What are the primary sources of laws and regulations relating to shareholder activism and engagement? Who makes and enforces them?
The primary source of law relating to shareholder activism and engagement is the German Stock Corporation Act (AktG), including the unwritten principle of shareholders’ duty of loyalty with respect to the company’s and the other shareholders’ legitimate interests. Provisions applying only to listed companies (ie, companies the shares of which are admitted to stock exchange trading on regulated markets; section 3(2) AktG) and their shareholders can be found in particular in the EU Market Abuse Regulation (Regulation No. 596/2014/EU, including various accompanying level 2 and level 3 acts), the EU Regulation on Short Selling (Regulation No. 236/2012/EU), the German Securities Trading Act (WpHG) and the German Securities Acquisition and Takeover Act (WpÜG). The primary sources of laws and regulations relevant for listed companies are either directly applicable EU regulations or are based on EU directives that aim to fully harmonise the capital market laws in all EU member states, such as the EU Transparency Directive (Directive 2013/50/EU amending Directive 2004/109/EC), the EU Market Abuse Directive (Directive 2014/57/EU) and the Shareholders’ Rights Directive (Directive (EU) 2017/828 amending Directive 2007/36/EC). Accordingly, the relevant German federal laws, which are acts of parliament, are partially based on EU directives (also see ‘Update and trends’ for upcoming legislation).
Shareholders can enforce their rights generally in front of the civil courts. The breach of specific obligations of the management (concerning, for example, the truthfulness of certain declarations and reports or information provided in shareholders’ meetings) can be prosecuted as a statutory offence (section 399 et seq, AktG). Regulations concerning listed companies are enforced by the competent supervisory body (ie, the Federal Financial Supervisory Authority (BaFin)).
Certain industries (eg, banking and insurance) are subject to additional regulations that are supervised and enforced by BaFin or certain EU institutions, in particular the European Securities and Markets Authority (ESMA).
In addition to statutory law as described, the German Corporate Governance Code (DCGK) contains recommendations and suggestions based on internationally acknowledged standards for the best practice of corporate governance. The aim is to support a more transparent and comprehensible corporate governance system in order to enhance the confidence of investors, clients, employees and the general public in German listed companies. The DCGK is not mandatory, but deviations have to be explained and disclosed in an annual declaration of conformity, which has to be published on the company website, section 162, AktG (see ‘Updates and trends’).Shareholder activism
How frequent are activist campaigns in your jurisdiction and what are the chances of success?
The number of activist campaigns has risen continually over recent years. Their chances of succeeding depend largely on whether the claims appear likely to increase the value of the shares. The chances of success hinge especially on whether the activists uncover unknown weaknesses or potentials of the company or receive support from proxy advisers and institutional investors.
How is shareholder activism generally viewed in your jurisdiction by the legislature, regulators, institutional and retail shareholders and the general public? Are some industries more or less prone to shareholder activism? Why?
Initially, the management and large shareholders in German companies as well as the general public were in general sceptical about activist shareholders. More recently, this perception has changed and became more differentiated, depending on the approach and the quality of the proposals of the activist shareholders.
There is a clear tendency that the boards of large listed companies are interested in a dialogue with activist shareholders who make constructive proposals or who can be expected to gain substantial support from other shareholders. Activist shareholders can expect support from other shareholders, provided these can benefit from the initiative taken by the activist shareholders as well and further provided the initiative is reasonable with regard to the companies’ best interests. A rising number of initiatives taken by activist shareholders is aligned with ongoing public discussions about, inter alia, potential corporate governance issues, allegedly poor strategic planning or voluminous management remuneration plans and bonus payments.
Shareholder activism appears across all industries. The following prominent companies have been targeted by activists’ campaigns in the past:
- Adidas (sports and lifestyle);
- Bilfinger (construction);
- Celesio (pharmaceuticals);
- CeWe Color (digital media);
- Conergy (solar power);
- Demag Cranes (engineering);
- Deutsche Bank (finance)
- Deutsche Börse (stock exchange);
- Deutsche Telekom (telecommunications);
- E.ON (energy);
- Gildemeister/DMG Mori (engineering);
- Hochtief (construction);
- Hypo Vereinsbank (finance);
- Infineon (semiconductors);
- IWKA (engineering);
- Kabel Deutschland Holding (cable provider);
- KUKA (engineering);
- Porsche Automobil Holding (car manufacturing);
- Röhn Klinikum (health);
- SLM Solutions (engineering);
- STADA Arzneimittel (pharmaceuticals);
- Ströer (digital media, advertisement);
- ThyssenKrupp (steel, engineering);
- Uniper (energy);
- Volkswagen (car manufacturing); and
- Wirecard (digital financial services).
