Any acquisition of shares in a German company, public or private, may directly or indirectly lead to a notification duty under the German Securities Trading Act. This duty to notify could either apply to an acquired target itself or—and this may be overlooked—to any significant equity holding of the target or any of the related companies in the target’s group. Furthermore, this duty should be closely monitored if the acquirer and the target together own a participation in a listed German company that requires notification. The rules of attribution of voting rights are rather complex, and the consequences of omitting such a notification are substantial.
Notification Duties According to the Securities Trading Act
Pursuant to the Securities Trading Act, if an entity (the notifying party) reaches, exceeds or falls below the thresholds of 3, 5, 10, 15, 20, 25, 30, 50 or 75 percent of the voting rights of a listed company by purchase, sale or other action, he or she must notify the company as well as the Federal Financial Supervisory Authority within four trading days after the applicable event. The listed company itself must publish the notification and must send the Federal Financial Supervisory Authority proof of such publication.
The complexity of the notification duties is significantly increased by the attribution rules of the Securities Trading Act, which direct that, under certain circumstances, voting rights of shares be attributed to the notifying party if such shares are owned by third parties on which the notifying party has some influence. Such an attribution takes place, for example, with respect to voting rights of shares that are held by a subsidiary or by another person for the account of the notifying party.
In the case of conglomerates and other groups of companies, the voting rights of shares of a listed company that are held by an entity are attributed to the respective shareholders of such entity (and subsequently, to the shareholders of such shareholders). The purpose of these regulations is to disclose the true holders of influence. As a result, within international conglomerates that have numerous holding companies as intermediaries, several companies may be required to notify.
Recently, the district court in Cologne decided in favor of minority shareholders who challenged a number of resolutions adopted at the shareholders’ meeting of Strabag AG in 2006 with the argument that the majority shareholders of Strabag violated the notice requirements of the Securities Trading Act. The district court declared the challenged resolutions of the shareholders’ meeting to be void. The district court found that Strabag did not disclose certain international corporate integrations, and that the ultimate parent company of Strabag SE, the majority shareholder of Strabag AG, was a holding company in which several major shareholders, including the chief executive officer, Dr. Haselsteiner, collectively owned more than 50 percent. The court concluded that these major shareholders had a detrimental influence on the holding company. Therefore, the voting rights of the shares held by Strabag SE were to be attributed to them as well.
Additionally, the court ruled that the previous change in name of Strabag AG’s majority shareholder (Bauholding Strabag SE to Strabag SE) had triggered an additional notification obligation. The court held that, for transparency reasons, a new notification should be filed even in cases of marginal changes of a shareholder’s name. Strabag SE unsuccessfully argued that it was not obligated to notify because the Federal Financial Supervisory Authority (BaFin) had advised Strabag SE that the change of name does not require a new notification.
The legal consequences for an omission or a default of the notification requirement are substantial. The breach of the notification requirement according to the Securities Trading Act constitutes a misdemeanor, which can result in a civil penalty fine of up to €200,000 per occurrence.
A negligent breach of the notification requirement results in a loss of that shareholder’s rights to dividends and to voting rights. As a result, the rights granted to the shareholder do not exist for the time during which the company does not comply with its obligation to notify. This loss of rights occurs throughout an affiliated group. It therefore affects even shares belonging to a subsidiary, if such subsidiary’s parent company did not meet its obligation to notify. The loss of rights generally includes claims for dividends granted in the Stock Corporation Act. A loss of a dividend claim may be prevented if the notification has not been deliberately omitted and the person corrects the omission.
In the Strabag matter, the disqualification of the incorrectly exercised voting rights of the majority shareholder resulted in different outcomes for certain previously passed resolutions (among them, the resolutions on exoneration of the board members, election of an auditor and amendment of the statutes). Particularly relevant was the invalidation of the auditor’s appointment. If annual accounts were audited by persons not elected as auditors, the Stock Corporation Act provides that the annual accounts may be void. A voided election of auditors is also a consequence of a successful challenge. However, the Stock Corporation Act provides a cure of such invalidity six months after the publication of the annual accounts in the Bundesanzeiger, if the invalidity of the annual account has not been previously asserted.
According to the Act on the Limitation of Risks caused by Financial Investments (an amendment, inter alia, to the Securities Trading Act) the legal consequences of a loss of voting rights will intensify. In the future, the deliberate or grossly negligent breach of the notice requirement will result in a loss of shareholder rights for six months. This term of six months will not begin before the acquittal of the notice requirement. Consequently, voting rights of the affected shares will not be reinstated for six months even though the shareholder obligated to so notify has made up the required notice.
Following any acquisition of shares in a German company, public or private, the acquirer should closely review whether the acquisition directly or indirectly leads to a notification duty under the German Securities Trading Act.