Introduction
Scope of the Takeover Act
Mandatory Offer
Voluntary Offer
Cash Offers and Exchange Offers
Offer Price
Offer Document
Time Frames
Duty of Neutrality and Defence Measures
Supervision and Sanctions
Squeeze-Out Rule
On June 29 2000 the German Federal Ministry of Finance submitted a draft of the future German Takeover Act. The act will replace the existing non-binding Takeover Code, an instrument of voluntary self-regulation. This took effect on October 1 1995 and was subsequently amended as of January 1 1998. The Takeover Code has not been accepted by all companies listed in Germany, and a large number of companies refused to adhere to its provisions. Accordingly, the enactment of binding statutory rules for the regulation of takeovers was necessary.
Last year the Federal Ministry of Finance began to prepare a draft of the Takeover Act. Early this year, in the wake of Vodafone's successful takeover bid for Mannesmann AG, Chancellor Gerhard Schröder convened an expert commission to counsel the ministry on the future Takeover Act. In its last session on May 17 2000, the expert commission made recommendations consisting of 10 so-called 'cornerstones', which were taken into account by the Federal Ministry of Finance.
The draft was sent for consultation to business and banking circles, as well as to leading academic experts. The act is scheduled to come into force at the beginning of 2001, or by the middle of next year at the latest. However, during an experts hearing which took place on July 25 2000 at the Federal Ministry of Finance, it was revealed that because of a need for further discussion, it is unlikely that the Takeover Act will enter into force on January 1 2001.
On June 19 2000, just 10 days before the draft of the Takeover Act was submitted, the Council of Ministers of the European Union adopted a common position on the 13th Directive on Company Law concerning Takeover Bids. Rather than formulating detailed rules, the EU directive adopts a 'framework approach', which will allow national differences to remain. Due to this approach, and to the fact that the principles and provisions of the directive were taken into consideration when preparing the draft, it is unlikely that the Takeover Act will conflict with the EU directive once it has been finally adopted (this is expected in Spring 2001). Members of the European Parliament have already announced that several amendments to the provisions of the common position will be necessary. However, because of the expected delay in enacting the Takeover Act, there should be sufficient time for the German legislature to make any necessary amendments before the act enters into force.
The Takeover Act applies to all takeover bids targeted at stock corporations and partnerships limited by shares that have their registered offices in Germany, as long as the target company's shares are admitted for trading on a domestic stock exchange or on the stock exchange of an EEA member state. Unlike the Takeover Code, which also applies if the shares in the target company are traded over the counter (ie, in a non-regulated market) with the company's consent, the Takeover Act does not apply to shares traded over the counter, unless these shares are listed.
In an explanatory comment to the draft, the Federal Ministry of Finance states that it makes no difference whether the shares are admitted to trading both in Germany and in another contracting state of the EEA, or only in Germany, or only in another EEA state. However, the provisions dealing with the international scope of the Takeover Act are only a provisional arrangement. The draft EU directive contains detailed provisions on how to determine the applicable national takeover law and the internationally competent supervisory authority in the case of cross-border takeover bids. The German legislator has already announced that the respective provisions of the Takeover Act will be amended after the final adoption of the EU directive, in order to comply with its regulations.
Mandatory Offer
A mandatory offer to all shareholders becomes necessary if the bidder acquires control of the target company. The Takeover Act defines 'control' as the acquisition of at least 30% of the target company's voting rights (including voting rights which are attributed to the bidder as defined in the act). However, the Takeover Code employs a more complicated concept of 'control'. Under the code, a mandatory offer is necessary if the bidder acquires at least 50% of the voting rights in the target company, or if the bidder's shareholding is such that it would have constituted a qualified majority at each of the previous three shareholders meetings.
Pursuant to the draft Takeover Act, a shareholder must publish the fact that it has acquired control within two working days. It must make the mandatory offer within two weeks of this notification. However, the Federal Ministry of Finance has already indicated that this two-week period, which gives the shareholder little time to prepare the offer document, especially in the case of cross-border takeovers, will be extended to four weeks.
The bidder may apply to the competent authority, the Federal Authority for Securities Trading, to disregard certain voting rights defined in the act when calculating the 30% threshold (eg, acquisition due to family succession, change of legal form or internal group restructuring measures).