To date, there is no legislation underway dealing specifically with shareholder activism. However, BaFin recently issued a general prohibition on establishing and increasing net short positions in shares of Wirecard based on article 20 of EU Regulation No. 236/2012. This was explicitly supported by ESMA.
What are the typical characteristics of shareholder activists in your jurisdiction?
Shareholder activists not only exercise their statutory rights as shareholders, but try to leverage their influence beyond their proportionate shareholding through informal measures (eg, letters to the management, public campaigns, etc). In the public awareness, mainly hedge funds have been viewed as activist shareholders. However, this has changed recently. Some investment funds or private equity investors have acquired substantial holdings and publicly adopted a medium term or long-term strategy. In several cases, representatives of activist shareholders have acquired seats in the supervisory board of their respective target company. Activist shareholders can expect support from other shareholders, provided these can benefit too, and the proposals are reasonable with regard to the company.
Activist shareholders in this sense must be discerned from (i) shareholders trying to make a short-term profit from well prepared short sale attacks and (ii) notorious claimants who make use of statutory minority rights in order to block resolutions on structural measures adopted by the majority. Contrary to notorious claimants, activist shareholders are strongly interested in their proposals being implemented.
What are the main operational governance and sociopolitical areas that shareholder activism focuses on? Do any factors tend to attract shareholder activist attention?
Shareholder activism mainly focuses on the following topics:
- corporate strategy and restructuring measures (eg, Bilfinger and ThyssenKrupp);
- takeover bids (eg, Uniper, Deutsche Börse, Gildemeister, Kabel Deutschland Holding, Celesio and SLM Solutions);
- corporate governance, in particular changes in composition of management or supervisory board (eg, Infineon, KUKA, STADA and Volkswagen);
- return of value to shareholders (eg, ThyssenKrupp);
- short sale attacks (eg, Wirecard and Ströer);
- debt-for-equity swaps (eg, Conergy); and
- damages claims in Germany and in other jurisdictions (eg, Porsche Automobil Holding and Volkswagen).
Activist shareholders in Germany do not focus on sociopolitical activism (environmental, political, ethical, or gender discrimination). There are small non-profit organisations with typically very small shareholdings that use shareholders’ meetings as a platform to bring forward their views on these topics. Other factors that attract the attention of shareholder activists are:
- a high free float (in particular because of traditionally low attendance of free float at shareholders’ meetings in Germany);
- a specific capital structure, for example, significant cash positions or defensive financial gearing or strong cash generation opportunities not being utilised;
- an unsatisfactory share price performance or a vague business strategy, which leads to poor business prospects;
- a conglomerate structure; and
- takeover and restructuring situations.
Shareholder activist strategiesStrategies
What common strategies do activist shareholders use to pursue their objectives?
It is becoming increasingly common that activist shareholders apply pressure and vigorously pursue change in their respective ‘target’ company. When doing so, activist shareholders regularly seek to gain mainstream investor support.
Strategies based on minority shareholder rights
Most activist strategies are based on statutory minority shareholder rights, which, to some extent, depend on a minimum amount of capital stock held by the respective activists.
Basic minority rights are granted to each shareholder, regardless of the number of shares he or she owns. All shareholders are entitled to, for example:
- attend and speak at a shareholders’ meeting;
- make counterproposals before or at a shareholders’ meeting (section 126, AktG);
- request information at a shareholders’ meeting. Every shareholder is entitled to ask questions in the shareholders’ meeting (section 131(1), AktG) and request information that has been disclosed to other shareholders (section 131(4), AktG);
- use the shareholders’ forum in the Federal Gazette (section 127a, AktG);
- commence litigation against shareholders’ resolutions (section 245 Nos. 1-3, AktG);
- pursue damages claims against controlling shareholders or against management or supervisory board members (section 309(4) and sections 317(4) and 318(4), AktG); and
- request the appointment of a supervisory board member by the court to fill a vacancy (section 104(1), AktG).
