be estimated by the BaFin. The BaFin will also publish its decision on imposing fines and sanctions on its website in which it will disclose the names of the persons or entities subject to the BaFin measures (“naming and shaming”).
Although the new rules constitute no major change in the substance of the voting rights notification obligations under the WpHG, the notification process will be affected significantly, and investors must quickly get familiar with the new formal requirements set by the BaFin. It remains to be seen whether the new notification form will facilitate the notification process and will help avoid incorrect notifications. The BaFin has indicated that it will monitor developments with respect to the new notification process and publish guidelines in areas where necessary. Because the new law provides a more comprehensive sanctioning framework, the BaFin may assume an obligation to sanction violations of the notification obligations more rigorously in the future.