The Federal Authority for Securities Trading can also exempt shareholders from the obligation to make a mandatory offer in certain situations, especially in cases where the bidder cannot exert control for some reason or where the obligation to bid would be detrimental, as is often the case in rescue operations. Further details will be defined by a statutory order published by the Federal Ministry of Finance.
Voluntary offers are subject to the same rules as mandatory offers. The legislature intends to prevent potential bidders from circumventing the provisions that apply to mandatory offers.
During the experts hearing, Federal Ministry of Finance representatives proposed that a voluntary offer made by a controlling shareholder which is not required to make a mandatory offer, since control was acquired before the enactment of the Takeover Act, should not be subject to the act's provisions. According to most experts who participated in the hearing, this should also apply to voluntary offers which are not aimed at the acquisition of control. Instead, both types of voluntary offer should only be subject to simpler rules, limited to the regulation of certain procedural standards and the transparency of the bid procedure, as well as the provision of information and equal treatment of the shareholders in the target company. The Federal Ministry of Finance seems to be prepared to implement these proposals.
Cash Offers and Exchange Offers
The Takeover Code does not specify whether the bidder must pay the offer price in cash or by way of shares. However, the Takeover Act contains detailed provisions which deal with the type of consideration that must be offered to the shareholders. In principle, the bidder is free to choose whether he will offer cash (in euros) or its own shares. In the latter case, the shares that are offered as consideration must be traded in a liquid market and listed on a stock exchange within the EEA. Therefore, any company that has its seat outside the EEA may offer own shares as consideration if they are admitted for trading on an EEA stock exchange.
However, the bidder must make a cash offer if (i) it acquired for cash shares in the target company that exceed 5% of all shares or voting rights within the last six months before launching the takeover bid, or (ii) it acquires for cash a share or shares in the target company during the takeover procedure (ie, after the bid has been launched and before the end of the offer period).
The offer price must be at least equal to the average weighted stock-exchange price of the target's shares during the six months that preceded notification of the intention to make a takeover bid. Through this provision, the Takeover Act sets out how the offer price should be determined, taking the volatility of the market into consideration. This contrasts with the Takeover Code, under which the offer price must only be reasonably related to the current stock-exchange price.
If the bidder has acquired shares in the target company during the six months before the bid was launched, the offer price must be determined according to the highest price paid in this share acquisition. Consequently, a block premium is generally distributed among all shareholders if a package of shares was acquired. However, the Takeover Act (apart from the City Code on Takeovers and Mergers) allows for a discount to the package price of up to 15%. This is more restrictive than the Takeover Code, which allows for a maximum deduction of 25%.
The Federal Ministry of Finance or, through delegation, the Federal Authority for Securities Trading, is empowered to regulate further details on determining the offer price.
Like the Takeover Code, a bidder under the Takeover Act is obliged to improve its offer if it acquires shares in the target company during the offer period and pays or agrees to pay a higher consideration than that offered in the takeover bid. This also applies if shares are acquired at a higher price in the year following the end of the offer period.
In the offer document the bidder must inform the target company's shareholders of the takeover and its effects. The offer document must be in German and must contain all information which is necessary to enable the shareholders to make an informed decision regarding whether to accept the bid. The target company's board of directors must inform the employees or their representative bodies immediately of the offer document's contents.
The offer document must provide detailed information as prescribed by the Takeover Act. This includes details on the following:
- the financing of the takeover and the expected effects of a successful takeover on the bidder's financial status and operations;
- confirmation of the bidder's ability to finance the takeover, provided by an investment services enterprise or an auditor (both must have its seat in an EEA member state). Any shareholder who accepts the offer and suffers a loss because the takeover bid is insufficiently financed may hold the auditor or investment services enterprise liable for the losses incurred;
- the bidder's plans with respect to the future business of the target company, including the takeover's impact on employees and their representative bodies (eg, plans for dismissals, transfer of the company's seat or closing of branches);
- the consideration and the method of its determination; and
- the status of antitrust clearance procedures and any other administrative procedures, if applicable.
The Takeover Act provides for the liability of the offer document's issuers, and of those who sign as responsible for it, for incorrect, misleading or incomplete statements which the shareholders of the target company may consider in their evaluation of the takeover.