Other minority rights depend on the amount of capital stock the shareholders are holding. For example, shareholders holding:
- 1 per cent of the capital stock or €0.1 million nominal share value may:
- request a special audit by a court-appointed auditor (section 142(2), AktG); or
- request the permission of the court to pursue liability claims against members of the management or supervisory board (section 148, AktG);
- 5 per cent of the capital stock or €0.5 million nominal share value may:
- request amendments to the agenda of a shareholders’ meeting (section 122(2) No. 1, AktG). For example, a resolution to change the corporate charter, remove supervisory board members or pursue liability claims against the management or supervisory board members; or
- request the permission of the court to make amendments to the agenda public (section 122(2), (3), AktG);
- 5 per cent of the capital stock may:
- request the company to call a shareholders’ meeting (section 122(1) No. 1 AktG); or
- request the permission of the court to call a shareholders’ meeting (section 122(2), (3) AktG);
- more than 5 per cent of the capital stock may block a squeeze-out of minority shareholders (section 327a, AktG);
- 10 per cent of the capital stock or €1 million nominal share value may:
- request an individual vote on dismissal of management or supervisory board members (section 120(1), AktG); or
- request a court-appointed representative to pursue liability claims against members of the management or supervisory board (section 147(2), AktG);
- 10 per cent of the capital stock (or less if capital stock is not fully represented in the shareholders’ meeting) may nominate members of the supervisory board in a privileged way (section 137 AktG);
- more than 10 per cent of the capital stock may block a merger-related squeeze-out of minority shareholders (section 62(5), UmwG); and
- more than 25 per cent of the capital stock (or less if capital stock is not fully represented in the shareholders’ meeting) may block amendments of the corporate charter and other major shareholder resolutions - for example, capital increases, corporate agreements, or transfer of substantially all of the company’s assets (sections 179(2) and 179a(1) AktG).
Strategies based on majority shareholder rights
Those who hold majority shareholder rights may:
- initiate a vote of no confidence with respect to management board members (a simple majority at the shareholders’ meeting; section 84(2), (3), AktG); or
- remove members of the supervisory board (a three-quarters majority at the shareholders’ meeting; section 103(1), AktG).
Informal activism is less common, although there are various informal strategies that activists may use to pursue their objectives. For example:
- a letter to the management or supervisory board;
- a request to meet the management or members of the supervisory board, in particular its chairman;
- public campaigns to encourage shareholders to vote in a certain way;
- publishing white papers or research reports;
- proxy solicitation;
- utilising proxy advisers who provide research, advice and recommendations on how to vote in shareholders’ meetings;
- fast or hidden stakebuilding; and
- short-selling, sometimes after having published critical reports on the target company.
What are the general processes and guidelines for shareholders’ proposals?
Shareholders’ proposals concerning items of the agenda of a shareholders’ meeting (counter proposals)
At shareholders’ meetings, every shareholder is entitled to speak, to ask questions (section 131, AktG) and to make proposals directed against proposals of the management or the supervisory board under specific items of the agenda (section 126, AktG). Shareholders are not required to notify the company in advance of such proposals, but if the company receives such a proposal including the shareholder’s name and the reasons for the proposal in writing at least 14 days before the relevant meeting, the proposal (including shareholder’s name and reasons) must be made accessible to other shareholders as well as to certain institutions and persons mentioned in section 125(1)-(3), AktG. This usually means that such proposals are published on the company website. For listed companies, publication on the company website is mandatory (section 126(1), AktG). The company does not have to make proposals accessible only in exceptional circumstances (such as section 126(2), AktG). If several shareholders present proposals in respect of the same subject, the management board may combine such proposals and respective statements of the reasons (section 126(3), AktG), without curtailing or corrupting the proposals.
Shareholders’ proposals concerning other subjects
Shareholders’ proposals concerning subjects other than items on the agenda are only admissible if the agenda is amended accordingly. Only shareholders individually or collectively holding shares representing at least 5 per cent or €0.5 million nominal share value (or less if stated in the corporate charter) of the company’s capital stock may request that additional items be placed on the agenda of a shareholders’ meeting (section 122(2), AktG). Requests, including the reasons or a draft resolution, must be addressed to the company’s management board in writing and must be received by the company at least 24 days (in case of non-listed companies) or 30 days (in case of listed companies) prior to the shareholders’ meeting. Requesting shareholders must prove that they have held the sufficient number of shares (quorum) for the legally required minimum period of ownership of 90 days, which has to be calculated from the date of receipt by the company.
As long as shareholders comply with the formal requirements, there are very few reasons why a company may reject such request; for example, if the request is directed at a resolution that would be unlawful, or if the request constitutes an abuse of shareholder rights or conflicts with the shareholder’s duty of loyalty.
Amendments to the agenda of non-listed companies must be made public in the Federal Gazette (or by registered mail to all shareholders if they are known to the company and the corporate charter does not stipulate differently; section 121(4) AktG), either upon calling the meeting or immediately following receipt of the request. Listed companies must publish amendments to the agenda on their website (section 124a, AktG) and, if the company has issued bearer shares, forward the information to the media (section 121(4a), AktG).
