- Fewer formalities regarding the invitation procedure
- Facilitation of proxy voting and absentee voting
- Increased hurdles for predatory shareholders
The latest amendment of the German Stock Corporation Act will transform the EU directive on investor rights (Shareholders' Directive) into German Law. Parts of the legislation are expected to become effective on August 1, 2009, while others will take effect on November 1, 20091. The website of a listed company will now be the key source of information for shareholders and investors. Furthermore, the new rules for participation in general meetings and the exercise of voting rights allow a shareholder to actively participate in the general meeting without the necessity of being physically present – a change which is of particular importance to non- German investors. Finally, the new legislation enacts provisions which reduce the ability of predatory shareholders to block shareholders' resolutions, increasing legal certainty for investors and the company itself.
In the following we provide a high level summary of the newly enacted rules which we believe to be of specific interest to foreign shareholders of German stock corporations:
1. Paperless General Meeting
Stock corporations may utilize the advantages of the Internet in the preparation for and the holding of the general meetings:
a) Listed stock corporations have to publish the relevant documents for the general meeting (e.g., invitation, agenda, reports of the management board and the supervisory board, financial and other reports) on the Internet. It is no longer sufficient that a listed company makes them available at its corporate premises. Non-listed corporations may choose to publish the documents on the Internet, in which case they do not need to be displayed at the company's premises. As a consequence, the web pages of stock corporations will become a central portal for information.
b) The invitation to the general meeting can be delivered to the shareholders electronically, which allows companies to save the costs of printing and sending the invitation by postal mail to each shareholder.
c) It is no longer required that sufficient copies of the relevant documents be physically displayed at the general meeting if the shareholders are provided with electronic access to these documents.
2. Participation in the general meeting
The new rules aim to alleviate the requirements for participation by shareholders in the general meeting and thereby increase overall participation. If the number of shareholders who are present should really increase it will become less likely that larger institutional investors with a shareholding between 15 and 30% will have a majority of the votes present in a general meeting.
a) Online participation
Under current law general meetings may be broadcasted via TV or the Internet. However, a shareholder who wishes to actively participate in the general meeting, i.e., ask questions and cast votes, needs to be physically present. The new legislation provides that the company's articles of association may be amended to allow for a true online general meeting. Although it will still be necessary to announce a physical location where the general meeting will actually be held, the shareholders may join the meeting via video or the Internet or even telephone conference. However, we expect online participation to give rise to new problems: For example, if the online connection fails during the voting process due to technical reasons which bar the online participant from voting, a decision is made nonetheless and cannot be challenged in court. Therefore it is recommendable that a shareholder ensures that its vote is effectively taken into account by other means, e.g., absentee voting.
b) Absentee voting
To avoid problems arising from or in connection with failed online participation shareholders may prefer, at least in the early stages of online participation, to use another new feature of the adopted legislation. Companies may – after amending their articles of association – allow their shareholders to ask questions, make suggestions and vote in absentia even without having to send a proxy to the general meeting, e.g., by letter, telefax or e-mail.
c) Proxy voting
Although the sending of a proxy to the general meeting is generally admissible, most small shareholders are not inclined to make this effort nor do they use their deposit banks as proxies, whereby the deposit bank prior to a general meeting advises the shareholder on how to vote in the general meeting and exercises the shareholder's voting rights in accordance with its suggestion unless it receives a differing order from the shareholder. Under the new legislation, the deposit bank is obliged to grant its customers two additional choices on how to exercise their vote: A deposit bank has to offer to vote on behalf of the shareholder in line with the recommendations of the management board or supervisory board and, alternatively, the bank has to offer its customer the option of transferring the exercise of his or her voting rights to a shareholder association.
3. Countermeasures against predatory shareholders
In Germany it is a common practice of certain predatory shareholders to challenge the validity of shareholders' resolutions in court, mostly on the basis that a resolution violates formal provisions of statutory law. As a consequence, the respective shareholders' resolution cannot be registered with the commercial register. Especially the important resolutions, however, require registration in the commercial register in order to become legally effective (e.g., capital measures, amendments of the articles of association, profit and loss pooling agreements). The new rules will increase the hurdles for minority shareholders to obstruct and block important shareholder resolutions from registration:
a) Simplified calculation of dates and deadlines
To reduce shareholder complaints based on the alleged violation of various, independently determined dates and deadlines, the method of calculation for relevant dates and deadlines has been simplified and unified. Now the date of the general meeting serves as the reference point for the calculation of all dates and deadlines.
b) De minimis rule
Shareholders with an aggregate shareholding below a face value of EUR 1,000 are prohibited from lodging complaints against the validity of a shareholders' resolution.
Their rights are limited to claims for damages. This requires predatory shareholders to make a considerable investment of financial resources in order to pursue their strategy.
c) Release procedure
Although a release procedure had been introduced previously, i.e., the company can apply for a court decision that a shareholders' resolution is registered with the commercial register despite pending lawsuits, predatory shareholders remained problematic as the release procedure itself could take several months – too long for some companies.
The new legislation intends to shorten the time required to obtain a release decision:
- The courts are provided with more precise statutory guidance to determine whether the company's interest in a release prevails over the shareholder's. The new provision stipulates a direct comparison of the disadvantage to be suffered by the company because the resolution is suspended and by the plaintiff if the resolution were to become effective. As in most cases the disadvantage can be quantified in a monetary amount, the courts' decisions will become more predictable. In the past, several courts have rejected a direct comparison of economic disadvantages; the new legislation now requires them to do so.
- Procedural improvements limit means of delaying the release procedure (e.g., time consuming overseas delivery of correspondence, late prepayment of court's fee and expenses).
- The regional upper court (Oberlandesgericht) is the court of first instance and last resort. Its decision is final and binding; an appeal to a higher court is not admissible. The removal of the regional court as first instance cuts the time to obtain a final release decision in half, from six to nine months to approximately three to four months.