Within two weeks of publishing the decision to launch a takeover bid or the acquisition of 'control', a bidder must file the offer document with the Federal Authority for Securities Trading (as mentioned, the Federal Ministry of Finance has indicated that the two-week period will be extended to four weeks to allow for the document's preparation). As soon as the authority has approved the offer document, the document must be published on the Internet and in one national exchange publications newspaper (eg, FAZ, Handelsblatt). This also applies if the authority does not forbid the takeover bid within 10 days.
The offer period must last for at least four weeks but for no more than six weeks (in the Takeover Code these figures are 28 days and 60 days respectively). The offer period will be extended to two months if a meeting of the target company's shareholders is called within two weeks of the offer document's publication.
Duty of Neutrality and Defence Measures
The target company's board of directors and supervisory board have, in principle, a duty of neutrality. That is, they must abstain from measures which could hinder the success of the takeover bid from the time of the bid's launch until the end of the offer period. Actions taken in the ordinary course of business which are in the company's interests remain possible.
However, the target company is not left without defence. Unlike the Takeover Code, which does not set out permitted measures, but rather prohibits the target company from taking any steps that run contrary to the interest of the shareholders that take advantage of the offer, the Takeover Act expressly permits the following measures:
- search for a 'white knight';
- defence measures taken on the basis of a shareholders vote during the takeover procedure. The period of notice for this meeting will be shortened from one month to two weeks; or
- capital increase and the issuance of new shares, provided that the underlying shareholders' vote was passed in the 18 months preceding the offer document's publication and that due regard is paid to the pre-emptive rights of the existing shareholders. Since the bidder may extend its offer to new shares issued during the bid procedure, this measure may not be particularly effective.
The board of directors must issue a statement with respect to the takeover bid. This statement must consider the interests of the company as a whole, and must also include the response of the employees or their representative bodies to the bid.
The bidder may not make or offer to make any payments to members of the target company's board of directors or supervisory board in connection with the takeover.
The provision of the draft Takeover Act which establishes the duty of neutrality for the target company's board of directors and supervisory board has been heavily criticized as too far-reaching, particularly by industry representatives. At European level, the corresponding provision in the EU's common position on the Takeover Directive has also been subject to criticism. Members of the European Parliament have already publicly announced that amendments will be made, since the duty of neutrality for which the directive currently provides is too restrictive.
The Federal Authority for Securities Trading, situated in Frankfurt am Main, will be responsible for administering the new takeover law and supervising compliance with the provisions of the Takeover Act. It will be granted all necessary supervisory and investigatory powers. An appeals committee consisting of five practitioners will be established to decide on most of the appeals against authority decisions. All appeals will be dealt with within two weeks, and the decisions will be immediately enforceable. The final decisions of the federal authority may be appealed to the Frankfurt am Main Court of Appeal within one month. The court's decision may not be appealed further.
The Takeover Act provides for sanctions which the Federal Authority for Securities Trading may impose if the bidder or any other person violates his duties and obligations under the act. These include fines of up to €1.5 million, as well as the loss of rights arising from shares in the target company (eg, voting rights) which the bidder owns until the obligations have been fulfilled.
German law does not permit squeeze-outs of minority shareholders. However, in order to enable a majority shareholder to acquire all shares in the target company, a squeeze-out rule will be introduced. This will allow for the squeeze-out of minority shareholders against adequate cash compensation if the majority shareholder has acquired more than 95% of the company's shares.
The new squeeze-out rule will not be part of the new Takeover Act, but will be included in the Stock Corporations Act. It will enter into force together with the Takeover Act. Thus, the squeeze-out rule applies to all stock corporations, whether listed or unlisted. Further, there is no obligation to launch a takeover bid as a prerequisite of a squeeze-out.
The shareholders must decide on the squeeze-out at a meeting. The resolution of the shareholders' meeting may be set aside upon an action for a violation of law or the company's articles of association. However, the action may not be based on the grounds that the cash compensation offered to the minority shareholders is inadequate. Upon a motion of a minority shareholder, the compensation will be determined in special court proceedings. These will not delay or prevent the execution of the squeeze-out.
For further information on this topic please contact Petra Mennicke or Oleg de Lousanoff at Hengeler Mueller by telephone (+49 69 17 09 50) or by fax (+49 69 72 57 73) or by e-mail ([email protected] or [email protected]).
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