If the company does not comply with such request, relevant shareholders may apply to the competent court (ie, the local court at the registered seat of the company) for authorisation to amend the agenda and to publish such amendment accordingly at the company’s cost (sections 122(3) and (4), AktG).
Common shareholders’ proposals
Naturally, the type of shareholders’ proposals depends on the company involved and the individual situation at hand, but common subjects are:
- counterproposals regarding profit distribution;
- proposals of supervisory board candidates;
- the appointment of special auditors (sections 119(1) No. 7 and 142, AktG);
- the enforcement of certain compensation claims against board members or other persons; and
- the appointment of special representatives to enforce these claims (section 147, AktG).
Mandatory voting rights
The shareholders’ meeting is competent only as far as expressly provided for by corporate law or by the corporate charter. The following examples are particularly relevant:
- amendments of the corporate charter (sections 119(1) No. 5 and 179(1), AktG);
- appointment and removal of members of the supervisory board, as far as they are not appointed under the co-determination regime (sections 119(1) No. 1 and 103(1), AktG);
- allocation of distributable profits (section 119(1) No. 2, AktG);
- approval of the actions of the members of the management and supervisory board (section 119(1) No. 3, AktG);
- appointment of the company auditor (section 119(1) No. 4 AktG);
- capital increase or reduction (section 119(1) No. 6, AktG);
- management matters put before the shareholders’ meeting by the management (section 119(2), AktG);
- decisions of major importance for the company such as major divestments or drop-downs (based on (controversial) case law known as the Holzmüller-Gelatine doctrine);
- appointment of special auditors (sections 119(1) No. 7 and 142, AktG);
- enforcement of certain compensation claims against board members or other persons (section 147(1) AktG) and appointment of special representatives to enforce these claims (section 147(2), AktG);
- liquidation of the company (sections 119 (1) No. 8 and 262 No. 2, AktG) as well as the continuation of a liquidated company (section 274, AktG);
- transfer of substantially all of the company’s assets (section 179a(1), AktG);
- issuing convertible, warrant or dividend bonds as well as participation rights (section 221 AktG);
- affiliation agreements (section 293(1),(2) AktG);
- integration of one stock corporation into another (section 319 AktG);
- squeeze-out (section 327a AktG); and
- restructuring measures (changes of the legal form, mergers, demergers under the Merger and Reorganisation Act (UmwG)).
May shareholders nominate directors for election to the board and use the company’s proxy or shareholder circular infrastructure, at the company’s expense, to do so?
All shareholders are entitled to make proposals for the election of supervisory board members. Proposals do not need to include reasons, but should contain name, occupation and domicile of the proposing person. If a proper proposal is received by the company in writing at least 14 days before the relevant meeting, it must be made available to other shareholders (or the public) on the company website (see question 7).
Shareholders cannot make proposals for members of the management board as they are appointed by the supervisory board, usually following a selection process conducted by the chairman of the supervisory board to find suitable candidates.
May shareholders call a special shareholders’ meeting? What are the requirements? May shareholders act by written consent in lieu of a meeting?
Request to call a shareholders’ meeting
Shareholders who together hold at least 5 per cent of the capital stock (or less if stated in the corporate charter) may require the company to call a shareholders’ meeting (section 122(1), AktG). The request should be addressed to the management board in writing and state the objective and reasons. Requesting shareholders must prove that they have held a sufficient number of shares (quorum) for the legally required minimum period of ownership of 90 days, such period being calculated from the date on which the company received the request.
Permission to call a shareholders’ meeting at the company’s expense
If the company fails to comply with a proper request to call a shareholders’ meeting, the requesting shareholders may apply to the competent court (ie, the local court at the registered seat of the company) for authorisation to call a shareholders’ meeting at the company’s expense (section 122(3), (4), AktG).
Exercise of voting rights
Shareholders are entitled to exercise their voting rights in shareholders’ meetings. They may not act by written consent without a meeting. However, there are various options for voting in a meeting:
- proxy voting (sections 134(3) and 135, AktG); and
- postal vote (section 118(2), AktG) or online participation (section 118(1), AktG), if the corporate charter provides for such way of voting.
What are the main types of litigation shareholders in your jurisdiction may initiate against corporations and directors? May shareholders bring derivative actions on behalf of the corporation or class actions on behalf of all shareholders? Are there methods of obtaining access to company information?
Main types of litigation
Shareholders can initiate lawsuits relating to their membership rights, particularly the right to attend the general meeting (section 118(1), AktG), to request a general meeting or to request amendments to the agenda of a general meeting (section 122, AktG), to obtain information (section 131, AktG) or to receive dividends (sections 58(4), 60, AktG). Shareholders can also bring actions against the company to challenge shareholder resolutions adopted by the general meeting: In case of severe breaches listed in section 249, AktG, shareholders may bring an action for the declaration of nullity, or in other cases to set aside the resolution (section 246, AktG). If compensation is offered to shareholders with regard to certain structural measures such as squeeze-outs, mergers, profit and loss transfer agreements and so on, shareholders can request the adequacy of the compensation offered to be examined by the court in special proceedings regulated by the Appraisal Proceeding Act (SpruchG).
Individual shareholders are generally not entitled to assert claims against members of the board of management or the supervisory board that neglect their duties. In principle, such claims have to be raised by the supervisory board against members of the management board and vice versa (sections 93 and 116, AktG). They can in theory also be raised by shareholders but only in the name of the company after approval by the court (section 148, AktG) and to the effect that payment is to be made to the company.
Shareholders who together hold at least 1 per cent of the capital stock or an amount of €0.1 million nominal share value may request that the court allows them to pursue liability claims on behalf of the company against members of the management or supervisory board (section 148, AktG).
German law does not provide for class actions. However, depending on the subject matter, model case proceedings are available under the Capital Investors Model Proceedings Act and the General Model Proceedings Act.
Methods of obtaining access to company information
The Stock Corporation Act does not grant shareholders full access to company information - they do not have a right to review the company’s books and records. However, shareholders have a right to request information from the management board in the annual general meeting to the extent that such information is necessary for an appropriate evaluation of an agenda item (section 131(1), AktG). This includes information about the legal and business relationships between the company and an affiliate. The management board may refuse access to information in certain instances (section 131(3), AktG). If access to information is refused, shareholders may initiate court proceedings to enforce the right to information (section 132, AktG), challenge majorly shareholders’ resolutions (sections 241 et seq, AktG) or motion to appoint special auditors (section 142, AktG).
Shareholders' dutiesFiduciary duties
Do shareholder activists owe fiduciary duties to the company?
Each shareholder owes a general duty of loyalty to the company and to other shareholders. The duty of loyalty is based on case law and imposes limits on the power of the majority as well as on minority rights.
Shareholders who influence members of the management or supervisory board to act against the interests of the company may be held liable for damages (section 117, AktG). Furthermore, German corporate law concerning groups of companies provides that a controlling shareholder (who has not entered into a domination agreement) is obliged to refrain from any act that is disadvantageous for the controlled company unless the disadvantage is compensated in cash at the end of the respective business year. Controlling shareholders may be held liable for uncompensated disadvantages (section 317, AktG).Compensation
May directors accept compensation from shareholders who appoint them?
Members of the supervisory board are elected by the shareholders, and members of the management board are appointed by the supervisory board.
Members of the supervisory board are usually compensated by the company. However, they may accept direct compensation from shareholders under certain circumstances.
Whatever the case, members of the supervisory board are not allowed to accept compensation from shareholders if conflicts of interest arise. All duties of the supervisory board are primarily owed to the company (and not the shareholders), regardless of whether a member receives direct compensation from shareholders or not. Members of the supervisory board who are in breach of their duties may be held liable under civil and criminal law. In principle, members of the management board may not accept any compensation from third parties (eg, shareholders) owing to statutory restraints on competition.Mandatory bids
Are shareholders acting in concert subject to any mandatory bid requirements in your jurisdiction? When are shareholders deemed to be acting in concert?
Acting in concert requires joint conduct of shareholders in the form of an agreement or by other means:
- in respect of the exercise of their voting rights; or
- with the objective of permanently and substantially changing the company’s business strategy (section 34(2), WpHG; 30(2), WpÜG).
The respective voting rights of parties acting in concert are attributed to each other. If, together, they hold at least 30 per cent of the voting rights, they are deemed to be in control of the company (section 29 (2), WpÜG). In this case, the shareholders are obliged to disclose their proportion of the voting rights within seven days (section 35(1) WpÜG). In addition, within four weeks of disclosure, they must submit a mandatory bid (section 35(2) WpÜG).Disclosure rules
Must shareholders disclose significant shareholdings? If so, when? Must such disclosure include the shareholder’s intentions?
Shareholdings in listed companies (see question 1) must be disclosed if the voting interest in the company (directly or indirectly by way of attribution) reaches, exceeds or falls below 3, 5, 10, 15, 20, 25, 30, 50 or 75 per cent (sections 33 and 34, WpHG). In this case, shareholders must notify the company and BaFin without undue delay (within four trading days at the latest).
Furthermore, shareholders whose voting rights exceed 10 per cent are required to inform the company within 20 trading days (section 43, WpHG):
- of the aims they pursue with the investment;
- whether they plan to acquire further voting rights within the next 12 months, to exert influence on the management’s composition or to seek changes of the capital structure, including the company’s dividend policy; and
- of the origin of the funds used for the investment.
Voting rights from shares held by subsidiaries are deemed equivalent to voting rights from shares held directly by the parent company (section 34(1), WpHG).
Shareholders must notify the commercial register if they have acquired all shares of the company (section 42, AktG).
Disclosure of derivative holdings
Positions in instruments (eg, transferable securities, options, forward purchases, swaps, interest adjustment options, contracts for difference) through which voting shares can be acquired or in instruments that have a similar economic effect are subject to the same disclosure requirements as shares, except for the minimum threshold for a disclosure being 5 per cent instead of 3 per cent (section 38, WpHG). A netting between short and long positions resulting from derivatives is not permitted. For the purpose of determining whether a threshold has been reached, voting rights from shares and instruments are aggregated (section 39, WpHG).
Acting in concert
Disclosure requirements also apply to shareholders acting in concert. The voting rights of parties that act in concert are attributed to each other (see question 13 for when shareholders are deemed to be acting in concert).
Sanctions for non-compliance
Failure to comply with disclosure requirements may lead to the loss of certain shareholder rights (section 44(1), WpHG). In case of wilfully or grossly negligent misconduct, the right to dividends will be lost.
Shareholders could be fined up to €2 million for non-compliance by BaFin. If the shareholder is a legal entity, the maximum fine rises (according to whichever is the highest) to:
- €10 million;
- 5 per cent of the legal entity’s revenue in the past fiscal year; or
- up to three times the legal entity’s economic advantage (profits made or losses avoided owing to misconduct).
Furthermore, offences will be made public on the internet by BaFin (‘naming and shaming’).
Shareholders of non-listed companies are subject to disclosure rules if they are enterprises. The term ‘enterprise’ covers all types of corporations and partnerships. Individuals may, under certain conditions, be deemed enterprises as defined by the AktG.
If an enterprise or a subsidiary of an enterprise holds (directly or indirectly by way of attribution) more than 25 per cent of the shares of a stock corporation (section 20 (1), AktG) or a majority of the shares (section 20 (4), AktG), it is required to promptly inform the stock corporation of this in writing. The stock corporation must also be informed if the holding of an enterprise falls below the level requiring disclosure. For the purpose of determining whether a threshold has been reached, shares already held by the enterprise or its subsidiaries and shares whose transfer may be required, or shares that the enterprise or its subsidiaries are obligated to acquire, will be aggregated (section 20(2), AktG).
In case of non-compliance with the disclosure requirements, rights arising from shares may not be exercised (section 20(7), AktG).
Do the disclosure requirements apply to derivative instruments, acting in concert or short positions?
See question 14.Insider trading
Do insider trading rules apply to activist activity?
Listed companies are subject to restrictions on insider trading and more general market abuse rules (eg, under the EU Market Abuse Regulation), which further restrict selective disclosure of non-public information to shareholders. Furthermore, the mere fact that information has been disclosed to an activist shareholder could qualify as inside information.
Company response strategiesPreparation
What are the fiduciary duties of directors in the context of an activist proposal? Is there a different standard for considering an activist proposal compared to other board decisions?
In general, directors are obliged to enable all shareholders to exercise their rights in a proper and unimpeded manner. Shareholder activists and other shareholders must be treated equally. Board decisions regarding activist proposals are subject to the same standard of care as other board decisions.
What advice do you give companies to prepare for shareholder activism? Is shareholder activism and engagement a matter of heightened concern in the boardroom?
As a general measure, companies should identify potential vulnerabilities by analysing their business and strategy as an activist shareholder would do.
Following such analysis and risk-assessment, the following defence measures should be considered:
- preparing investor or public relations statements;
- implementing a ‘one voice policy’;
- appointing a rapid reaction team; and
- analysing the shareholder structure and other ‘early warning signs’ on a regular basis.
Shareholder activism has increased significantly in recent years in Germany. According to Lazard, in 2018, there were 58 campaigns of activist investors targeting listed companies in Europe, a significant number hereof being directed at targets in Germany.Defences
What defences are available to companies to avoid being the target of shareholder activism or respond to shareholder activism?
Available structural defences are:
- the existence of majority shareholders;
- preference shares (non-voting shares);
- restricted transferability of registered shares;
- staggered terms of members of the supervisory board; and
Other factors that make a company more likely to be targeted are:
- a high free float (traditionally low attendance of free float at shareholders’ meetings);
- a specific capital structure, eg, significant cash positions or defensive financial gearing or strong cash generation opportunities not being utilised;
- an unsatisfactory share price performance or a vague business strategy that leads to poor business prospects;
- a conglomerate structure; and
- takeover and restructuring situations.
New rules on delisting from regulated markets require that an unconditional tender offer be made to all shareholders (section 39, BörsG). This will result in a more complex and costly delisting process and presumably limit the role of delisting as a defence mechanism against activist shareholders.
Based on the new Shareholders’ Rights Directive, companies will be entitled to identify their shareholders and to obtain information regarding shareholder identity from any intermediary in the chain that holds the information. The purpose is to facilitate the exercise of shareholder rights and their engagement with the company. The member states may provide that companies are only allowed to request identification with respect to shareholders holding more than a certain percentage of shares or voting rights that will not exceed 0.5 per cent.
The new requirements aim to increase transparency and help the companies in their approach to shareholder engagement. Institutional investors and asset managers will either have to develop and publicly disclose a policy on shareholder engagement or explain why they have chosen not to do so.
Owing to the important influence on voting behaviour of investors, proxy advisers will also be subject to transparency requirements (eg, disclosure of methods and main sources of information) and a code of conduct.
Details remain to be seen since national implementation is not due before 10 June 2019.Reports on proxy votes
Do companies receive daily or periodic reports of proxy votes during the voting period?
There is no statutory proxy voting system outside the shareholders’ meeting. The corporate charter may provide that shareholders vote in writing or by way of electronic communication. However, a vote made in such a way becomes binding only at the beginning of the voting procedure in the shareholders’ meeting. Until then, any vote made in writing or by electronic communication may be rescinded by the shareholder.
In practice, votes cast outside the shareholders’ meeting are kept confidential, and there is no exchange between management and shareholders on votes submitted before the shareholders’ meeting.Private settlements
Is it common for companies in your jurisdiction to enter into a private settlement with activists? If so, what types of arrangements are typically agreed?
Private settlements with activists are not explicitly prohibited. However, any settlement with activists has to be in the best interest of the company, comply with the principle of equal treatment of shareholders (section 53a, AktG) and may not lead to a repayment of capital other than distributable profits (section 57, AktG). As a consequence, any private settlements that lead to an economic advantage for activists holding at least one share has to be published and benefit the other shareholders equally. Private settlements can, as the case may be, bring about inside information that is subject to the mandatory rules on the disclosure of inside information.
Shareholder communication and engagementRules on communication
Is it common to have organised shareholder engagement efforts as a matter of course? What do outreach efforts typically entail?
With a view to the general legal obligations (i) to treat all shareholders equally in principle and to grant all shareholders access to the same information and (ii) to keep the company’s affairs confidential and to not disseminate inside information, German listed companies in the past usually abstained from organised shareholder engagement efforts outside of the reporting obligations imposed by law and regulation. Exceptions have always been normal investor relation efforts such as regular analysts’ conferences, meetings, calls and such like. However, listed companies in Germany have recently begun to put a stronger focus on communication with specific groups of shareholders or even a single shareholder. Such engagement can be legally permissible provided that such ‘exclusive’ communication is in the best interests of the company and not only in the interests of the respective shareholders. The question if and to what extent a listed company may (or may not) engage with an activist shareholder very much depends on the individual case at hand and requires a careful analysis of all circumstances, in particular regarding the goals of the activist shareholder and the situation of the company. As a rule of thumb, the management board of the company will be more inclined (or even obliged) to engage in direct communication with an activist shareholder if the approach is well structured and presented in a way that can be viewed as being beneficial not only to the activist shareholder, but to the long-term interests of the company and its stakeholders as well.
Are directors commonly involved in shareholder engagement efforts?
Save for very few exceptions, German listed companies are represented as regards third parties, including its shareholders, exclusively by the management board (section 78, AktG). Therefore, if a company chooses to engage directly with activist shareholders, it is common practice that a managing director (often the CFO and, in important cases, also the CEO) is involved. Less common but increasing in number are cases in which the chairman of the supervisory board is involved in direct communication with activist shareholders. In light of the management board’s exclusive right to run the business and operations of the company (section 76(1), AktG), the chairman of the supervisory board may only discuss, subject to the general legal restrictions set out under question 22, those topics with activist shareholders that are within the competence of the supervisory board - for example, the composition of the management board or its remuneration. In order to make the dialogue between institutional investors and supervisory boards as fruitful as possible, the initiative ‘Developing Shareholder Communication’ has formulated eight guiding principles that are addressed to investors and listed companies in Germany with a supervisory board. Direct communication between the investor and the supervisory board can create added value for both parties. Such a dialogue allows investors to get first-hand information on whether the supervisory board is properly staffed and works effectively. In turn, the supervisory board has the opportunity to explain to foreign investors the German two-tier system and the national characteristics of co-determination.
Must companies disclose shareholder engagement efforts or how shareholders may communicate directly with the board? Must companies avoid selective or unequal disclosure? When companies disclose shareholder engagement efforts, what form does the disclosure take?
Companies are not required to publicly disclose their shareholder engagement efforts.
Generally, selective or unequal disclosure of non-public information is not permitted. If a shareholder has received information from the management board outside a shareholders’ meeting, such information shall, upon request, be provided to any other shareholder (section 131 (4), AktG). However, selective disclosure on the basis of non-disclosure agreements is permitted if in line with the interests of the company (eg, due diligence in a friendly takeover scenario).
Listed companies are subject to restrictions on insider dealing and more general market abuse rules (eg, under the EU Market Abuse Regulation), which further restrict selective disclosure of non-public information to shareholders. Furthermore, the mere fact that information has been disclosed to an activist shareholder could qualify as inside information.
What are the primary rules relating to communications to obtain support from other shareholders? How do companies solicit votes from shareholders? Are there systems enabling the company to identify or facilitating direct communication with its shareholders?
AktG does not require a special system for direct communication between the company and its shareholders. The majority of the communication takes place at the general meeting. As most listed companies have issued registered shares, they know the name and addresses of each shareholder, which enables them to send them serial or individual messages if so required in specific cases.
Rules relating to selective disclosure of non-public information to
shareholders are detailed in question 24.
Communication can be conducted by companies via:
- Federal Gazette;
- email; and
- social media.
Communication can be conducted by activist shareholders via:
- the press;
- social media; and
- shareholders’ forum in the Federal Gazette (section 127a, AktG).
Companies may offer shareholders to authorise proxy agents appointed by the company (section 134 (3), AktG). However, according to the prevailing opinion, the authorisation of a company proxy to vote at a shareholders’ meeting requires that detailed voting instructions are given by the shareholder.
Must companies, generally or at a shareholder’s request, provide a list of registered shareholders or a list of beneficial ownership, or submit to their shareholders information prepared by a requesting shareholder? How may this request be resisted?
Stock corporations do not need to maintain a register of known holders of bearer shares.
Stock corporations with registered shares have to maintain a share register, but are not permitted to make the register available to the public or to other shareholders owing to privacy requirements (data protection legislation). Shareholders may only request information relating to their own shareholding. Hence, requests to provide a list of other registered shareholders by an activist shareholder can easily be (and in most cases should be) resisted. Recently, there have been efforts to entitle companies to have their shareholders identified and to allow further processing of the information in the share register in order to facilitate the exercise of shareholder rights and engagement with the company.
However, each shareholder has the right to be, upon request, granted access to the list of participants of a shareholders’ meeting for review until up to two years after the meeting (section 129 (4,) AktG). The list of participants states name and place of residence (in the case of par shares), the amount (in the case of non-par shares), the number and the class of shares represented by each person present at the meeting.
Update and trendsRecent developments
What are the current hot topics in shareholder activism and engagement?
The EU shareholder rights directive ((EU) 2017/828) has to be transposed into German law until 10 June 2019.
New features to be implemented are:
- the right for listed companies to have their shareholders identified and to directly communicate with them;
- new public disclosure requirements for institutional investors and asset managers (investment strategies and engagement policies, certain aspects of arrangements with asset managers, and votes cast);
- a code of conduct for proxy advisers;
- a binding or advisory vote on the remuneration policy; and
- control of related-party transactions.
The German Corporate Governance Code is currently under review. A draft of the new version was published in late 2018 and was widely discussed (www.dcgk.de/en/consultations/current-consultations.html). The draft preamble focuses on institutional investors and calls them to exercise their right of ownership in an active and responsible manner.
The draft DCGK further intends to increase the public acceptance of executive compensation by making it more comprehensible. Another important change will be the definition of requirements for the independence of supervisory board members.